Sunday, September 13, 2009

Global Traders’ Outlook: September 14-18: Part III- Following Stocks, Overcoming Facts?

CHF: May Be Volatile Ahead of SNB Rate, Policy Announcements

Outlook: Neutral


- Swiss Franc Speculative Sentiment Hits Extreme Levels Against US Dollar

- Unemployment Rate Surges to 4% in August, Highest in Six Years

Details & Events

The Swiss Franc may see heavy volatility in the week ahead as the Swiss National Bank gets set to announce monetary policy.

As with most major central banks, there is little doubt that the SNB will leave benchmark interest rates unchanged. Rather, traders will focus on any updates to policymakers’ commitment to keep a lid on the value of the Swiss Franc with direct intervention into the currency markets.

Consumer prices printed a bit better in August, rebounding from the low set in July, and expectations of a similar moderation in Producer Prices foreshadow slightly better results for the headline inflation gauge in the months ahead. Still, it is surely much too early to say that the specter of deflation has dissipated, so the SNB is unlikely to do a complete about-face on exchange rate policy.

Thus the markets will look for subtle hints about the bank’s bias going forward, such as an upward revision of inflation expectations. The 1.50 level in EURCHF seems to have been the threshold of the SNB’s comfort zone, and traders would be wise to watch the behavior of the cross vis-Ă -vis this juncture ahead of the policy announcement.

Also of note on the economic calendar, Industrial Production is set to shrink at an annual pace of -11.1% in the second quarter, the most in at least 18 years. This is quite telling: manufactured goods top the list of Swiss export commodities, so the drop in industrial output is indicative not only of a sagging domestic economy but of lackluster demand in key overseas markets. The EURCHF has not moved much since the SNB intervened in mid-March and therefore is unlikely to have significantly impacted European preferences for Swiss-made products. Thus the likely dreary Industrial Production figures stand in contrast of the surface-level improvements in second-quarter GDP readings out of the Euro area.

We hold that the apparent stabilization in the region owes primarily to fiscal stimulus and the inventory cycle, both of which are inherently limited in scope and thus unable to support a sustained recovery in private demand.

Finally, Retail Sales are set to rise 0.7% in the year to July, a reading slightly lower than the previous month’s 0.9% result. On balance, sales have been trending lower since the beginning of last year and this reading falls firmly along that trajectory. September’s edition of the ZEW Survey of investor sentiment is also due for release.

CAD: Could Falter With Productivity and Price Pressures

Outlook: Bearish


- Bank of Canada Holds Rate Steady, Trade Deficit Widens

- Canadian Housing Starts Surges Higher in August, But New Permits Plunge-Weakness Ahead?

- New House Prices Unexpectedly Rise in July



Like everything else this past week, the Canadian dollar advanced against the greenback, with the USD/CAD slipping to fresh monthly low of 1.0673 earlier this week, and pair may continue to hold below the 20-Day moving average (1.0898) over the following week as investors hold an improved outlook for the world’s eighth largest economy.

Like many other counter currencies, this was at least as much of dollar weakness story as any comment on the CAD’s strength. As economists forecast the capacity utilization rate to fall to a fresh record-low in the second quarter, with the annual rate of price growth expected to fall further in August, fears of a slower recovery may weigh on the exchange rate as the outlook for growth and inflation remains weak.

Meanwhile, the Bank of Canada held the benchmark interest rate at 0.25% earlier this week and pledged to maintain borrowing costs at the record-low throughout the first-half of 2010 as price growth remains subdued. However, the central bank reiterated that the recent appreciation in the exchange rate could hamper the prospects for a sustainable recovery as trade conditions falter, and that it retains “considerable flexibility” for monetary policy even as the key rate remains at its lowest level since the central bank was established in 1934.

Moreover, Finance Minister Jim Flaherty said that the government, in conjunction with the Bank of Canada, may take steps to maintain a floor on the exchange rate as he sees a risk for a double-dip recession. Nevertheless, as the board anticipates the annual rate of inflation to hold below the 2% target until the second-quarter of 2011, weakening price pressures may hamper long-term expectations for higher borrowing costs, and a pull back in the interest rate forecast is likely to drag on the Canadian dollar as investors weigh the outlook for future policy.

The economic calendar for the following week is expected to show the capacity utilization rate fall to a record-low of 65.5% in the second quarter from 69.3% during the first three-months of the year, while consumer prices are anticipated to fall at an annual rate of 0.6% in August. Moreover, the core rate of inflation is forecasted to weaken to an annualized pace of 1.6% from 1.8% in July, and the downturn in price growth is likely to hamper the prospects for a rate hike next year as the central bank maintains a dovish policy stance.

AUD: Continuing to Test Its Strength, Vulnerable to Disappointments From RBA

Outlook: Bullish/Neutral


- Australian Dollar Retreats on disappointing Retail Sales data

- Reserve Bank of Australian rate expectations nonetheless remain buoyant


Given the USD’s past week, the AUD was still able to finish a week of fairly disappointing economic data near yearly highs against its even more beaten up n US namesake. Historically market-moving Retail Sales and Employment Change reports both proved sharply worse than expected, but the data releases only managed to slow down the Aussie’s rallies against the US Dollar. Of course, sharp rallies in key risky asset classes mitigated the effects of the disappointments; the US S&P 500 registered fresh 2009 highs on several different occasions. Whether or not risky asset classes can maintain their impressive trajectory remains the key question in our Australian Dollar outlook, but traders should likewise keep an eye out for potentially market-moving Reserve Bank of Australia rhetoric through early-week trade.

At their peak, Overnight Index Swaps were pricing in an approximate 50 percent chance that the Reserve Bank would raise interest rates as soon as October. Yet official commentary following September’s rate announcement clearly stated that current interest rates were “appropriate” and instantly poured cold water on interest rate speculation.

Week’s Main Events

Markets will get a closer look at the Reserve Bank’s reasoning behind their neutral stance on short-term rates, and it will be important to watch for shifts in rhetoric on inflation forecasts and future monetary policy tightening. Overnight Index Swaps still price in a marginal probability of a rate hike before the year is through. Any indication that the RBA has ruled out near-term rate hikes could easily hurt the Aussie, while hawkish rhetoric would have the opposite effect.

Traders should otherwise keep an eye out for important shifts in risk sentiment. Recently impressive momentum gives us little reason to believe that the S&P 500 may reverse through near-term trade. Yet traders should be wary of trend exhaustion—and treat excessive AUDUSD strength with a sense of caution.

NZD: Continues Moving With Risk Sentiment, Too High for Its Own Good

Outlook: Bearish


- New Zealand Dollar gains on S&P Rally

- Reserve Bank of New Zealand rate decision key event in week ahead

- Moving with Risk Sentiment, news of secondary importance

Tightly correlated with global risk appetite as reflected in the S&P, likely to continue to move accordingly barring extreme local news.

CONCLUSIONS: What to Do if We’ve a Solid Gold Warning to Go Short?

Currencies continue to follow global risk appetite in general and the S&P in particular.

The S&P continues to rise, evidence against it be damned. The reason is not really clear.

We continue to view most markets as overbought compared to growth prospects. Ongoing failure to resolve the root causes of the current slowdown – weakness in the financial sector and employment, strengthens our belief that the next move is likely to be down, though markets have been resilient thus far.

If so, currency traders might:

short risk currencies: AUD, NZD, CAD, and EUR

go long JPY, USD, and CHF

Options and futures traders should consider shorting stock indexes and commodities

Those preferring to work through ETFs should consider shorting:

(FXA), (FXB), (FXC), (FXE), (FXF), (JYF), (FXY),(UUP), (UDN), (CYN), (CYB), (DBV), (YCL), (ULF), (URR), (YCS), (EUO), (DRR), (FXEN), (GLD) (SLV) (USO), (UNG), (GSG), (DBA), (SPY),(DIA),(QQQ)

Long (SDS), (DUG)

As the past months have shown however, it is best to not try and anticipate the move, but rather wait for a high volume move down over 1% before committing even a partial position, and even then

Wait for another such move within a week to confirm the move down, at least for the near term

Always use stop loss orders to control risk

Disclosure and Disclaimer: The opinions expressed herein are not necessarily those of AVA FX. The author holds positions in the above mentioned instruments.

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