Forex, Commodities, Stock Indices Guide

Trader's Diary: A Dow Short Gone Bad, A Potential NZD/USD Long

2009-12-01T09:26:00.000-08:00

Here's an analysis I wrote for a VIP client. It contains some lessons we all should review.

Hi Mr. X,

Here's the analysis as per our conversation.

A Dow Short Gone Bad

Here's the chart of the Dow that we discussed:

Dow 30 Daily Chart (image:11 dec 01)

You had the right idea getting on an established downtrend on November 2nd. You were very close to strong resistance at 9750, where there was a QUADRUPLE combination of

• Price support as shown by repeated closes/opens, ( I count about 14 since August)showing that this level was a price support level

• A 50 day moving average

• A 23.6% Fibonacci retracement

• The lower trend line of a long established rising channel

This was indeed a great "QUAD" combination of strong support indicators. A great place to go short because if this support at 9750 didn't hold, it was a strong signal that the uptrend was not yet dead.

Clearly we're not the only ones who thought so. When price broke through it decisively the next day on 11/5 ( the third candlestick to the right, the big blue one), the market decided there was more upside. The fact that 11/5 shattered it decisively (along with a series of further Fibonacci retracements and Bollinger Bands was your big warning that the lower line of the rising channel was holding nicely as support.

If you still had doubts, the next day showed broke through the next Fibonacci level, and on 11/9 the entire downtrend was retraced and a new high set. It's understandable to believe there might be a reversal/retest at the new high, but we never try to anticipate reversals, we wait for them, as you did when you got into this short.

My only criticism/reservation is that you were trying to trade against a long established channel, as shown in the chart below. That can be very dangerous because

• The DJIA needn't have even dropped, it could have just stayed flat for a while until the bottom trend line caught up to it. Even if YOU don't believe this channel has validity, many others do, and there are computerized systems that may choose this line as a buy point given the uptrend that was in place since March. Remember, trading isn't about understanding what's true, but understanding what most other traders are thinking.

• You needed to identify the channel (not too hard, though slight variations possible and legitimate) and THEN be careful to place a stop loss after you have some kind of confirmation that the support (in this case, lower) channel line is holding. You got that loud and clear on 11/5. The big blue candle on 11/5 was the third day that the lower channel line had held, AND that candle smashed through the combined 3 support types at 9750 and closed far above it, AND the move was confirmed the next day when price opened higher still and closed even higher.

Of course, at the start of ANY reversal of a long trend, you'd be doing something like this. Thus the need for the stop loss in case you're wrong.

In sum your key mistake was not to look for support points which, if violated, would be your signal that you were wrong. For reasons noted above, the big ones were:

around 9750, where there was a combination of

o Price support as shown by repeated closes/opens, ( I count about 14 since August)showing that this level was a price support level

o A 50 day moving average

o A 23.6% Fibonacci retracement

o The lower /support line of a rising channel

Consider exiting the position and wait for the next move down.

A Potential Long on the NZD/USD

IF markets continue up (watch for a rising S&P 500 and have criteria chosen to tell you there is more room for the uptrend, like a strong break about 1100, etc), the NZDUSD has room to run higher. Consider the following chart.

NZD/USD Daily Chart (12 Dec 01)

This is an intriguing long at current levels because it's at the lower end of its horizontal trading range, and has already broken through the following resistance:

• Downward trend line

• 23.6% Fibonacci retracement

• 0.7265 price level

Beware, however, that this pair has long broken below its rising channel, AND has broken below its 50 day moving average (red line)

FYI if the S&P 500 does pull back (my preferred indicator of overall risk sentiment) AND the NZDUSD breaks below the 0.7100 level (has both price support and the 38.2% Fibonacci retracement support, THEN the pair might make a worthwhile short once it looks like it will close under the 0.7100 level. Once it does, if you go short, consider placing a stop loss not too far ABOVE that 0.7100 level, perhaps near 0.7288, at which point there is both price and another Fibonacci level

Cheers & Good Luck, Cliff

DISCLOSURE: NO POSITIONS IN THE ABOVE INSTRUMENTS

GLOBAL OUTLOOK 12/01 Cheat Sheet: Markets Rise As Dubai Fears Ease, Yet USD Up on Fed Moves

2009-12-01T04:12:00.000-08:00

NB: The following is an abridged version-those seeking full details should refer to the full version at http://fxmarketanalysis.wordpress.com/

FX: higher equities, today bias against safety currencies [JPY, USD, CHF in order of safety appeal] vs. risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD up on Fed moves, Black Fri Monday, losing ground Tuesday morning.

- Main events today: NZD: Building Consents m/m+, CAD: GDP m/m= USD: Chicago PMI+, Tues.AUD Building Approvals-, Cash Rate-, RBA Statement, CNY: Mfg. PMI+, GBP Nationwide HPI m/m+, Halifax HPI m/m, Mfg. PMI, USD: Mfg PMI, Pending Home Sales m/m, Wed: GBP Halifax HPI m/m, USD: ADP NFP, Fed Beige Book

- Big Theme: Stocks, Risk Stabilizing after Dubai Crisis Appears Contained For Now-See Conclusions below for trading opportunities. TRADERS SHOULD HAVE TRADING PLANS READY FOR MOVES IN EITHER DIRECTION, still unclear if markets have fully digested the US jobs data, and news this week is light, suggesting trading with ranges

STOCKS

US: Stocks spent the afternoon trading with modest losses after rolling over in the early going, but they managed to make a late push into positive ground during the final hour of trade. The move was led by the financial sector, which actually had been unable to provide a lift to the broader market for most of the session, as fears about Dubai eased and Chicago PMI showed manufacturing improving. The Week Ahead: Dubai, Holiday Sales, NFP & Employment to Dominate Trading – See Weekly Outlook, Full Version

Asia: HONG KONG (AP) -- Asian stock markets rebounded Monday from their steep fall last week after the United Arab Emirates moved to contain the fallout from Dubai's debt crisis. Most indexes up over 2%

Europe: European shares rose early on Tuesday, bouncing back from falls in the previous session, as fears about the fallout from Dubai's debt problems eased and investors' appetite for relatively risky equities increased

ASIA- UP N225I +2.91% HS +3.25% SSEC +3.20% FTSTI -1.10% AORD +2.57 %

EUROPE DOWN FTSE -1.05% DAX -1.05% CAC -1.11%

US- UP S&P +0.77% DJIA +0.34% NASDAQ +0.29%

ASIA CLOSING UP N225I +2.43% HS +1.34% SSEC +1.25% FTSTI +0.92% AORD +0.37 %

EUROPE OPEN UP FTSE +1.47% DAX +1.46% CAC +1.51%

Oil: PERTH, Dec 1 (Reuters) - Oil rose above $77 a barrel on Tuesday, after a rebound of 1.6 percent in the previous session, as Dubai debt default fears eased and cautious investors cast about for fresh clues to the pace of global economic recovery.

With a series of key economic indicators due out in the United States later in the day, as well as a preliminary snapshot of the weekly U.S. fuel inventory report, traders are expected to stay on the sidelines until they get a clearer picture on the state of energy demand.

US NFP report from related data like the employment portion of the PMI non-manufacturing report and the ADP nonfarms payrolls.

Gold: Steadied Monday morning around $1178, and has resumed climbing early Tuesday to around $1185 as Asian markets close higher and European markets look to open higher. 1200 level should be an important psychological level in the near term and some correction should be seen to keep gold below 1200 for a while, with some risks of a break of 1100 level if there are any major shifts in risk sentiment.

Reports of new IMF sales to Sri Lanka (10 tons) and possible additional purchases by India & China added support.

CURRENCIES: Surprising USD rebound on a mixed but overall up day for global stocks

USD: Gained Monday against the EUR, JPY, GBP, AUD as hawkish Fed moves and a disappointing black Friday cast even more doubt on the critical holiday consumer spending season .While this data supported the USD as a safe-haven asset, there was also positive fundamental news as the Fed began testing was to drain liquidity and exit its stimulus program, though it said it had no plans to do so at this time.

EUR: After breaking back above 1.500 resistance to 1.5071m the EUR dropped back yesterday to close lower at 1.5010, despite positive CPI data that makes interest rate increases more likely. Eurozone CPI rose to 0.6% y/y versus consensus 0.4%.

JPY: Down vs. USD on intervention threats from BoJ, new stimulus measures. National Strategy Minister Kan announced that the Japanese government has agreed on measures to stop the JPY's rise. Financial Services Minister Kamei also put pressure on the BOJ and suggested the BOJ has to consider ways to ease monetary policy further.

GBP Down vs USD, GBP: European banks have 72% exposure to the $26 billion of Dubai debt under restructure. UK banks have about 41% of that, making the UK banking system the most exposed to Dubai's crisis.PMI disappoints Tuesday

AUD: Raises interest rates 25 bps to 3.75%, yet down today against the USD and JPY on profit taking, as the RBA gave no timetable for further increases, and the move was largely expected given recent official statements by RBA Deputy Governor Battelino,

NZD: Fell yesterday vs. the USD, rising in early Tuesday trade. Rising dairy prices should provide support for both the economy and NZD, as these push interest rate rises closer. Likely to move with overall risk appetite, the overall direction of which remains up, though vulnerable

CAD: Moving up against the USD w/ rising oil, stocks

CHF: Monday it gained against EUR, dropped against the USD, these trends are reversing early Tuesday. Q3 GDP as forecasted at 0.3%

CONCLUSIONS: S&P 500 still struggling around 1100 resistance, still unclear if stocks and other risk assets are going to stay flat, pullback, or make a yearend run. Liquidity and low rates support stocks and other risk assets as cash seeks a parking spot, but questions on valuations and still poor fundamentals weigh against stocks, and have many believing the rally is in trouble and that a bearish double or triple top is forming. See Trading Opportunities section below. Traders should consider going with the current trend but be ready for pullbacks. See below for specific opportunities with the S&P 500, CRUDE, GOLD, EURUSD, and NZDUSD.

Trading Opportunities: Near term has favored risk currencies, shorting safe-haven assets. Today's news provides potential volatility for r the EUR/USD and USD/CAD in particular. Given that markets remain very high despite mixed earnings and negative US jobs reports, they're vulnerable to a pullback at this 1100 resistance level for the S&P 500: 1. Be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Crude oil breaches key $74 resistance, implying more upside unless stocks pull back on earnings disappointments. Always use sell stop orders.

S&P 500: After dropping hard on Dubai news, continues regaining about half of losses in early Monday trade. Resistance at 1110 where there is a convergence of both the upper Bollinger Band and a bearish doji candlestick from Nov. 18th, surrounded by equally indecisive spinning top candlesticks. Also of concern, the price level is currently in the middle of its rising channel, and the current $1100 level is itself a price resistance level. Thus we believe traders should be wary of opening new positions on this index and on all other assets until we get a decisive move above or below 1100. As noted above, it’s a struggle between liquidity pushing stocks up vs. concerns over the underlying fundamentals and high valuations that suggest selling. Add to that brew the unresolved Dubai crisis, a disappointing Black Friday, Fed preparations to reduce liquidity, and the added uncertainty of US Non Farms Payrolls and unemployment this Friday makes for a potentially volatile week. Unclear how it will play out. Because the S&P 500 is so representative of overall risk sentiment, and thus the "One Chart to Rule Them All", this indecisive picture suggest traders should make long or short moves when the S&P hits support levels at 1076 (Fib retracement +20 day MA + some price support from mid-October + rising trend line) or a decisive break over 1100. Traders should be very cautious opening long positions in ANY risk assets at this time, and employ tight trailing stops or monitor positions closely on existing open long risk asset positions. They should also have some short positions planned, complete with initial and confirming indicators, and planned entry/ exit points.

S&P 500 Daily Chart as of Dec 1 08:47 GMT (03 Dec 01) (chart courtesy of avafx.com)

GOLD: Showing renewed strength on a combination of rising risk appetite Monday and news of new gold purchases from Sri Lanka and possible new ones coming from China and India. While the dollar seems stuck in a long term downtrend as well, this combination of fundamentals suggests a long term uptrend for gold. Look to purchase on pullbacks.

Gold Daily Chart (04 Dec 01) (chart courtesy of avafx.com)

From a technical perspective, the below chart shows possible retracement points if/when the move makes normal retest of support. Note how gold tested to the 23.6% and 38.2% Fibonacci retracement drawn from its last pullback to its recent high, exactly as one would expect. It appears that this 1130-60 level is some kind of mild support level, given the convergence of both Fibonacci and mild price support.

Also, recent price action suggests near term the rally still has strength, as gold's decline was quite muted on a daily basis, though on shorter term charts it appeared more dramatic. This is why we prefer the perspective of the daily timeframe vs. intraday timeframes when analyzing the big picture of a trend.

As noted in our Global Markets Outlook 11/23-11/27, the belief that there are large buyers like central banks seeking to buy gold may have caused a new fundamental upward shift in price based on this perceived demand. While gold was not immune from the Dubai induced panic late last week, it has recovered those losses already, and is close to recovering its steep upward trend line. This relative strength suggest that if markets truly calm down, gold could resume its climb, even if global equity markets remain pressured by the weight of the extended rally, valuation concerns, and year-end tax selling.

There's a growing belief in a new fundamental factor -- that underlying demand for gold has increased due to central bank buying. After the Reserve Bank of India, the Bank of Mauritius bought 2 metric tons of gold from the IMF at market price on November 11. Compared with India's 200 metric tons, Mauritius' purchase was insignificant. However, same as the deal with India, the implications radiate far beyond the size of the deal itself.

Earlier this year, the IMF announced its plan to sell a total of 403.3 metric tons of gold to bolster its finances. The news weighed on market sentiment as investors worried about at how much and to whom the gold would be sold. Now, more than half of the planned amount has been sold to official sectors at market prices, sentiment appears to have shifted from concern over overhanging supply to disappearing supply as large exporter central banks and sovereign wealth funds seek to convert depreciating dollar holdings into gold. Right or wrong, that is the sentiment at this time, and it's been strong enough to send gold soaring while crude and stocks have been stalling out. Impressive relative strength that has won many believers and convinced markets that any pullback will not be pronounced or long.

Consider:

• In April, China, the biggest gold producer in the world, increased reserves by +76% to 154 metric tons since 2003. The market anticipates China will be another big buyer of IMF's gold.

• Since the beginning of 2009, gold price has rallied almost +30%. Also, after breaching 2008-high at 1033.9, the yellow metal's rise has accelerated, jumping more than 100 dollars in a month. The long-term uptrend is not likely to end soon.

• Apart from government buying, new private gold funds should give a further boost to robust investment demands. John Paulson announced his plan to launch a new gold fund next year with as much as $250M of his money. Large gold ETFs or funds usually have holdings that are comparable to central banks. For instance, SPDR Gold Shares, the world's largest gold ETF, is the world's 5th largest bullion owner just below France and above China.

In short, it's not just increasing gold demand, but demand from big buyers.

In coming weeks, gold price should continue to be very much directed by USD's movement. However, the inverse relationship between gold and the dollar should not be taken for granted. For instance, in the 90s, the yellow metal's supply was so abundant that its price plummeted. In 2005, gold price surged due to tightness in the market. Therefore, some analysts hold that gold price may continue to rise given the reduction in gold production and increase in central bank demand, despite a possible rebound in USD early next year. Famed NYU Economics Professor Nuriel Roubini, credited for calling the current crisis years ago, believes the run in gold is an unsustainable bubble, while famed commodity trader Jim Rodgers holds gold is going much higher. As long as the central bank/sovereign wealth/momentum story holds up, Rogers looks correct.

Crude Oil: Still in a 5 week downward channel. Range trading between $82-$76/bbl since mid October, moving more or less with stocks as the S&P struggles at the $1100 resistance level and oil at $82, neither to move higher until further positive news on the recovery. However, with gold having continued higher to $1194 as of this writing, the historic gold ratio now justifies oil as high as around $99.50 (12:1 ratio) and no less than $77.80 (15:1). Thus while crude remains range bound, if gold can continue breaking to new highs, as many expect it to do, then crude could follow it sharply higher over time, especially if other risk assets can avoid a sharp correction (which they are doing nicely, as shown by the S&P 500 breaching resistance at $1100) or there is evidence of continued strong demand from China and other developing economies.

NB: Crude has been among the weaker risk assets over the past month despite the USD's weakness. Crude peaked weeks before stocks did, and has been behaving relatively worse than stocks. For example, yesterday's action showed that stocks were still able to retain some of their gains when momentum reversed, but crude could not, and closed lower. Not surprising, since crude tends to exaggerate the S&P 500's trends for better and for worse. Range bound for the near term, will likely follow stocks higher to its upper range near $82 if stocks can rally, but poor fundamentals and an extended rally for both oil and the S&P 500 that it tracks suggest more downside risk at this time.

Certainly seems unwise to consider new longs until oil stabilizes, likely around the $73-$60 range, if not lower. An additional outcome of the Dubai crisis may be increased production as the UAE may need to produce more oil in order if it decides to fund a bailout or related assistance to stabilize the Dubai situation. Watch the S&P 500 to lead oil.

WTI Crude Oil Daily Chart (05 Dec 01) (chart courtesy of avafx.com)

EURUSD: Breaking above 1.5000 resistance again to after dropping on Dubai fears, approaching new annual highs. Still at the lower end of its rising channel, abundant support points below it for low risk stop loss setting if going long should risk sentiment continues.

EURUSD DAILY CHART (06 Dec 01) (chart courtesy of avafx.com)

As noted in our Global Outlook for 11/30-12/04:

The Euro finished the week only marginally higher against the US Dollar, but the modest week-to-week change belies impressive volatility in recent trading. The EUR/USD moved to a fresh 2009 peak near the 1.5150 mark as the USD dropped market-wide. As discussed above, the credit scare out of Dubai sent the safe-haven US dollar and Japanese Yen substantially higher through Asian and European market hours. The nasty surprise came as a sharp reminder that financial market risk sentiment remains skittish and the USD extremely shorted, making it ripe for sharp moves higher if the USD-short herd stampedes to the exits. The week ahead could prove similarly eventful on strong economic event risk out of Europe and the US. Thus use caution going long the EUR.

However, Friday's session suggests the EUR may well maintain it's near term trend against the USD barring new bad news from Dubai. Although dollars were bought aggressively throughout the Asian and European trading session, the correction in the U.S. session suggests that the overall trend for the dollar is still down.

However, this pair is closely correlated with risk appetite and thus the S&P 500, which is struggling at resistance, and will have end of year tax selling and a likely bleak retail season to cope with. Given the factors working against risk appetite over the coming weeks, we urge caution (and tight stop losses) for new long positions, and plans for some short positions should markets turn, with planned entry/exit points.

NZDUSD: Unclear for now, stand aside and wait for overall market direction (aka S&P 500 or other preferred major stock index). Moving with risk appetite, which could go either way in the coming days depending on various news events and the continuing resolution of the Dubai crisis. As noted above, firming dairy prices should be supportive of the NZD, though local events tend to be overwhelmed by overall risk sentiment. Near strong support around 0.7100, which would make a good entry point for those playing the long or short side, depending on one's' read on the direction of global stocks and risk appetite.

NZDUSD Daily Chart (08 Dec 01) (chart courtesy of avafx.com)

OTHER HEADLINES

Bloomberg.com

Global Stocks Rally on BOJ Emergency Lending, China Economy; Yen Declines

•Japan's Central Bank to Pump Cash Into Economy on Lower Prices, Higher Yen

•China Manufacturing Grows at Faster Pace, Helping Asia Lead World Recovery

•Dubai World Starts Talks With Banks on Restructuring $26 Billion of Debt

•Australia Raises Interest Rates for Third Straight Month as Economy Grows

•GM May Sell Some Saab Unit Assets to Beijing Automotive, Discontinue Brand

•Manufacturing in U.S. Probably Grew in November, Taking Lead in Recovery

•Obama's Troop Increase Means He Now `Owns' Unpopular Afghanistan Conflict

•Iran Holds Five-Member Crew of British Racing Yacht, U.K. Government Says

•Spanish Bullrings, Fake Eiffel Towers Can't Prevent 20% Unemployment Rate

(Seekingalpha.com)

Case-Shiller: Home Prices Continue to Rise

Murdoch’s Bing Bluster Will Hurt News Corp, Not Google

How to Trade the Rest of the Year - Goldman Sachs

10 Common Myths About ETF Investing

Do Black Swans Negate Option Premiums?

Another Crisis Looms Right Around the Corner

Wall Street Breakfast: Must-Know News

How to Trade the Rest of the Year - Goldman Sachs

Apple's AT&T Deal: Setting the Record Straight

Seven Dividend Stocks to Take the Emotion Out of Investing

DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS NO POSITIONS IN ABOVE INSTRUMENTS.

Dubai Crisis For Dummies: Basics & Implications For Stocks & Global Markets

2009-11-29T06:42:00.001-08:00

NB: The below is a basic quick review of the Dubai Crisis and Its Meaning For Stocks

Key Points to Note

The biggest near term influence on the direction of risk appetite and global markets appears likely to be the Dubai debt crisis, so we need to evaluate the importance of this past week’s credit scare.
The request to delay repayment on its loans by Nakheel (a real estate development arm of Dubai's development fund Dubai World) confronts markets with what is potentially the largest sovereign default since the 2001/2002 when Argentina stopped payments on its government bonds. The Dubai default threat does not have the same fundamental complexities as its Argentina's did, however, context and timing can be everything.

Given that markets are:

Sitting atop an extended rally on questionable fundamentals and valuations
Nervously remembering how two years ago, a supposedly containable US real estate default crisis metastasized into a near worldwide financial and economic collapse from which they are still trying to recover

a far more dramatic response from the dollar and nearly every other asset class is quite conceivable, thank you.

Market concerns include:

There could be “contagion”-type effects that could affect the creditworthiness of related entities, particularly those that have lent to Dubai World. Most of those are either UAE-related or European banks. This isn’t a huge issue, unless it becomes a big European issue — unlikely, but remember that European banks are even more levered than US banks. It's believed that UK's RBS, HSBC, Barclays, Lloyds and Stand Chartered are having large exposures in case of defaults. Who would be affected if these were undermined?

Secondary aftershocks to would be entities similar to Dubai — other places in the world that have borrowed a lot (Greece, Ireland, Iceland, parts of Eastern Europe, etc). Thus many emerging markets are getting hit in this mini-crisis by rising borrowing costs.

More borrowing to solve the Dubai crisis makes another one more likely.

What investors should remember is that in ordinary circumstances (peace, absence of famine, plague, or rampant socialism), the economies tend to grow at about 2%/year. One can try to increase that by borrowing, and at the right opportunity that can be a winner. But most of the time, huge increases in debt levels are eventually associated with default. In a highly leveraged financial system where lenders are themselves indebted, defaults can cascade. As markets get more risk averse and credit tightens (i.e. rates rise to compensate for perceived increased risk) various government ministers/bureaucrats come forth and say, “There is nothing fundamentally wrong here. All we need is to restore confidence. This is not a solvency issue, it is a liquidity issue!” They answer by taking on more debt to free up liquidity.

Risk that an isolated default can spread then rises, as an increasingly leveraged financial system comes more and more to resemble a massive arrangement of dominoes. The more leverage on any entity, the taller that domino. The more leverage in the system, the more tightly the dominoes are spaced. That arrangement collapses when someone knocks over a key domino.

Now, most analysts believe that this situation is contained, and after falling hard for the two prior days, European markets are rallying today, including financials. Values for debts closely related to Dubai World have fallen hard, and S&P and Moody’s have downgraded them, and may declare the payment delay to be a default. (Also, with credit to Moody’s — they did downgrade many Dubai-related entities earlier this month. Remember, with rating agencies, smart investors ignore the ratings, and look at what the analyst says. The Moody’s analyst highlighted the lack of any explicit guarantees from Dubai.)
In the week ahead, the key to gauging price action for the broader financial markets and the USD will lie with the market’s ultimate response to the Dubai crisis. There hasn't been enough time to see market’s true response to the threat. The incredible volatility through the end of last week was certainly leveraged by the thin liquidity from the US holiday.
Indeed, the timing of Dubai World's announcement coincidentally (?) allowed an incredible short term profit opportunity for anyone with advanced notice, and to minimize the time markets had for panicking before taking a weekend break to calm down and perhaps minimize the chances of an even more extreme reaction. Liquidity was extremely low at the time of the Nov 25^th-26^th announcement, with both the US and Islamic World their respective Thanksgiving and Eid holidays. Thus the volatility generated by this market moving news was exaggerated by the small number of traders available.
The demand for safe-haven dollar shorts unwound was so strong that the euro hit an intraday low of 1.4829 when the European markets opened. The price action in USD/JPY tells us that risk aversion was the primary driver of the forex markets as USD/JPY dropped to a 14 year low when the Asian markets opened last night.
Perhaps very significantly for the coming week, the selling did not continue into the U.S. trading session. The limited number of U.S. traders Friday actually sold rather than bought dollars which suggests that not everyone believes that the Dubai news will have immediate global ramifications, because the first reaction to a major surprise announcement like this one is always sell first and ask questions later. As a result, the USD and JPY were the biggest winners. That USD buying didn't continue into Friday suggests markets might open Monday on a more positive note.
Indeed, when the deep pockets return to the market after having had a weekend evaluate things, it will be easier to establish true trends as there will be a source for momentum.
While we can't say for certain whether this is the beginning of a longer term reversal in risk assets, some tentative conclusions can be drawn.

Additional Points to Consider

As noted above, a major surprise risk event like the Dubai news is one of the few things that might set a near term bottom in the U.S. dollar as its safe haven status overrides its still poor fundamentals. On the eve of November 25th, the Thanksgiving Holiday in the U.S. and the Eid Holiday in the Middle East, Dubai World shocked the markets by saying that its property developer Nakheel has requested to delay its Dec 14 debt payments. While Dubai World is not technically owned by the Dubai government, its liabilities of US$59 billion is a significant amount of the total estimated US$80-100 billion in Dubai's liabilities.
As a result, investors fear that this could mean an outright default on Nakheel's debt, because delinquency is usually the precursor default. Although the market believes that this is a major development for the global economy, it is important to realize that Nakheel's debt is only $3.52 billion, a fraction of Dubai World's overall debt. Also, U.S. and European banks have very small exposure to Nakheel’s debt, though it's not fully clear who has what exposure, and how well they can absorb possible losses.
However, markets heard the same kind of talk at the start of the US sub-prime lending crisis, and realize that these things can quickly snowball into far bigger problems.
Granted a default may entitle investors to some of Dubai World's assets, H.H Sheikh Ahmed bin Saeed Al-Maktoum, Chairman of the Supreme Fiscal Committee, has already issued a statement confirming the Dubai Government's intention to directly intervene and manage the restructuring of Dubai World commercial operations and its debt obligations. Although some people are afraid that this could turn into an Argentina style debt default or a repeat of volatility of Q4 2008, what is more worrisome is the fact that this may be indicative of the health of the entire property sector in the Middle East. Which global banks are deeply exposed there?

STOCKS

Analysis: Apart From Dubai, Pullback Potential Was Already Present & Watch for Black Friday Results
Even before Dubai threatened markets with the largest sovereign credit default since Argentina in 2001, a larger underlying shift in global capital markets likely already began in October. In addition to Dubai, consider the already extant pressures on risk appetite.

Morgan Stanley index of world stock prices fell the most in eight months while
The VIX Index, a stand-by measure of investors’ fear, rose the most in a year.
The S&P 500 remains unable to sustain a break above multi-week resistance at 1100, and any failure by world leaders to calm markets soon will harden that resistance.

The financial system's resistance to further crises has been weakened by the crisis of the past two years, with central banks already burdened with debt. Relative equity valuations have looked excessive for some time now with prices trading at the highest levels relative to earnings in seven years.

Further, the market’s mood seems to be in transition, with the relief that collapse had been averted, which produced the risk rally of recent months, giving way to concerns about valuations and what happens when interest rates invariably reverse course higher and the flow of government cash dries up.

Companies’ “better than expected” earnings of the past several quarters have relied heavily on, cost cuts, usually from firing workers. Ultimately this means lost consumer demand.

Commodities

If the crisis appears to spread (and this could take time to play out, similar to the US subprime crisis), most will drop back. This includes gold, unless fear of another threatened global collapse occurs, which could favor gold.

Currencies

If the crisis lingers on, or markets pull back for some other reason (there are potentially many), the JPY, USD, and CHF will be the big likely winners. The AUD, NZD, CAD, and EUR would retreat against these.
DISCLOSURE: NO POSITIONS IN THE ABOVE

The Dubai Crisis For Idiots: Basics & Implications For Stocks & Global Markets

2009-11-29T06:29:00.001-08:00

NB: The below is a basic quick review of the Dubai Crisis and Its Meaning For Stocks. Those seeking full details should visit: http://fxmarketanalysis.wordpress.com or http://worldmarketsguide.blogspot.com

Key Points to Note

The request to delay repayment on its loans by Nakheel (a real estate development arm of Dubai's development fund Dubai World) confronts markets with what is potentially the largest sovereign default since the 2001/2002 when Argentina stopped payments on its government bonds. The Dubai default threat does not have the same fundamental complexities as its Argentina's did, however, context and timing can be everything.

Given that markets are:

Sitting atop an extended rally on questionable fundamentals and valuations
Nervously remembering how two years ago, a supposedly containable US real estate default crisis metastasized into a near worldwide financial and economic collapse from which they are still trying to recover

a far more dramatic response from the dollar and nearly every other asset class is quite conceivable, thank you.

Market concerns include:

There could be “contagion”-type effects that could affect the creditworthiness of related entities, particularly those that have lent to Dubai World. Most of those are either UAE-related or European banks. This isn’t a huge issue, unless it becomes a big European issue — unlikely, but remember that European banks are even more levered than US banks. It's believed that UK's RBS, HSBC, Barclays, Lloyds and Stand Chartered are having large exposures in case of defaults. Who would be affected if these were undermined?

Secondary aftershocks to would be entities similar to Dubai — other places in the world that have borrowed a lot (Greece, Ireland, Iceland, parts of Eastern Europe, etc). Thus many emerging markets are getting hit in this mini-crisis by rising borrowing costs.

More borrowing to solve the Dubai crisis makes another one more likely.

What investors should remember is that in ordinary circumstances (peace, absence of famine, plague, or rampant socialism), the economies tend to grow at about 2%/year. One can try to increase that by borrowing, and at the right opportunity that can be a winner. But most of the time, huge increases in debt levels are eventually associated with default. In a highly leveraged financial system where lenders are themselves indebted, defaults can cascade. As markets get more risk averse and credit tightens (i.e. rates rise to compensate for perceived increased risk) various government ministers/bureaucrats come forth and say, “There is nothing fundamentally wrong here. All we need is to restore confidence. This is not a solvency issue, it is a liquidity issue!” They answer by taking on more debt to free up liquidity.

Risk that an isolated default can spread then rises, as an increasingly leveraged financial system comes more and more to resemble a massive arrangement of dominoes. The more leverage on any entity, the taller that domino. The more leverage in the system, the more tightly the dominoes are spaced. That arrangement collapses when someone knocks over a key domino.

In the week ahead, the key to gauging price action for the broader financial markets and the USD will lie with the market’s ultimate response to the Dubai crisis. There hasn't been enough time to see market’s true response to the threat. The incredible volatility through the end of last week was certainly leveraged by the thin liquidity from the US holiday.

Indeed, the timing of Dubai World's announcement coincidentally (?) allowed an incredible short term profit opportunity for anyone with advanced notice, and to minimize the time markets had for panicking before taking a weekend break to calm down and perhaps minimize the chances of an even more extreme reaction. Liquidity was extremely low at the time of the Nov 25^th-26^th announcement, with both the US and Islamic World their respective Thanksgiving and Eid holidays. Thus the volatility generated by this market moving news was exaggerated by the small number of traders available.

The demand for safe-haven dollar shorts unwound was so strong that the euro hit an intraday low of 1.4829 when the European markets opened. The price action in USD/JPY tells us that risk aversion was the primary driver of the forex markets as USD/JPY dropped to a 14 year low when the Asian markets opened last night.

Perhaps very significantly for the coming week, the selling did not continue into the U.S. trading session. The limited number of U.S. traders Friday actually sold rather than bought dollars which suggests that not everyone believes that the Dubai news will have immediate global ramifications, because the first reaction to a major surprise announcement like this one is always sell first and ask questions later. As a result, the USD and JPY were the biggest winners. That USD buying didn't continue into Friday suggests markets might open Monday on a more positive note.

Indeed, when the deep pockets return to the market after having had a weekend evaluate things, it will be easier to establish true trends as there will be a source for momentum.

While we can't say for certain whether this is the beginning of a longer term reversal in risk assets, some tentative conclusions can be drawn.

Additional Points to Consider

As a result, investors fear that this could mean an outright default on Nakheel's debt, because delinquency is usually the precursor default. Although the market believes that this is a major development for the global economy, it is important to realize that Nakheel's debt is only $3.52 billion, a fraction of Dubai World's overall debt. Also, U.S. and European banks have very small exposure to Nakheel’s debt, though it's not fully clear who has what exposure, and how well they can absorb possible losses.

However, markets heard the same kind of talk at the start of the US sub-prime lending crisis, and realize that these things can quickly snowball into far bigger problems.

Granted a default may entitle investors to some of Dubai World's assets, H.H Sheikh Ahmed bin Saeed Al-Maktoum, Chairman of the Supreme Fiscal Committee, has already issued a statement confirming the Dubai Government's intention to directly intervene and manage the restructuring of Dubai World commercial operations and its debt obligations. Although some people are afraid that this could turn into an Argentina style debt default or a repeat of volatility of Q4 2008, what is more worrisome is the fact that this may be indicative of the health of the entire property sector in the Middle East. Which global banks are deeply exposed there?

STOCKS

Analysis: Apart From Dubai, Pullback Potential Was Already Present & Watch for Black Friday Results

Even before Dubai threatened markets with the largest sovereign credit default since Argentina in 2001, a larger underlying shift in global capital markets likely already began in October. In addition to Dubai, consider the already extant pressures on risk appetite.

Morgan Stanley index of world stock prices fell the most in eight months while
The VIX Index, a stand-by measure of investors’ fear, rose the most in a year.
The S&P 500 remains unable to sustain a break above multi-week resistance at 1100, and any failure by world leaders to calm markets soon will harden that resistance.

The financial system's resistance to further crises has been weakened by the crisis of the past two years, with central banks already burdened with debt. Relative equity valuations have looked excessive for some time now with prices trading at the highest levels relative to earnings in seven years.

Further, the market’s mood seems to be in transition, with the relief that collapse had been averted, which produced the risk rally of recent months, giving way to concerns about valuations and what happens when interest rates invariably reverse course higher and the flow of government cash dries up.

Companies’ “better than expected” earnings of the past several quarters have relied heavily on, cost cuts, usually from firing workers. Ultimately this means lost consumer demand.

Commodities

Currencies

DISCLOSURE: NO POSITIONS IN THE ABOVE

Global Markets Outlook 11/30 – 12/04 Short Version: Dubai, Other Key Events, Implications

2009-11-29T05:56:00.001-08:00

NB: THE BELOW IS A HIGHLY ABRIDGED VERSION. THOSE SEEKING FULL DETAILS ON EACH SECTION SHOULD VISIT http://fxmarketanalysis.wordpress.com or http://worldmarketsguide.com

SPECIAL SECTION: The Threat of Dubai Debt Crisis Spreading Hangs Over All Global Asset Markets

Key Points to Note

Given that markets are:

Sitting atop an extended rally on questionable fundamentals and valuations
Nervously remembering how two years ago, a supposedly containable US real estate default crisis metastasized into a near worldwide financial and economic collapse from which they are still trying to recover

a far more dramatic response from the dollar and nearly every other asset class is quite conceivable, thank you.

Market concerns include:

Rising risk aversion lowers the creditworthiness of related entities, particularly those that have lent to Dubai World. Most of those are either UAE-related or European banks. This isn’t a huge issue, unless it becomes a big European issue — unlikely, but note that European banks are even more levered than US banks. It's believed that UK's RBS, HSBC, Barclays, Lloyds and Stand Chartered are having large exposures in case of defaults. Who would be affected if these were undermined?

Secondary aftershocks to entities similar to Dubai — other places in the world that have borrowed a lot (Greece, Ireland, Iceland, parts of Eastern Europe, etc). Thus many emerging markets are getting hit in this mini-crisis by rising borrowing costs, which brings them closer to defaults of their own.

More borrowing to solve the Dubai crisis makes another one more likely.

o What investors should remember is that in ordinary circumstances (peace, absence of famine, plague, or rampant socialism), the economies tend to grow at about 2%/year. One can try to increase that by borrowing, and at the right opportunity that can be a winner. But most of the time, huge increases in debt levels are eventually associated with default. In a highly leveraged financial system where lenders are themselves indebted, defaults can cascade. As markets get more risk averse and credit tightens (i.e. rates rise to compensate for perceived increased risk) various government ministers/bureaucrats come forth and say, “There is nothing fundamentally wrong here. All we need is to restore confidence. This is not a solvency issue, it is a liquidity issue!” They answer by taking on more debt to free up liquidity.

o Risk that an isolated default can spread then rises, as an increasingly leveraged financial system comes more and more to resemble a massive arrangement of dominoes. The more leverage on any entity, the taller that domino. The more leverage in the system, the more tightly the dominoes are spaced. That arrangement collapses when someone knocks over a key domino.

Ray Of Hope From Friday's End of Session Action?

Indeed, when the deep pockets return to the market after having had a weekend evaluate things, it will be easier to establish true trends as there will be a source for momentum.

While we can't say for certain whether this is the beginning of a longer term reversal in risk assets, some tentative conclusions can be drawn.

Additional Points to Consider

Investors fear that this could mean an outright default on Nakheel's debt, because delinquency is usually the precursor default.

While U.S. and European banks have very small exposure to Nakheel’s debt, it's not fully clear who has what exposure, and how well they can absorb possible losses. Many believe the crisis is quite containable

However, markets heard the same kind of talk at the start of the US sub-prime lending crisis, and realize that these things can quickly snowball into far bigger problems.

STOCKS

Analysis: Apart From Dubai, Pullback Potential Was Already Present & Watch for Black Friday Results

Morgan Stanley index of world stock prices fell the most in eight months while
The VIX Index, a stand-by measure of investors’ fear, rose the most in a year.
The S&P 500 remains unable to sustain a break above multi-week resistance at 1100, and any failure by world leaders to calm markets soon will harden that resistance.

The financial system's resistance to further crises has been weakened by the crisis of the past two years, with central banks already burdened with debt. Relative equity valuations have looked excessive for some time now with prices trading at the highest levels relative to earnings in seven years.

Further, the market’s mood seems to be in transition, with the relief that collapse had been averted, which produced the risk rally of recent months, giving way to concerns about valuations and what happens when interest rates invariably reverse course higher and the flow of government cash dries up.

Companies’ “better than expected” earnings of the past several quarters have relied heavily on, cost cuts, usually from firing workers. Ultimately this means lost consumer demand.

Black Friday Results Due Early This Week

In addition to the reverberations from Dubai, another critical event played out on Friday- Black Friday, named because it's the official opening of the US holiday gift buying season that essentially extends until after the New Year. Results should be out early this week and give some hint at how this make-or-break period for retailers plays out. A bad season could mean more layoffs and commercial loan defaults from the retail sector.

Weekly Recap Nov. 23-7

A surprising sell-off in overseas markets triggered by Dubai debt concerns led to sharp losses in U.S. equity markets on Friday, wiping out the gains made earlier in the week.
The market's only notable move higher this week came at the open on Monday, when a weaker U.S. dollar and much better-than-expected Existing Home Sales report helped stocks surge.

Stocks held those gains through Monday's session, and into Tuesday and Wednesday as volume slowed ahead of the Thanksgiving Day holiday. But one headline from Wednesday, that the UAE government was restructuring Dubai World, didn't initially receive much of a reaction.
But on Thursday, with U.S. markets closed, European markets plunged as concerns grew, helping to change investors' risk appetite. The Dubai government asked creditors, which reportedly include many European banks, particularly in the United Kingdom, to defer payments on some $20 billion in debt coming due over the next 18 months.
Asian markets, which had traded lower on Thursday, plunged overnight on Friday, and the weakness carried over to U.S. markets, with the S&P 500 losing 1.7%.
Even if Dubai crisis is contained, it may still serve as warning for those seeking to book profits ahead of yearend tax selling to do so soon.

MAJOR COMMODITIES

Commodities dropped sharply around the world along with risk sentiment from fear of contagion effect from Dubai debt payment delay request, which could trigger second wave in the credit crisis. Gold has a better chance of stabilizing and recovering if Dubai crisis is contained, because it has shown it can rise while the other markets struggle. Oil to follow stocks, then fundamentals. Both of these bearish for now.

CURRENCIES

USD

On Temporary "Dubai High" or Reversing Trend?

Summary

US Dollar Outlook: Bullish

- Key Events: Monday: Preliminary Black Friday Sales Results, Tuesday ISM Manufacturing PMI, Pending Home Sales m/m, Construction Spending m/m, Wed. Fed Beige Book, Thurs. ISM Non-Mfg. PMI, Fri. Non-Farms Payrolls, Unemployment Rate

- Fear of Dubai debt default contagion reminds traders of the dollar’s value

- US recovery more measured than initially expected, confidence uncertain

- Is the USD's recent bounce the start of a true technical reversal?

EUR

Critical ECB Decision, US NFP Bring EUR Volatility -Euro Drops on Dubai World Credit Scare

Summary

EUR Outlook: Bearish/Neutral – Moving Opposite USD

- Key Events: Mon. Eurozone (EZ)CPI y/y, Tues. German Unemployment Change, Rate, EZ Unemployment Rate, Wed. EZ PPI m/m, Thurs. EZ GDP q/q, Retail Sales m/m, ECB Interest Rates

- Bargain-hunters still maintain Euro bid through week’s end, suggest EUR resilience or USD weakness in the face of all but most dire crises, suggesting EUR/USD downtrend tough to break barring real pullback in stocks.

- ECB Decision to reduce QE could boost EUR, but could be outweighed by big moves in stocks

- EURUSD double top still forming?

GBP

Diminishing Risk Appetite To Support the Pound?

Summary

GBP Outlook: Bearish

- Key Events: Sun. Gfk Consumer Confidence, Hometrack Housing m/m Mon. Net Consumer Credit, Mtg Approvals, Tues. Nationwide House Prices, PMI Mfg., Thurs. PMI Services

- The second reading of U.K. 3Q GDP was revised higher to 0.3% from 0.4%, as Private consumption improved, but still shows UK in recession

- The BBA reported that loans for house purchase rose to 42,238 from 42,073, highest in over a year

- The CBI Quarterly Distributive trades reading improved to 13 from 8

- Lies in the middle of risk appetite spectrum, will move with risk appetite, USD

JPY

Probable Drop In Risk Appetite & Improving Fundamentals Likely to Outweigh BoJ Intervention Threats

Summary

Yen Outlook: Bullish

- Key Events: Mfg. PMI, Industrial Production y/y, Mon. Housing Starts, BoJ. Gov. Speaks

- Trade Surplus Swells as Unemployment Weighs on Imports

- BOJ May Resume Buying Corporate Debt, Meeting Minutes Show, to weaken the yen

- Jobless Rate Declines For the Third Month as Workers Exit Labor Force

- Officials Step Up Currency Intervention Threats as Yen Pushes Higher

- The key to restoring yen weakness lies with stabilizing risk appetite than with the BoJ

- BoJ should consider US examples of how to weaken a currency via stimulus increase

CHF

Moving With Risk Appetite, And That's Good For the CHF

Summary

CHF Outlook: Bullish/Neutral

- Key Events: Mon. SNB Chairman Roth Speaks, Tues. SVME PMI, Friday CPI m/m

- Safe Haven Status Helps in Dubai Scare

- SNB intervention looms if big pullback in risk assets pushes CHF higher against the EUR

- Gaining against USD, EUR

CAD

CURRENT ACCOUNT DEFICIT HITS RECORD HIGH-Likely to Continue Following Oil, Stocks, News In That Order.

Summary

CAD Outlook: Bearish

- Key Events: Mon. GDP m/m, Fri. Unemployment Change, Rate, Ivey PMI

- Losing ground to the USD since mid October, trend could continue

AUD

Riding Risk Appetite Down, But Could Be Least Hurt Of All The Risk Currencies

Summary

AUD Outlook: Bearish

- Key Events: Tues. Building Approvals, Cash Rate, RBA st., Thurs. Retail Sales m/m

- Moving with Risk Appetite, But May Drop Least if Markets Pull Back

NZD

Moving With Risk Appetite And Thus Vulnerable to Pullback

Summary

NZD Outlook: Bearish

- Key Events: Mon. Building Consent

- Like the CAD, has risen with the AUD yet lacks the fundamentals to justify the rise

- Little major NZD news means it will go with risk appetite, which is likely to be flat to down

- Down trending against the USD since early Nov

CONCLUSIONS

The beginning of the week will be dominated by further reactions and news related to Dubai, we expect some attempts to calm markets from Dubai and other world leaders. Black Friday results may also figure strongly. After that ECB announcements about reducing QE and events leading up to and including US employment reports Friday should be the dominant market movers.

Traders should keep watch on these events and as always, on the major stock indices, especially the S&P 500.

DISCLOSURE – NO POSITIONS IN ABOVE MENTIONED INSTRUMENTS

The Must-Know Truth About Stocks and the USD

2009-11-26T06:01:00.000-08:00

Want a solid grasp of inter-market relationships in 10 seconds? Here it is:

Just follow the S&P 500 Chart, in whatever time frame you trade or invest.

A Brief Explanation & Executive Summary of this Article

In general:

• Most asset markets follow the moves of global stocks, either moving in the same or opposite direction, but deriving that direction from global equities. That's because equities are the best overall picture of global risk appetite (so much so that the movements of global stocks and risk appetite are virtually one and the same)

• The S&P 500, as the most representative index of the US stock market, still the world's single largest stock market, is the one chart that best summarizes the prevailing sentiment, be it positive (aka risk appetite or optimism) or negative (aka risk aversion or pessimism).

• In general, in the short term the S&P 500 also drives the direction of currency value, especially that of the most liquid one of all, the USD. In sum, it is truly the One Chart to Rule Them All (yes, yes, of course there are exceptions, qualifications etc. Please, I'm trying to keep this simple for the lay-traders).

• Many commentators wrongly believe the opposite, that a weak USD drives stocks higher, due to cheaper US exports and inflated US multinational earnings from foreign revenues, and a strong dollar drags them lower. By the same logic underpinning this belief, European and Asian stocks should behave in the opposite manner, as a weak USD hurts their exports and earnings. In fact European and Asian stock markets move in the same direction as the S&P 500 relative to the USD. That is, when they rise, the USD falls, and vice versa. So what is the real relationship between the USD and stocks?

• Risk appetite/optimism about economic recovery and growth is best reflected in stocks. When there is optimism, i.e. rising stock markets, that causes traders to buy higher yielding currencies and sell/borrow the low yield USD (and a few others, but especially the USD) to fund these purchases at low interest, hoping to profit on the interest rate differential. In effect they are "shorting" the USD. When fear aka risk aversion rises, traders unwind these trades and buy back the USD, causing the USD to rise like a shorted stock. THUS STOCKS USUALLY DRIVE THE USD AND OTHER FOREX PAIRS, NOT VICE VERSA

The One Chart That Rules Them All Rules the USD Too-Though Many US Stock Commentators Don't Get It

In other words: Equities Generally Drive the USD and Other Currencies , Not Vice Versa.

Many US stock pundits still don't get it. Many believe the USD is a primary cause of movements in the S&P 500 and other major stock indexes.

For example, look at the US stock market summary of the November 25th US stock market action published on Yahoo! Finance from Briefing.com, which opened with the following statements.

A new 52-week low for the Dollar Index [emphasis mine] and a generally pleasing batch of economic data helped stocks make their way higher….

Renewed pressure against the U.S. dollar sent the Dollar Index to a 1.1% loss, its worst single-session percentage drop in nearly four months. The drop also put the Dollar Index at a fresh 12-month low, but gave a broad lift to the equity market.

In other words, a weak dollar lifts stocks, and vice versa. In general, the opposite is in fact the case, stocks drive the USD and other forex, not the other way around.

This confusion is somewhat understandable if one considers the perspective US based, US-centric stock commentators who don't fully do their homework. Why?

What Confuses Many US Stock Pundits

• If one focuses ONLY on US stock market movements and USD movements during US stock market hours, the negative correlation (tendency to move in opposite directions) occurs simultaneously, so the real cause/effect relationship isn't clear on a superficial level.

• Forex Does Affect Equities Over the Longer Term: It's true that forex does affect equity markets, however this influence is usually over the longer term. One reason for this is that longer term forex trends influence interest rates over a longer term, which in turn influences demand for equities. Conversely, stock market movements tend to have immediate impact on currency markets. Much of the reason for this is that 80% of currency trading is speculative, mostly very short term from minutes to a few days. A much larger proportion of equities tend to be held for longer periods.

There ARE reasons a weak USD might move stocks in the short term. This reasoning is seductively simple:

• A rising dollar makes US exports more expensive and less competitive, lowering earnings expectations. This is correct. Forget for a moment that it makes US imports, and America IS a net importer, cheaper and key imported imputs like oil cheaper, at least in theory.

• A rising dollar makes US multi-national earnings in foreign currency worth less, thus also lowering earnings expectations. This is also correct. Again, suspend any thoughts that a stronger dollar makes foreign currency denominated expenses cheaper.

While we're being easy on poor stock market pundits, please also put aside any thoughts about the potentially disastrous effects of a long term decline in the US dollar on the US economy (and US corporate earnings, because 70% of US GDP is domestic consumer spending), how it will ultimately drive up the interest rates that the US government must pay to finance itself, interest rates in general (goodbye housing market, bank credit risk, banks, housing related jobs, etc), and the effects of the dollar ultimately losing its reserve currency status (far less demand still for the USD). What the heck.

WHY THE ABOVE REASONING IS WRONG

However, if a weak dollar is good for US stocks for the above reasons, it should be bad for Asian and European stocks for the same reasons. That is:

• A weak US dollar makes exports from these regions more expensive and less competitive, and should thus lower earnings expectations seriously. The US is still one of, if not the, largest customers for these regions.

• A weak US dollar makes the dollar denominated earnings from sales in the US, (again, often the biggest single customer they have) from these exports worth less, again lowering earnings expectations. In the case of commodity exporters, this is an especially serious problem unless commodity prices rise (and they don't do so easily when the growth picture gets negative and stocks fall) because their commodities are typically priced in dollars.

Thus by the same reasoning that says a weak dollar is good for US stocks and a strong dollar is bad for them, then Asian and European stocks should be falling when the US dollar falls and rising when it rises. In other words, they should correlate positively with the USD. Rising when the USD rises, and falling when it falls.

Indeed, the positive effects of a weak USD should be more pronounced, because most economies in Asia and many Europe depend on exports for a far larger portion of their GDP than the US, which derives most of its GDP from domestic consumer spending.

As an analyst who lives seven hours ahead of EST, and watches all major global stock, forex, and commodity markets, especially during the hours in which Asian and European equities markets are open, I see things many miss.

Here's a key observation that anyone in the markets must understand:

In fact, major Asian and European stock markets share the same multi-day (and longer) trends that US stocks show, moving in the opposite direction of the USD. That is, when Asian and European stocks are rising, the USD is falling, just like is does with US stocks.

That all global stocks in general are rising while the USD falls suggests that the reasoning behind the "dollar as a major mover of stocks" is wrong, because a weak USD should be hurting non-US stock markets by the same reasoning used by those who claim it helps US stock markets.

THE USD HAS BEEN IN A DOWN TREND SINCE MARCH 2009

Let's examine the below charts and how the USD and Global Stocks have moved over the same periods.

Here’s a chart of the UUP, an ETF that rises with a rising USD and falls with a falling USD

UUP Daily Chart : Note how it's been falling since the March Rally in Global Equities Began (08 Nov 25)

Note how the USD has been falling since early March, the same time that Global stocks began rallying.

For another example of the USD's fortunes, here's a daily chart over the same period of the EURUSD, perhaps the forex trading pair most representative of the USD's fortunes, because this pair alone comprises about one third of all forex trades. Thus every third forex trade is this pair, and for every 3 Euros bought or sold, a USD is used, and vice versa.

Here too, note how the EUR has gained over the USD, meaning the USD has been weakening during this period against other pairs. Check any major forex pair you want, the trend is indeed the same – weakening USD.

EURUSD Daily Chart 3/09—11/09 (06 Nov 26) Chart Courtesy of AVAFX.com

Thus for those not aware of it, since March, the USD has been losing value and in a steady down trend against other major currencies.

EXAMPLES OF INTERNATIONAL STOCK MARKETS RISING WHILE THE USD FALLS

Meanwhile, not only has the S&P has been in a strong uptrend, but so have most other major international stock indexes.

European Stock Indexes

For example, look at a daily chart of the DAX, the main German stock market index.

Daily Chart DAX 3/09—11/09 (07 Nov 26) Chart Courtesy of AVAFX.com

Here's a daily chart for the CAC, the main French stock index

Daily Chart CAC 3/09—11/09 ( 08 Nov 26) Chart Courtesy of AVAFX.com

Here's a chart for the FTSE, the main UK stock index

Daily Chart FTSE 3/09—11/09 (09 Nov 26) Chart Courtesy of AVAFX.com

Note how all have similar up trends to that of the S&P 500

Asian Stock Indexes

The same trends have held for the Asian markets, for example this chart of Hong Kong's Hang Seng. Considering the negative effects of a weak dollar on Chinese export earnings, this chart should not be showing such a strong uptrend if in fact the reasoning applied by US stock pundits held true. If the dollar was driving stocks, this and other charts of Asian export economies should be more of a mirror image of the S&P 500 rather than a similar and sometimes more strongly up-trending version

Daily Chart Hang Seng Index 3/09—11/09 (10 Nov 26)

THE TRUE RELATIONSHIP REVEALED - WHY STOCKS IN FACT USUALLY PROVIDE DIRECTION THE USD AND FOREX TRADE IN GENERAL

When Asset Markets Are Optimistic, Currency Traders Sell Dollars

Global stocks, arguably best represented by the S&P 500, are widely believed to be the best barometer of optimism about growth prospects, aka risk appetite, or pessimism, aka risk aversion.

When there is risk appetite, traders buy currencies that tend to rise when there is growth (for a variety of reasons, but mostly because these offer the highest short term yields). These are referred to as risk currencies, because they tend to rise with risk appetite. The main ones being the AUD, NZD, EUR, and CAD).

When Stocks Markets Retreat, Currency Traders Buy Back Dollars (also JPY and CHF), Thus Misleadingly Labeling these "Safe-Haven" Currencies

When there is fear or risk aversion, the risk currencies are sold and traders buy back the low yielding currencies used to fund these purchases, thus these low yielders tend to rise in times of fear. Thus this group is known as the safe-haven currencies. The USD has, over the past few years, generally been the #2 most in-demand safe haven currency, after the #1 JPY, though recently it has arguably become #1 currency bought in times of fear.

These Labels Refer to Market Behavior Only, Not Fundamental Store of Value Safety

Understand that these labels do NOT at all mean that one currency is actually a better or less reliable store of value than another, indeed some of the "risk" currencies have much better fundamentals than the safe havens, and are backed by far healthier banking systems that are largely unburdened with bad debt, unlike the USD.

Rather this nomenclature simply refers to how the currencies behave in times of optimism of pessimism.

Because risk and safety assets tend to move in opposite directions at the same, which asset influences which is not always clear to casual observers. To further complicate matters the roles do at times briefly shift, and the primary forces that drive a given currency price can and do change over time.

Conclusion: Short Term Movements In Stocks Drive Daily Currency Movements , Whereas Currencies Generally Influence Stocks Over a Longer Period

Short term currency moves thus generally have little short term influence on stocks, whereas short term stock market movements have immediate influence on currency pair prices.

This is true for all economies to varying degrees, though in fact ironically far less so for the USD, since most of US GDP is from consumer spending, NOT exports. As a net importer, when the US economy is healthy and importing, the US economy reaps benefits, especially in the short term, from a strong USD because the imports become cheaper.

However, about 80% of currency trade is from very short term speculative traders, and in the short run, they look to the direction of stocks to decide whether to go long or short on the risk currencies or safety currencies.

The above article has attempted to present a complex topic in simple terms, and thus inherently suffers from certain oversimplifications. Historically, currencies trade based on the same fundamentals that influence their local stock markets, and thus have often move in the same direction.

That has not been the case since the current crisis began. Until there are deep improvements in the fundamentals of the US economy that will allow the Fed to raise interest rates, the USD is likely to continue to move in the opposite direction of stocks, as are other low yielding currencies like the JPY and CHF (the CAD has fundamental underlying differences from these that allow it to trade in the same direction as risk appetite / stocks despite its low yield).

Since the current downturn began, the USD started trading as a safe-haven currency, i.e. one that traders buy ONLY in times of rising fear. Without getting too much into the technicalities of why this is the case (like that it's used as a funding currency of carry trades) suffice to say that it behaves this way due to the USD's poor fundamentals, including:

• Low income: yield low short term yields that are likely to be among the last among the major currencies to rise, thus one gets very low returns from holding low risk USD debt

• Low chance of capital gains due to (at least perceived) ballooning supply that is widely believed to virtually guarantee inflation/devaluation), thus making the USD a poor holding for capital appreciation

Thus the only reason to hold the USD at this time is that it DOES tend to rise when there is risk aversion. Because stocks are currently seen by currency traders as the prime barometer of risk appetite, the safe-haven USD falls when stocks rise and vice versa when they come in.

DISCLOSURE: NO POSITIONS IN ABOVE INSTRUMENTS

BEST INTERNATIONALTRADES PER DAILY CHARTS 11/24: S&P 500 Stalled at Resistance, Ditto Other Risk Assets

2009-11-24T02:29:00.000-08:00

S&P 500: Resistance holding at 1110 where there is a convergence of both the upper Bollinger Band and a bearish doji candlestick from Nov. 18th, surrounded by equally indecisive spinning top candlesticks. Also of concern, the price level is currently in the middle of its rising channel, and the current $1100 level is itself a price resistance level. Thus we believe traders should be wary of opening new positions on this index and on all other assets until we get a decisive move above or below 1100. As noted above, it’s a struggle between liquidity pushing stocks up vs. concerns over the underlying fundamentals and high valuations that suggest selling. Unclear how it will play out. Because the S&P 500 is so representative of overall risk sentiment, and thus the "One Chart to Rule Them All", this indecisive picture suggest traders should make long or short moves when the S&P hits support levels at 1076 (Fib retracement +20 day MA + some price support from mid-October + rising trend line) or a decisive break over 1100. Traders should be very cautious opening long positions in risk assets at this time, and employ tight trailing stops or monitor positions closely on existing open long risk asset positions.

S&P 500 Daily Chart as of Nov 24 (01 Nov 24)

GOLD: Continues moving largely independent of movements in equities, moving instead on speculation (or a new fundamental outlook of greater demand?) that other central banks and other large buyers may do the same, and breaking to new highs despite the struggles of stocks and energy commodities with which it has typically moved. The below chart shows possible retracement points if/when the move makes normal retest of support. Making a very grudging retreat, far less than most other risk assets, in early Tuesday trade

NB: Yesterday's candle shows an indecisive spinning top. No major deal by itself, but taken together with

• it's being perched atop such a steep, fast rally and

• the coming a low liquidity thanksgiving weekend

Traders have to be wondering if the next day or so might be a time to book profits. Those with open longs should have some kind of stop loss to protect profits.

Gold Daily Chart (02 Nov 24)

As noted in our Global Markets Outlook 11/23-11/27:

Last week, gold rallied +2.75 to 1146.8 and the new record high was set Wednesday at 1153.4.

There's a growing belief in a new fundamental factor -- that underlying demand for gold has increased due to central bank buying. After the Reserve Bank of India, the Bank of Mauritius bought 2 metric tons of gold from the IMF at market price on November 11. Compared with India's 200 metric tons, Mauritius' purchase was insignificant. However, same as the deal with India, the implications radiate far beyond the size of the deal itself.

Earlier this year, the IMF announced its plan to sell a total of 403.3 metric tons of gold to bolster its finances. The news weighed on market sentiment as investors worried about at how much and to whom the gold would be sold. Now, more than half of the planned amount has been sold to official sectors at market prices, sentiment appears to have shifted from concern over overhanging supply to disappearing supply as large exporter central banks and sovereign wealth funds seek to convert depreciating dollar holdings into gold. Right or wrong, that is the sentiment at this time, and it's been strong enough to send gold soaring while crude and stocks have been stalling out. Impressive relative strength that has won many believers and convinced markets that any pullback will not be pronounced or long.

Consider:

• In April, China, the biggest gold producer in the world, increased reserves by +76% to 154 metric tons since 2003. The market anticipates China will be another big buyer of IMF's gold.

• Since the beginning of 2009, gold price has rallied almost +30%. Also, after breaching 2008-high at 1033.9, the yellow metal's rise has accelerated, jumping more than 100 dollars in a month. The long-term uptrend is not likely to end soon.

• Apart from government buying, new private gold funds should give a further boost to robust investment demands. John Paulson announced his plan to launch a new gold fund next year with as much as $250M of his money. Large gold ETFs or funds usually have holdings that are comparable to central banks. For instance, SPDR Gold Shares, the world's largest gold ETF, is the world's 5th largest bullion owner just below France and above China.

In short, it's not just increasing gold demand, but demand from big buyers.

In coming weeks, gold price should continue to be very much directed by USD's movement. However, the inverse relationship between gold and the dollar should not be taken for granted. For instance, in the 90s, the yellow metal's supply was so abundant that its price plummeted. In 2005, gold price surged due to tightness in the market. Therefore, some analysts hold that gold price may continue to rise given the reduction in gold production and increase in central bank demand, despite a possible rebound in USD early next year. Famed NYU Economics Professor Nuriel Roubini, credited for calling the current crisis years ago, believes the run in gold is an unsustainable bubble, while famed commodity trader Jim Rodgers holds gold is going much higher. As long as the central bank/sovereign wealth/momentum story holds up, Rogers looks correct.

Crude Oil: Following stocks lower early Tuesday. Range trading between $82-$76/bbl since mid October, moving more or less with stocks as the S&P struggles at the $1100 resistance level and oil at $82, neither to move higher until further positive news on the recovery. However, with gold having continued higher in utter disconnect from stocks and oil, the historic gold ratio now justifies oil as high as around $97.25 (12:1 ratio) and no less than $77.80 (15:1). Thus while crude remains range bound, if gold can continue breaking to new highs, as many expect it to do, then crude could follow it sharply higher over time, especially if other risk assets can avoid a sharp correction (which they are doing nicely, as shown by the S&P 500 breaching resistance at $1100) or there is evidence of continued strong demand from China and other developing economies.

NB: Crude has been among the weaker risk assets over the past month despite the USD's weakness. Crude peaked weeks before stocks did, and is behaving relatively worse than stocks. For example, yesterday's action showed that stocks were still able to retain some of their gains when momentum reversed, but crude could not, and closed lower. Not surprising, since crude tends to exaggerate the S&P 500's trends for better and for worse. Range bound for the near term, will likely follow stocks higher to its upper range near $82 if stocks can rally, but poor fundamentals and an extended rally for both oil and the S&P 500 that it tracks suggest more downside risk at this time.

Certainly seems unwise to consider new longs until oil hits at least the $73-6 range, if not lower. Watch the S&P 500 to lead oil.

WTI Crude Oil Daily Chart (03 Nov 24)

EURUSD: Like the S&P 500 and Oil, has been range trading since mid October and is closely mimicking the S&P 500's action yesterday and early Tuesday as of this writing. Expect it to continue to do so. It's primary advantage as a trading vehicle over the S&P 500 is that as a forex pair, traders can use 200:1 leverage, thus increasing profit potential dramatically, as a 1% move becomes a 200% change in profit or loss, thus making it an excellent vehicle for those with familiar with technical analysis and risk management tools, and the discipline to follow them. These aren't hard to acquire, and forex sites like avafx.com provide plenty of free material on the topic. For all others, forex is a great way to lose money really fast.

EURUSD DAILY CHART (04 Nov 24)

As noted in our Global Outlook for 11/23-11/27:

For the coming weeks euro traders need to consider the following developments.

• In the background, stimulus reduction that is starting to build momentum, developing both interest rate expectations and concerns that the Euro-zone economy will falter as government spending slows and exposes a weaker economy.

• Of more immediate concern, there's a series of weighty economic indicators that will offer some volatility.

• However, the main threat of an impending break in recent trends comes from intangible fundamental dynamics like liquidity and the influence of a domineering US dollar.

Risk appetite is the main catalyst and fuel for the financial markets. After an eight-month trend founded based on the need to reinvest funds and take advantage of an historical rally; confidence may now be turning into a hesitation that will be well reflected in the EURUSD.

While the overall rising trend of higher lows from March remains; the past few weeks have turned to chop that is starting to develop an ominous bias, similar to that of the S&P 500. Given the unusual market conditions that back this liquid pair up, the possibility of a reversal in trend shift is more pronounced. The US markets, the single largest source of liquidity in the world, begin an extended holiday weekend starting Thursday, and in turn, a full-week of notable economic releases gets condensed into just a few days. A combination of event risk and shallow market depth may be the final ingredients for a breakout.

NZDUSD: More room to short?

NZDUSD Daily Chart (05 Nov 24)

As Monday and Tuesday morning action shows, this pair is also mimicking stocks, like the EURUSD. Still has room to run in either direction within Fibonacci, Bollinger Bands, moving average and price level support/resistance levels.

We noted in our prior Weekly Outlook of 11/16 – 11/20 that this pair was likely to be one of the best shorting plays when stocks dropped back to retest support, because the pair had risen in tandem with the AUDUSD but the NZD lacked the strong underlying economic fundamentals of the AUD and was thus a better shorting candidate. Almost on cue, the pair fell about 282 basis points, 3.76%, a potentially almost 800% profit for currency traders typically using 200:1 leverage, of which they could easily net over 400% even if using a relatively conservative trading plan to minimize risk and get in only once a trend is established. Now in the middle of its $0.7562 - $0.7073 range since late October, the pair moves with the S&P, and this range has enough room to be played in either direction WHEN the S&P 500 decisively breaks though $1100 or drops to retest support

NB: See a daily chart of the AUDUSD, and note the similarity. Those seeking to trade this pair could apply the above mentioned indicators and comments.

GBPUSD: Another risk appetite play, especially as short opportunity if stocks continue to pull back?

On Nov. 9th, we wrote: "One of the strongest currencies last week against the USD and EUR as it gained on less than expected expansion of QE, but nearing the top of its trading range since mid July and at the top of its Bollinger Band Range and recent high of $1.700. Could be a good short trade if markets pull back." Like the NZDUSD above, has room to run in either direction if a trend resumes

GBP/USD Daily Chart. (05 Nov 09)

Look what happened.

GBP/USD Daily Chart (08 Nov 23)

The GBP/USD did just that the following week on evidence of new dovishness from the BOE and made a nice 2% move down, a potentially 400% profit for currency traders typically using 200:1 leverage, of which one could take a 200%+ profit if using a sound trading plan that minimizes risks by triggering entries only on confirmed trends and uses trailing stop losses to lock in gains. As the chart above shows, it's following the S&P 500 and has room to play in either direction once the S&P trend is clear. The pair also has enough support/resistance points to provide entry points for long or short plays if the S&P settles into a range for a while. The 1.6300, 1.6400, 1.6500 and 1.6800 levels provide both Fibonacci and price support/resistance.

Given the broken trend line, slight bias to the downside, though again, this pair should continue to follow the S&P 500.

DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS NO POSITIONS IN ABOVE INSTRUMENTS.

BEST INTERNATIONAL TRADE OPPORTUNITIES 11/23/09

2009-11-23T02:42:00.000-08:00

S&P 500

S&P 500 Daily Chart (01 Nov 23)

Resistance holding at 1110 where there is a convergence of both the upper Bollinger Band and a bearish doji candlestick from Nov. 18th, surrounded by equally indecisive spinning top candlesticks. Also of concern, the price level is currently in the middle of its rising channel, and the current $1100 level is itself a price resistance level. Thus we believe traders should be wary of opening new positions on this index and on all other assets until we get a decisive move above or below 1100. As noted above, it’s a struggle between liquidity pushing stocks up vs. concerns over the underlying fundamentals and high valuations that suggest selling. Unclear how it will play out. Because the S&P 500 is so representative of overall risk sentiment, and thus the "One Chart to Rule Them All", this indecisive picture suggest traders should make long or short moves when the S&P hits support levels at 1076 (Fib retracement +20 day MA + some price support from mid-October + rising trend line) or a decisive break over 1100.

GOLD:

Gold Daily Chart (04 Nov 23)

Continues moving largely independent of movements in equities, moving instead on speculation (or a new fundamental outlook of greater demand?) that other central banks and other large buyers may do the same, and breaking to new highs despite the struggles of stocks and energy commodities with which it has typically moved. The below chart shows possible retracement points if/when the move makes normal retest of support

As noted in our Global Markets Outlook 11/23-11/27:

Last week, gold rallied +2.75 to 1146.8 and the new record high was set Wednesday at 1153.4.

There's a growing belief in a new fundamental factor -- that underlying demand for gold has increased due to central bank buying. After the Reserve Bank of India, the Bank of Mauritius bought 2 metric tons of gold from the IMF at market price on November 11. Compared with India's 200 metric tons, Mauritius' purchase was insignificant. However, same as the deal with India, the implications radiate far beyond the size of the deal itself.

Earlier this year, the IMF announced its plan to sell a total of 403.3 metric tons of gold to bolster its finances. The news weighed on market sentiment as investors worried about at how much and to whom the gold would be sold. Now, more than half of the planned amount has been sold to official sectors at market prices, sentiment appears to have shifted from concern over overhanging supply to disappearing supply as large exporter central banks and sovereign wealth funds seek to convert depreciating dollar holdings into gold. Right or wrong, that is the sentiment at this time, and it's been strong enough to send gold soaring while crude and stocks have been stalling out. Impressive relative strength that has won many believers and convinced markets that any pullback will not be pronounced or long.

Consider:

• In April, China, the biggest gold producer in the world, increased reserves by +76% to 154 metric tons since 2003. The market anticipates China will be another big buyer of IMF's gold.

• Since the beginning of 2009, gold price has rallied almost +30%. Also, after breaching 2008-high at 1033.9, the yellow metal's rise has accelerated, jumping more than 100 dollars in a month. The long-term uptrend is not likely to end soon.

• Apart from government buying, new private gold funds should give a further boost to robust investment demands. John Paulson announced his plan to launch a new gold fund next year with as much as $250M of his money. Large gold ETFs or funds usually have holdings that are comparable to central banks. For instance, SPDR Gold Shares, the world's largest gold ETF, is the world's 5th largest bullion owner just below France and above China.

In short, it's not just increasing gold demand, but demand from big buyers.

In coming weeks, gold price should continue to be very much directed by USD's movement. However, the inverse relationship between gold and the dollar should not be taken for granted. For instance, in the 90s, the yellow metal's supply was so abundant that its price plummeted. In 2005, gold price surged due to tightness in the market. Therefore, some analysts hold that gold price may continue to rise given the reduction in gold production and increase in central bank demand, despite a possible rebound in USD early next year. Famed NYU Economics Professor Nuriel Roubini, credited for calling the current crisis years ago, believes the run in gold is an unsustainable bubble, while famed commodity trader Jim Rodgers holds gold is going much higher. As long as the central bank/sovereign wealth/momentum story holds up, Rogers looks correct.

Crude Oil:

WTI Crude Oil Daily Chart (05 Nov 23)

Range trading between $82-$76/bbl since mid October, moving more or less with stocks as the S&P struggles at the $1100 resistance level and oil at $82, neither to move higher until further positive news on the recovery. However, with gold having continued higher in utter disconnect from stocks and oil, the historic gold ratio now justifies oil as high as around $97.25 (12:1 ratio) and no less than $77.80 (15:1). Thus while crude remains range bound, if gold can continue breaking to new highs, as many expect it to do, then crude could follow it sharply higher over time, especially if other risk assets can avoid a sharp correction (which they are doing nicely, as shown by the S&P 500 breaching resistance at $1100) or there is evidence of continued strong demand from China and other developing economies.

EURUSD: Like the S&P 500 and Oil, has been range trading since mid October and is likely to continue to follow the S&P 500.

EURUSD DAILY CHART (06 Nov 23)

As noted in our Global Outlook for 11/23-11/27:

For the coming weeks euro traders need to consider the following developments.

• In the background, stimulus reduction that is starting to build momentum, developing both interest rate expectations and concerns that the Euro-zone economy will falter as government spending slows and exposes a weaker economy.

• Of more immediate concern, there's a series of weighty economic indicators that will offer some volatility.

• However, the main threat of an impending break in recent trends comes from intangible fundamental dynamics like liquidity and the influence of a domineering US dollar.

Risk appetite is the main catalyst and fuel for the financial markets. After an eight-month trend founded based on the need to reinvest funds and take advantage of an historical rally; confidence may now be turning into a hesitation that will be well reflected in the EURUSD.

While the overall rising trend of higher lows from March remains; the past few weeks have turned to chop that is starting to develop an ominous bias, similar to that of the S&P 500. Given the unusual market conditions that back this liquid pair up, the possibility of a reversal in trend shift is more pronounced. The US markets, the single largest source of liquidity in the world, begin an extended holiday weekend starting Thursday, and in turn, a full-week of notable economic releases gets condensed into just a few days. A combination of event risk and shallow market depth may be the final ingredients for a breakout.

NZDUSD: New Shorting Opportunity?

NZDUSD Daily Chart (07 Nov 23)

We noted in our prior Weekly Outlook of 11/16 – 11/20 that this pair was likely to be one of the best shorting plays when stocks dropped back to retest support, because the pair had risen in tandem with the AUDUSD but the NZD lacked the strong underlying economic fundamentals of the AUD and was thus a better shorting candidate. Almost on cue, the pair fell about 282 basis points, 3.76%, a potentially almost 800% profit for currency traders typically using 200:1 leverage, of which they could easily net over 400% even if using a relatively conservative trading plan to minimize risk and get in only once a trend is established. Now in the middle of its $0.7562 - $0.7073 range since late October, the pair moves with the S&P, and this range has enough room to be played in either direction WHEN the S&P 500 decisively breaks though $1100 or drops to retest support

NB: See a daily chart of the AUDUSD, and note the similarity. Those seeking to trade this pair could apply the above mentioned indicators and comments.

GBPUSD: Another risk appetite play, especially as short opportunity if stocks continue to pull back?

GBP/USD Daily Chart. (05 Nov 09)

On Nov. 9th, we wrote: "One of the strongest currencies last week against the USD and EUR as it gained on less than expected expansion of QE, but nearing the top of its trading range since mid July and at the top of its Bollinger Band Range and recent high of $1.700. Could be a good short trade if markets pull back." Look what happened.

WEEKLY GLOBAL MARKETS & FX OUTLOOK 11/23-27: Ominous Bearish Double Tops Still Forming on S&P 500, EUR/USD, Others

2009-11-22T09:02:00.001-08:00

Because global stocks tend to lead global asset markets, and these markets are so tightly integrated, a weekly preview of major forex pairs and commodities demands that we first look at equities.

GLOBAL STOCK MARKETS-ONE CHART TO RULE THEM ALL

As always, we begin our weekly preview of global markets with a look at the S&P 500 stock index. International forex and commodity markets tend to move according to stocks, and no single index provides a better single picture of overall market sentiment than the bellwether S&P 500. Just note how similar most other major international stock or commodity daily charts are to that of the S&P 500 in both trend direction and magnitude of moves, although there can be short term deviations and at times even longer term exceptions, such as gold's current burst higher (more on that below).

That the S&P 500 is arguably the best single snapshot of global risk sentiment is not news to experienced traders, but for the benefit of all others, this idea can't be repeated enough – it's truly the One Chart To Rule Them All.

Here is a daily chart of the S&P 500 as of last Sunday.

S&P 500 Daily Chart With Volume With 10 Day Moving Average for Volume

04 Nov 15

We said:

the key points to note about the chart:

The possible formation of a bearish double-top pattern forming around the 1100 level
The relatively low volume on the rallies to this level compared to the much higher volume at the tops and on the pullbacks since the beginning of September until now. The red line on the volume histogram is a 10 day Simple Moving Average of Volume that clarifies how volume is relatively low on the rallies and higher on the pullbacks.

For perspective on the significance of the 1100 level, we zoom back to a weekly chart of the S&P 500 for the past 5 years. Note how this level has served as minor multi-week support resistance. Thus if the past is any guide, the rally will need to pass the 1100 within the next few weeks or risk losing credibility. If that happens, then risk assets are likely to either consolidate in a horizontal range or stage a long awaited normal pullback. Note that a drop of 100-300 points would be a perfectly normal retracement and markets would still be in a firm overall uptrend.

S&P 500 5 Year Weekly Chart with 10 Week Moving Average for Volume

06 Nov 15

Again, note the declining overall volume of the rally since April, suggesting a lack of believers in this rally. The bright side is that there may be a lot of cash still available to fuel further rally if the recovery becomes more convincing. The downside of this low volume rally is that it suggests they buyers were short term hot money that will be inclined to sell if the recovery falters. That in turn will depend on whether economies can begin to hold up without massive new stimulus, and if they can't, whether governments will be able to continue providing it, and for how much longer.

If one can answer those questions correctly, then they'll know whether to be long or short these markets and virtually every asset traded.

Here's the update chart as of 11/22, with the past week's trading marked off by the cursor highlighting Monday 11/16.

Daily Chart S&P 500 as of 11/22 (image 01 Nov 22)

Monday's gains were wiped out by a combination of end of week profit taking and signs that the ECB is beginning to end its stimulus and moving closer to raising interest rates. The key point to note is that after moving decisively higher Monday on decent volume, the market turned indecisive for two days and pulled back to close the week with a slight loss. The 1100 resistance level bent but didn't break.

Meaning? We're back where we were last week, both literally and figuratively – waiting to see if the markets are going to range trade or begin a more serious drop to test support. While another move higher can't be ruled out, the extent of the rally since March, it's questionable underlying fundamentals, and usual year end selling make for a clear flat to lower bias. Gold's meteoric rise over the past 3 weeks makes gold also vulnerable to at least some kind of support test which could push the USD higher and thus also weigh further on the S&P.

Do not be lulled into thinking that a Thanksgiving holiday induced low liquidity Wednesday-Friday means necessarily means quiet trading. As Kathy Lien pointed out recently, in fact, the third week in November is usually even more volatile than the average throughout the year. She notes:

Over the last five years, the average weekly volatility in currencies (measured by the difference between the weeks high and low) has been about 270 pips in EUR/USD. This figure jumps to 372 pips when examining the pound. However, the average volatility over the last five years on Thanksgiving week is more volatile at 340 pips in EUR/USD and 433 pips in GBP/USD. In fact, on only one occasion, in 2005, did holiday volatility fall below that of the overall average.

At first glance, these figures are pretty shocking, but it makes sense considering that Thanksgiving is only an American holiday. The loss in traders adds to the illiquidity of the market place, magnifying the severity of the moves. In addition, most funds are still trying to satisfy better than expected year end results, and might prefer to relax during Christmas rather than Thanksgiving. Looking at the week itself, volatility does dry up on Thanksgiving day, but is actually rather high on the day after. In any event, keep in mind that like seasonality studies these patterns do not hold 100% of the time. Just keep in mind that opportunities do not cease to exist just because it is a holiday week.

KEY COMMODITIES: Oil Slipping & Red Hot Gold

Commodity prices rose across the board with Reuters/Jefferies CRB Index gaining +2% last week. However, while precious metals and certain base metals continued with strong upward momentum, rallies in other commodities began to lose steam, most notably crude oil. We believe it's because investors' risk appetite is declining. If the above S&P chart wasn't enough evidence of growing risk aversion, and it usually is, recent macroeconomic data displayed a mixed picture on global economic conditions. In fact, the VIX, an index measuring the stock market's degree of fear, fell for the third consecutive week, by -5%, to 22.19 last week, indicating investors have become risk- averse.

Energy

Crude Oil

WTI crude oil fell after recovering to 78.61 Friday. The benchmark contract settled at 77.47, climbed +1.5% for the week. Despite the gain, price movements in recent weeks suggest that a temporary top was formed at 82 in mid-October. Look at the weekly chart, crude oil price rose and dropped on alternate weeks, with declines more than offsetting increases.

After breaking above the range of 65-75 in mid-October, crude oil appears to have formed a new trading range from $73 -- $82/bbl. Despite attempts to push price above 80, selling pressures appear to be quite strong there. Unless the S&P 500 moves higher we doubt there will be enough speculative bulls to push oil higher, and any move higher for now will be from shorter term traders. Supply/demand fundamentals show plenty of supply, arguably more than is being reported, for the near term.

OPEC members are satisfied with oil price at 75-78. Angolan oil minister even said that 80/bbl is 'not too high'. Some analysts have gone so far as to speculate that the Saudis are considering upping production and driving oil down in order to give Iran's economy and regime a not so gentle shove.

Hurricane Ida curtailed US imports and suspended operations of oil facilities. Therefore, declines in inventories were more than expected last week. Crude inventory drew -0.89 mmb to 336.8 mmb in the week ended November 13 as led by decline in the Gulf Coast as attack of Hurricane Ida suspended oil imports and productions. However, builds were seen in the East Coast, West Coast and the Midwest.

Natural Gas

Gas price movement continued to be volatile over the week. After rebounding +7.8% to 4.734 Tuesday from the low in the prior week, gas price tumbled to as low as 4.22 Thursday amid disappointing gas storage report. Price then bounced back again and closed at 4.424 Friday. On weekly basis, gas price added +0.7%.

Gas storage climbed +20 bcf to 3833 bcf in the week ended November 13. The increase slightly widened the difference from 5-year average to 12.3%.

Meteorologist forecast weather in coming weeks will still be warmer than historical average and this will be a bad news for natural gas demand which should remain threatened. We double gas storage will rise further in coming few weeks and this should continue to depress price.

Precious Metals – Has Demand Truly Increased?

Buying remained strong in gold and other precious metals. Last week, gold rallied +2.75 to 1146.8 and the new record high was set Wednesday at 1153.4.

There's a growing belief in a new fundamental factor -- that underlying demand for gold has increased due to central bank buying. After the Reserve Bank of India, the Bank of Mauritius bought 2 metric tons of gold from the IMF at market price on November 11. Compared with India's 200 metric tons, Mauritius' purchase was insignificant. However, same as the deal with India, the implications radiate far beyond the size of the deal itself.

Earlier this year, the IMF announced its plan to sell a total of 403.3 metric tons of gold to bolster its finances. The news weighed on market sentiment as investors worried about at how much and to whom the gold would be sold. Now, more than half of the planned amount has been sold to official sectors at market prices, sentiment appears to have shifted from concern over overhanging supply to disappearing supply as large exporter central banks and sovereign wealth funds seek to convert depreciating dollar holdings into gold. Right or wrong, that is the sentiment at this time, and it's been strong enough to send gold soaring while crude and stocks have been stalling out. Impressive relative strength that has won many believers and convinced markets that any pullback will not be pronounced or long. Consider:

In April, China, the biggest gold producer in the world, increased reserves by +76% to 154 metric tons since 2003. The market anticipates China will be another big buyer of IMF's gold.
Since the beginning of 2009, gold price has rallied almost +30%. Also, after breaching 2008-high at 1033.9, the yellow metal's rise has accelerated, jumping more than 100 dollars in a month. the long-term uptrend is not likely to end soon.
Apart from government buying, new private gold funds should give a further boost to robust investment demands. John Paulson announced his plan to launch a new gold fund next year with as much as $250M of his money. Large gold ETFs or funds usually have holdings that are comparable to central banks. For instance, SPDR Gold Shares, the world's largest gold ETF, is the world's 5^th largest bullion owner just below France and above China.

In short, it's not just increasing gold demand, but demand from big buyers.

In coming weeks, gold price should continue to be very much directed by USD's movement. However, the inverse relationship between gold and the dollar should not be taken for granted. For instance, in the 90s, the yellow metal's supply was so abundant that its price plummeted. In 2005, gold price surged due to tightness in the market. Therefore, some analysts hold that gold price may continue to rise given the reduction in gold production and increase in central bank demand, despite a possible rebound in USD early next year.

CURRENCIES

USD

Range Trading Likely For the US Dollar

Summary

US Dollar: Bullish/Neutral

- Key Events: Monday-Existing Home Sales m/m, Tuesday-GDP q/q, Consumer Confidence, Personal Consumption, House Price Purchase Index q/q, Fed Minutes of Nov 3-4 Meeting, Wed. Personal Spending, Income, Durable Goods Orders, New Home Sales m/m

- Ben Bernanke calls for strong US Dollar, but Greenback fails to hold gains

- Crowd sentiment accurately calls for US Dollar bounce

- US Dollar surges as traders sell risk following Dell earnings report

Analysis

The US Dollar ended the week higher against all major currencies except the Japanese Yen, but failed to break key range highs against the Euro and other important counterparts. Forex markets remained highly indecisive and traders were seemingly unwilling to bust the Euro/US Dollar exchange rate from its multi-week range. Volatility is near its lowest levels of the year, and it seems FX Options traders are pricing in similar range trading for the holiday-shortened trading week ahead.

The indecision isn't surprising. As we've noted repeatedly, to achieve a sustained reversal, the USD will need either:

A sustained period of at least consolidation if not reversal in global stocks and other risk assets that drives up demand for safe haven currencies as carry trades unwind. The S&P 500 has twice backed off from the 1100 level. Failure to break through soon could lead to at least a consolidation period if not outright reversal.
A fundamental improvement in the US economy that brings recovery in the critical jobs, banking, and housing areas, quite possibly in that order, that provides reason for markets to believe USD interest rates will rise sooner than currently expected and thus lift the dollar out of its current status as a prime funding currency for carry trades.
A selloff in the EUR, because for every 3 Euros bought, a USD is sold, thus any selloff on one automatically helps the other. Since March, this relationship has been a key driver of the EUR's rally.

The first possibility is the most likely, but as yet stocks have made only modest pullbacks, the second and third have not happened. In sum, there is still no major reason to buy dollars unless risk appetite turns into nausea and dollar shorts unwind.

Events

Although the North American Thanksgiving holiday means that markets will likely become illiquid through later-week trade, earlier-week price action could produce big US Dollar moves on several important reports, especially given the nervousness across key asset classes.

The first is the admittedly unpredictable Existing Home Sales report, which often goes unnoticed but occasionally produces great equity market volatility. The next day brings the second release for Q3 Gross Domestic Product figures, Conference Board Consumer Confidence survey results, and the minutes from the Federal Open Market Committee’s most recent policy meeting. All three events have been known to force considerable moves in the S&P 500 and US Dollar, and it remains important to watch for surprises from each.

Fed Chairman Ben Bernanke recently shook US Dollar markets when he said that the Fed was paying close attention to exchange rate moves. Markets will pay very close attention to any and all references to the US Dollar through the Fed’s discussions—especially because it trades near significant lows versus the Euro and other key counterparts. We doubt there will be any explicit mention of the US Dollar in the Fed minutes, but such low expectations could make for extensive volatility if in fact the Fed starts talking the dollar higher. Thus traders should be watching for post-Fed financial market price moves. Personal Income and Spending, Durable Goods Orders, and New Home Sales reports finish the week of significant US Dollar event risk. Any one of these releases could cause big moves—especially in the relatively illiquid trading session before the US holiday.

The US Dollar remains in a trading range against major counterparts, and very low volatility expectations suggest that it may remain restricted through the week ahead. We've often noted that extremely one-sided FX Futures and Options positioning meant that a substantive US Dollar correction was inevitable. We have indeed seen the dollar bounce off of range lows, but positioning has lately been correcting and does not necessarily point to further Dollar gains. This suggests that we may need to wait for a large shock across financial markets to force substantive shifts in trends. However low volatility expectations, as reflected in fx options, suggest further range trading for the coming week.

EUR

Euro To Breakout Against the Dollar This Week?

Summary

Euro Outlook: Bearish

- Key Events: Monday PMI Mfg, Services, Composite, Tuesday-Industrial Orders m/m, German GDP q/q, Wednesday German Gfk Consumer Confidence, Thursday-CPI y/y, Fri. Consumer Confidence

- European Central Bank takes another small step in unwinding stimulus by upping collateral standards

- The pace of Euro Zone inflation improves, but the annual figure is still contracting

- Are technical indicators leaning towards a EURUSD breakout that spurs reversal or trend continuation?

- EUR/USD likely to follow equities, but news could play a role if no major risk sentiment shifts.

Analysis

For the coming weeks euro traders need to consider the following developments.

In the background, stimulus reduction that is starting to build momentum, developing both interest rate expectations and concerns that the Euro-zone economy will falter as government spending slows and exposes a weaker economy.
Of more immediate concern, there's a series of weighty economic indicators that will offer some volatility.
However, the main threat of an impending break in recent trends comes from intangible fundamental dynamics like liquidity and the influence of a domineering US dollar.

Risk appetite is the main catalyst and fuel for the financial markets. After an eight-month trend founded based on the need to reinvest funds and take advantage of an historical rally; confidence may now be turning into a hesitation that will be well reflected in the EURUSD.

While the overall rising trend of higher lows from March remains; the past few weeks have turned to chop that is starting to develop an ominous bias, similar to that of the S&P 500. Given the unusual market conditions that back this liquid pair up, the possibility of a reversal in trend shift is more pronounced. The US markets, the single largest source of liquidity in the world, begin an extended holiday weekend starting Thursday, and in turn, a full-week of notable economic releases gets condensed into just a few days. A combination of event risk and shallow market depth may be the final ingredients for a breakout.

Events

The Euro event calendar is stocked with significant market-movers of its own. At the start of the week (before US liquidity drains), we get a complete take on sentiment and growth.

The German GfK consumer and IFO business confidence readings will define growth expectations into the months ahead. The former will be particularly important considering the German Finance Ministry recently suggested fourth quarter regional growth would slow from the strong third quarter showing owing to consumers’ efforts to retrench themselves as jobs and wages recede.

Perhaps the most significant, the second (final) reading of 3Q GDP will offer much needed detail on the health of the various sectors. It is important to weigh how much of the recovery is from German citizens, businesses, trade and government.

More timely data comes from the first measurements of the November PMI figures, which provide a good gauge for broader growth. After the US markets shut down early, euro traders will still have the noteworthy German CPI and Euro Zone confidence readings to consider.

The above mix of event risk and low late week liquidity leaves potential for volatility in general and thus certainly in the EURUSD, by itself about a third of all forex trade. It will likely reflect what we've said above about global stocks, so EURUSD traders must always be watching the bellwether S&P 500.

JPY

Yen Breakout Threatens in Thin, Risk-Driven Trade, Quiet Event Calendar

Summary

Yen Outlook: Bullish

- Key Events: Tues. Merchandise Trade Balance, BoJ Monthly Report, Wed.-BoJ Monthly Policy Meeting Minutes, Thurs.-Jobless Rate, Unemployment, CPI y/y

- Japan’s Economy Expanded Most in Over Two Years in Q3

- BOJ Keeps Rates Unchanged, Conflict with MOF Continues

- Growing signs of deflation, which helped cause Japan's "lost decade", could undermine the yen

Analysis

The Japanese Yen outperformed last week as risk aversion and ensuing unwinding carry trades drove demand higher. A bland domestic economic calendar and thin liquidity conditions around the Thanksgiving holiday in the US leave the chance for coming volatility. Growing signs of deflation could undermine JPY, especially if there's no stock pullback to stoke demand for safe haven currencies.

Events

Although there's adequate scheduled event risk on next week’s docket, the market-moving potential of upcoming releases is limited.

The Bank of Japan’s monthly report is unlikely to yield much more clarity than the most recent interest rate decision.
An up-tick in the jobless rate after three consecutive months of moderation coupled with parallel declines in retail trade and household spending will reflect now-familiar concerns about the ebbing effects of fiscal stimulus, not surprising given the central bank’s steady warnings about a weak consumption outlook.
Similarly, another negative annual consumer price index print is expected after both monetary and fiscal authorities acknowledged the economy has fallen back into deflationary territory last week, with the BoJ adding that rising oil prices will offer help in that regard in the months to come.

The trend of risk assets seems likely to be a far more likely catalyst for price action. Although the earnings season is winding down, the early-week US calendar offers a healthy dose of market-moving releases that could shake things up on Wall St and translate into Yen volatility. In particular,

The second revision of US third-quarter GDP is expected to be trimmed to 2.9% from the 3.5% initially reported, and should show lower personal consumption levels.
Consumer confidence, new home sales, and durable goods orders data is also on tap.
Thursday’s Thanksgiving holiday means thin liquidity conditions that make a move over key support and resistance levels more likely.

This is especially important for USDJPY, where prices are flirting with trend-defining double bottom support around 87.09-88.23.

GBP

Pound Forecast Still Bearish Ahead of UK GDP Revisions

Summary

Pound Outlook: Bearish

- Key Events: Tues.-Total Business Investment q/q, Wed.-GDP q/q, CBI Distributive Trades q/q

- UK CPI rose more than expected in October to 1.5% from 1.1%

- The BOE’s meeting minutes showed that the MPC voted 7-1-1 to expand the APF by £25B

- The OECD suggested the BOE keep rates at a record low until 2011

- Threat of further QE, stock pullback could further pressure GBP

Analysis

The Sterling lost 1 % against the US dollar and nearly 2 % vs. the yen over the past week as the minutes from the Bank of England’s November meeting led the markets to price in fewer rate increases over the next 12 months. The vote showed that seven Monetary Policy Committee members voted to expand the Asset Purchase Facility (APF) by £25 billion to £200 billion, but one voted for no change while another voted to increase the APF by £40 billion. This suggests that the BOE may be open to expanding the APF later on, and belief in this possibility will increase on more disappointing news.

Events

The potential for bad news is there.

Tuesday’s data is expected to show that total business investment fell for the fifth straight period in the third quarter, this time at a rate of 3.9 percent. Companies that aren’t investing aren’t likely to be experiencing improved activity or hiring workers. While the BBA’s measure of loans approved for house purchases is projected to rise for the seventh straight month in October to 44,000 from 42,088, , it's hard to be optimistic about spending when growth and employment are still struggling.

On Wednesday, the second reading of UK GDP for the third quarter is anticipated to be revised slightly higher to a quarterly rate of -0.3 percent from -0.4 percent, and an annual rate of -5.1 percent from -5.2 percent. This will continue to reflect the sixth straight quarter of contraction, and the only way the British pound is likely to respond in a positive way is if quarterly GDP surprises and rises.

With US markets will be closed on Thursday for the Thanksgiving holiday and closing early on Friday, volumes will be lower than usual, which may contribute to either flat price movements or extremely choppy trade. The latter may dominate, though, because US event risk will be high. Also, from a technical view, GBPUSD could be in for further declines, as the pair’s break below a rising trend line drawn from the October 13 lows and bearish weekly candle chart formation suggests a bearish outlook on GBPUSD.

CHF

Swiss Franc Could Break Higher As Fear Rises Despite the SNB's Efforts

Summary

Swiss Franc Outlook: Neutral/Positive

- Key Events: UBS Consumption Indicator, Unemployment y/y, KOF Nov. Leading Indicator

- Swiss Monthly Retail Sales Down Again, By 1.6%

- October trade balance surplus up to 2.46 billion from 1.91 billion as exports gained 0.1%

- Moving with risk sentiment, if stock pullback deepens even SNB intervention my not prevent a rise

Analysis

The Swiss Franc trended lower during the past week against the dollar showing potential to break from its current range but hit resistance at the 50-Day SMA at 1.0217. Price movements have stayed below this level since August 12 and a break above would suggest upside potential. Traders worried that current valuations have outpaced underlying fundamentals have generated safe-haven flows and support for the USD/CHF. Weak Swiss fundamental data added to the bearish franc sentiment as retail sales dropped by 1.6%, reducing hopes for domestic growth, as consumers battling rising unemployment continue to retrench. A 0.1% rise in exports was encouraging but not enough to offset weakness generated by falling equity markets.

The OECD raised its GDP forecast for the economy, predicting growth by the end of 2009 offsetting earlier weakness for a net decline of 1.9%. Momentum is expected to carry into 2010 and 2011 which are expected to see gains of 0.9% and 1.9% respectively. SNB Chairman Jean-Pierre Roth said on Tuesday that 2010 will still be difficult for the Swiss economy, which will not recover quickly. He went on to say that "we have the have the necessary means to withdraw liquidity from markets.” The comments take on more significance with ECB president Trichet signaling that it is time to start withdrawing some stimulus that supported the financial system through the credit crunch. Swiss policy makers aren’t expected to alter monetary policy in the near-term because they're still concerned about deflation as the rising Franc continues to depress import prices. Additionally, policy makers are determined to defend the Swissie against appreciation in order to support demand for exports.

Events

If fears grow that a double dip in growth is ahead we could see traders look to lock in profits in front of the long weekend sending equities lower and pushing up the Franc against higher risk currencies. The prevailing uncertainty could see markets quiet leaving the USD/CHF within its current range between 1.0050-1.0200.

The weeks' calendar has potential to influence price action with consumption, employment and growth data coming. The UBS consumption indicator remains near a six year low and considering the sharp decline in retail sales we could see continued weakness in demand. As anywhere, quarterly employment figures may have the most market moving potential as rising unemployment has crippled domestic growth. The only positive report might be the KOF leading index which continues to point toward an improving economy and last month rose to its highest level since 02/08.

CAD

Canadian Dollar Tracking Oil & Stocks Lower

Summary

Canadian Dollar Outlook: Bearish

- Key Events: Mon.-Retail Sales m/m, Fri.-Current Account

- Consumer inflation turns positive, but BoC officials caution against calling an economic recovery

- The slowing pace in USDCAD matches a similar dip in crude, but is this still a tradable correlation?

- Can USDCAD continue its rise to a real reversal or will the pair flop back into a range?

- More risk downside than upside because it behaves as risk currency yet lacks the higher yield

Analysis

Despite lacking the higher rates of a carry currency; the loonie has long moved with the high-yielding Australian and New Zealand dollar, because oil moved on the same growth story as these other commodity currency, and oil drives the loonie. Thus it's no shock to see the CAD drop with oil and stocks while the AUD and NZD also fall on risk aversion. However, a special bond to the US dollar as well as uncertain monetary policy can complicate these correlations.

As usual, Canadian dollar will follow general risk trends as these play out through its relation to oil and equities. Though its lending rates are near zero) and the economy’s recovery is still in progress; it has enjoyed all the tangible benefits of a carry currency like the Australian or New Zealand dollar due to the primacy of oil exports. Thus if we see a significant drop in risk appetite, the Canadian dollar is likely to fall with it.

Aside from risk appetite, the assessment of the loonie’s fundamental strength lies in the same fundamentals (growth, interest rates, monetary policy)to which every other currency responds. Compared to the much higher yielding AUD and NZD, the CAD has little carry trade appeal, and its safe-haven low rates are not likely to rise soon. This past week, BoC Governor Carney reiterated his intention to maintain rates at 0.25 percent as long as inflation stayed low. Backing the policy authority up, the OECD recommended in its semi-annual economic assessment that the bank keep rates near zero until June of next year and perhaps longer.

The OECD offered a modest outlook on economic activity, saying a recovery began in the summer and was gaining traction; but the jobless rate would continue to rise into 2010, thus restraining expansion. Carney was more bearish, saying it was too early to call a recovery and that the CAD was stronger than what fundamentals supported, thus undermining a more robust recovery.

AUD

Stalling With Risk Appetite, Vulnerable To Interest Rate Expectation Disappointments

Summary

Australian Dollar Outlook: Neutral/Bearish

- Key Events: Monday-Conference Bd. Leading Indicators, Tues.-DEWR Skilled Vacancies m/m, Construction Work Done Q3, Wed.-Private Capital Expenditure Q3

- RBA Policy Outlook Remains “Open Question”

- Westpac Leading Index Improves For Fourth Month

- Wage Growth Slows In Third Quarter

- Vulnerable to stock pullback, possible interest rate increase disappointment

Analysis

The Australian dollar rose to yet another yearly high of 0.9408 earlier this week following the rise in risk appetite however; it may have topped in November as investors scale back expectations for higher interest rates in the $1T economy. However, because the rally remains near the 50-Day SMA at 0.9015, we may see the AUD/USD retrace the four-day decline over the following week if markets stick to range trading.

The Reserve Bank of Australia meeting minutes fed speculation that the central bank may hold a neutral policy going into the following year and slow the pace of rate increases and the drop in the interest rate outlook may pressure the AUD. Credit Suisse overnight index swaps shows investors are pricing a 62% chance for a 25bp rate hike next month, down from 83% in the prior week, while traders believe the central bank will raise borrowing costs by nearly 140bp over the next 12-months as policy makers maintain their dual mandate to ensure price stability while fostering full-employment.

The RBA said “business and consumer confidence could prove fragile” over the coming year and saw a risk for a protracted recovery as the government stimulus begins to taper off, and went on to say that the direction for monetary policy “remained an open question” as the board aims to balance the risks for the economy. In addition, the central bank repeated its concern that the appreciation in the Australian dollar is likely to “constrain output and dampen inflationary pressure” going forward, but simultaneously, the RBA argued that “a lengthy period with interest rates at a very low level carried its own risk” as the economy skirts the global recession.

Meanwhile, the Organization for Economic Cooperation and Development raised its economic outlook for the region and expects the growth to increase at a yearly rate of 2.4% after an initial forecast for a 1.2% rise in June, and the group expects to see “a gradual tightening of monetary policy” going forward as growth prospects improve.

Events

As a result, the Aussie calendar for the following week could feed increased volatility in the exchange rate as economists predict business spending will rise 1.0% in the third-quarter after expanding 3.3% during the previous three-month period, while construction outputs are anticipated to hold flat after falling 0.1% in the second quarter.

NZD

New Zealand Dollar Vulnerable Due To RBNZ Independence Threats

Summary

New Zealand Dollar Outlook: Bearish

- Key Events: Wed.-NBNZ Business Confidence, Thurs. Trade Balance Survey

- New Zealand dollar tumbles, hobbled by interest rate expectations, waning risk appetite

- Debate over RBNZ mandates also pressure the NZD

- Worst performing G10 currency last week, vulnerable to stock market corrections, trade balance disappointment could fuel debate over central bank policy and further damage the NZD

Analysis

Easily the worst performing G10 currency, the NZD fell against all major counterparts to end the week’s trade. It faded with the rest of the risky asset classes, while fairly bearish interest rate developments compounded NZD losses. New Zealand’s opposition Labour Party leader withdrew his party’s support for an incredibly important facet of Reserve Bank of New Zealand policy. Increased discontent with New Zealand dollar appreciation has led many politicians to question the RBNZ’s inflation-targeting policies—calling for the central bank to control exchange rate fluctuations. While the opposition party currently trails the ruling National Party in opinion polls, this is nonetheless a legitimate threat to RBNZ independence and could hurt confidence in the domestic currency.

Events

Barring major market shocks, a light economic calendar in the week ahead could keep traders focused on political developments, and it remains critical to monitor the ongoing debate on the RBNZ. Thursday’s Trade Balance result is a key exception, and could influence the ongoing RBNZ controversy. Forecasts call for a sizeable NZ$480 million deficit for the month of October—the second-worst result for the past year. New Zealand exporters have been hurt by the strong exchange rate, and a large deficit could embolden the opposition against RBNZ inflation targeting. Traders should watch markets’ reaction to the data.

The New Zealand Dollar appears likely to remain volatile in the week ahead—especially as it remains near significant peaks against the USD. It is easy to forget that the NZDUSD had rallied by nearly 60 percent off its lows, and such incredible strength leaves it vulnerable to a large correction. It is now only 5 percent off of its 2009 highs, but any further news to suggest the RBNZ will target the New Zealand Dollar exchange rate could easily force a much larger drop.

CONCLUSIONS

If the S&P 500 remains in a flat range, expect most other asset classes to behave likewise.
If it dives, that will favor the safe haven JPY, USD, and CHF in that order, against the higher yielding and commodity currencies, as well as against the EUR, which typically moves opposite the USD. Short other risk assets like stocks, oil, and possibly gold. As always, wait for some confirmation of the downtrend.
If it breaks past the 1100 resistance level, long risk assets and currencies, short the JPY, USD, and CHF.

Because the S&P remains at a possible trend reversal level given that it is still near 1100 resistance and still may be forming a bearish double top formation, traders and investors should be cautious about opening new positions until we have a clearer picture of overall market direction, and have stop loss orders in place to protect profits when not able to actively watch markets.

DISCLOSURE: The author has no open positions in the above instruments. Opinions expressed are not necessarily those of avafx.

WEEKLY GLOBAL MARKETS & FX OUTLOOK 11/23-11/27 Cheat Sheet

2009-11-22T08:55:00.001-08:00

NB: This is a very abridged version. Those seeking details should refer to the full length version

Because global stocks tend to lead global asset markets, and these markets are so tightly integrated, a weekly preview of major forex pairs and commodities demands that we first look at equities.

GLOBAL STOCK MARKETS-ONE CHART TO RULE THEM ALL

Here is a daily chart of the S&P 500 as of last Sunday.

S&P 500 Daily Chart With Volume With 10 Day Moving Average for Volume

04 Nov 15

We said:

the key points to note about the chart:

The possible formation of a bearish double-top pattern forming around the 1100 level
The relatively low volume on the rallies to this level compared to the much higher volume at the tops and on the pullbacks since the beginning of September until now. The red line on the volume histogram is a 10 day Simple Moving Average of Volume that clarifies how volume is relatively low on the rallies and higher on the pullbacks.

S&P 500 5 Year Weekly Chart with 10 Week Moving Average for Volume

06 Nov 15

Here's the update chart as of 11/22, with the past week's trading marked off by the cursor highlighting Monday 11/16.

Daily Chart S&P 500 as of 11/22 (image 01 Nov 22)

Meaning? We're back where we were last week, both literally and figuratively – waiting to see if the markets are going to range trade or begin a more serious drop to test support. While another move higher can't be ruled out, the extent of the rally since March, its questionable underlying fundamentals, and usual year end selling make for a clear flat to lower bias. Gold's meteoric rise over the past 3 weeks makes gold also vulnerable to at least some kind of support test which could push the USD higher and thus also weigh further on the S&P.

Do not be lulled into thinking that a Thanksgiving holiday induced low liquidity Wednesday-Friday means necessarily means quiet trading. Historically, the week is actually unusually volatile due to the lower liquidity.

KEY COMMODITIES: Oil Slipping & Red Hot Gold

Energy

Crude Oil

WTI crude oil fell after recovering to 78.61 Friday. Price movements in recent weeks suggest that a temporary top was formed at 82 in mid-October. Look at the weekly chart, crude oil price rose and dropped on alternate weeks, with declines more than offsetting increases. In fact, crude began falling well before stocks started to sputter.

Precious Metals – Has Demand Truly Increased?

Buying remained strong in gold and other precious metals. Last week, gold rallied +2.75 to 1146.8 and the new record high was set Wednesday at 1153.4.

CURRENCIES

USD

Range Trading Likely For the US Dollar

Summary

US Dollar: Bullish/Neutral

- Ben Bernanke calls for strong US Dollar, but Greenback fails to hold gains

- Crowd sentiment accurately calls for US Dollar bounce

- US Dollar surges as traders sell risk following Dell earnings report

EUR

Euro To Breakout Against the Dollar This Week?

Summary

Euro Outlook: Bearish

- Key Events: Monday PMI Mfg, Services, Composite, Tuesday-Industrial Orders m/m, German GDP q/q, Wednesday German Gfk Consumer Confidence, Thursday-CPI y/y, Fri. Consumer Confidence

- European Central Bank takes another small step in unwinding stimulus by upping collateral standards

- The pace of Euro Zone inflation improves, but the annual figure is still contracting

- Are technical indicators leaning towards a EURUSD breakout that spurs reversal or trend continuation?

- EUR/USD likely to follow equities, but news could play a role if no major risk sentiment shifts.

Analysis

For the coming weeks euro traders need to consider the following developments.

In the background, stimulus reduction that is starting to build momentum, developing both interest rate expectations and concerns that the Euro-zone economy will falter as government spending slows and exposes a weaker economy.
Of more immediate concern, there's a series of weighty economic indicators that will offer some volatility.
However, the main threat of an impending break in recent trends comes from intangible fundamental dynamics like liquidity and the influence of a domineering US dollar.

JPY

Yen Breakout Threatens in Thin, Risk-Driven Trade, Quiet Event Calendar

Summary

Yen Outlook: Bullish

- Key Events: Tues. Merchandise Trade Balance, BoJ Monthly Report, Wed.-BoJ Monthly Policy Meeting Minutes, Thurs.-Jobless Rate, Unemployment, CPI y/y

- Japan’s Economy Expanded Most in Over Two Years in Q3

- BOJ Keeps Rates Unchanged, Conflict with MOF Continues

- Growing signs of deflation, which helped cause Japan's "lost decade", could undermine the yen

- Likely to continue inverse correlation with S&P 500

GBP

Pound Forecast Still Bearish Ahead of UK GDP Revisions

Summary

Pound Outlook: Bearish

- Key Events: Tues.-Total Business Investment q/q, Wed.-GDP q/q, CBI Distributive Trades q/q

- UK CPI rose more than expected in October to 1.5% from 1.1%

- The BOE’s meeting minutes showed that the MPC voted 7-1-1 to expand the APF by £25B

- The OECD suggested the BOE keep rates at a record low until 2011

- Threat of further QE, stock pullback could further pressure GBP

CHF

Swiss Franc Could Break Higher As Fear Rises Despite the SNB's Efforts

Summary

Swiss Franc Outlook: Neutral/Positive

- Key Events: UBS Consumption Indicator, Unemployment y/y, KOF Nov. Leading Indicator

- Swiss Monthly Retail Sales Down Again, By 1.6%

- October trade balance surplus up to 2.46 billion from 1.91 billion as exports gained 0.1%

- Moving with risk sentiment, if stock pullback deepens even SNB intervention my not prevent a rise

CAD

Canadian Dollar Tracking Oil & Stocks Lower

Summary

Canadian Dollar Outlook: Bearish

- Key Events: Mon.-Retail Sales m/m, Fri.-Current Account

- Consumer inflation turns positive, but BoC officials caution against calling an economic recovery

- The slowing pace in USDCAD matches a similar dip in crude, but is this still a tradable correlation?

- Can USDCAD continue its rise to a real reversal or will the pair flop back into a range?

- More risk downside than upside because it behaves as risk currency yet lacks the higher yield

AUD

Stalling With Risk Appetite, Vulnerable To Interest Rate Expectation Disappointments

Summary

Australian Dollar Outlook: Neutral/Bearish

- Key Events: Monday-Conference Bd. Leading Indicators, Tues.-DEWR Skilled Vacancies m/m, Construction Work Done Q3, Wed.-Private Capital Expenditure Q3

- RBA Policy Outlook Remains “Open Question”

- Westpac Leading Index Improves For Fourth Month

- Wage Growth Slows In Third Quarter

- Vulnerable to stock pullback, possible interest rate increase disappointment

NZD

New Zealand Dollar Vulnerable Due To RBNZ Independence Threats

Summary

New Zealand Dollar Outlook: Bearish

- Key Events: Wed.-NBNZ Business Confidence, Thurs. Trade Balance Survey

- New Zealand dollar tumbles, hobbled by interest rate expectations, waning risk appetite

- Debate over RBNZ mandates also pressure the NZD

- Worst performing G10 currency last week, vulnerable to stock market corrections, trade balance disappointment could fuel debate over central bank policy and further damage the NZD

CONCLUSIONS

If the S&P 500 remains in a flat range, expect most other asset classes to behave likewise.
If it dives, that will favor the safe haven JPY, USD, and CHF in that order, against the higher yielding and commodity currencies, as well as against the EUR, which typically moves opposite the USD. Short other risk assets like stocks, oil, and possibly gold. As always, wait for some confirmation of the downtrend.
If it breaks past the 1100 resistance level, long risk assets and currencies, short the JPY, USD, and CHF.

DISCLOSURE: The author has no open positions in the above instruments. Opinions expressed are not necessarily those of avafx.

GLOBAL MARKETS & FX OUTLOOK 11/16-20: Ominous Bearish Double Tops on S&P 500, EUR/USD

2009-11-15T03:57:00.000-08:00

Because global asset markets are so tightly integrated, a weekly preview of major forex pairs also demands a look at key international equity markets, which tend to set the overall bullish or bearish tone, as well as key commodities like oil and gold, which provide a means of evaluating currencies independent of currencies themselves.

GLOBAL STOCK MARKETS

As always, we begin our weekly preview of global markets with a look at the S&P 500 stock index. International forex and commodity markets tend to move according to stocks, and no single index provides a better single picture of overall market sentiment than the S&P 500. Just note how similar most other major international stock or commodity daily charts match that of the S&P 500.

The key points to note about the chart:

• The possible formation of a bearish double-top pattern forming around the 1100 level

• The relatively low volume on the rallies to this level compared to the much higher volume at the tops and on the pullbacks since the beginning of September until now. The red line on the volume histogram is a 10 day Simple Moving Average of Volume that clarifies how volume is relatively low on the rallies and higher on the pullbacks.

S&P 500 Daily Chart With Volume With 10 Day Moving Average for Volume

04 Nov 15

For perspective on the significance of the 1100 level, we zoom back to a weekly chart of the S&P 500 for the past 5 years. Note how this level has served as minor multi-week support resistance. Thus if the past is any guide, the rally will need to pass the 1100 within the next few weeks or risk losing credibility. If that happens, then risk assets are likely to either consolidate in a horizontal range or stage a long awaited normal pullback. Note that a drop of 100-300 points would be a perfectly normal retracement and markets would still be in a firm overall uptrend.

S&P 500 5 Year Weekly Chart with 10 Week Moving Average for Volume

06 Nov 15

Again, note the declining overall volume of the rally since April, suggesting a lack of believers in this rally. The bright side is that there may be a lot of cash still available to fuel further rally if the recovery becomes more convincing. The downside of this low volume rally is that it suggests they buyers were short term hot money that will be inclined to sell if the recovery falters. That in turn will depend on whether economies can begin to hold up without massive new stimulus, and if they can't, whether governments will be able to continue providing it, and for how much longer.

If one can answer those questions correctly, then they'll know whether to be long or short these markets and virtually every asset traded.

COMMODITIES: ENERGY AND PRECIOUS METALS

Crude Oil

Summary

Earlier in the week, WTI crude oil price did attempt to pierce the 80 resistance. However, both industry-specific fundamentals and macroeconomic data were not strong enough to sustain the breakout. Release of bearish US inventory data and reduced consumer sentiment triggered sharp selloff towards the end of the week.

Analysis

Decline in crude oil price accelerated after the US reported surprising drop in consumer confidence in November. Price plummeted to 75.57, the lowest in a month, before recovery. The benchmark contract closed at 76.35, down -0.8% and -1.4% on daily and weekly basis respectively.

Preliminary reading for the University of Michigan sentiment index fell to 66 in November from 70.6 in October. Although strong GDP growth (revised down to +3.1%) in 3Q09 was good news, the 26-year high unemployment rate continued to hurt consumer confidence. Consumers lacked job security and this diminished their desire to spend and to invest.

For energy-specific data, we received the weekly inventory report from the US Energy Department. Moreover, the 3 oil agencies also published their latest forecasts on global oil demands. In short, the data were still mixed, pointing to long-term recovery with short-term headwinds seemingly inevitable.

Crude inventory rose +1.76 mmb in the week ended November 6 with the Midwest leading the build. Oil inventory in that region surged +2.1 mmb of which 1.4 mmb was from Cushing, Oklahoma. Other regions also showed modest builds with decline only seen in the East Coast. Refinery runs dropped to 79.9%, the lowest in a year although many facilities have resumed operations after maintenance. This was probably driven by abundant fuel stocks.

After making a trough of around -$5 in August, the spread between WTI and Brent crude oil has turned positive again since September. However, WTI's premium to Brent has narrowed recently as driven by increasing stocks at Cushing, Oklahoma, the place where WTI oil is stored.

The biggest disappointed came from gasoline stockpiles which surged +2.56 mmb. Gasoline demand fell -1.9% from a week ago to 8.844M bpd. The reading was also -1.7% below the level a year ago. 4-week average at 8.917M bpd represented declines of -1.1% and -1.5% on weekly and annual basis respectively.

Distillate inventories climbed -0.35 mmb, the first increase in 5 weeks, as demand slipped. Weather in the Northeast was warmer-than-expected in November and this dampened demand for heating oil.

All of the US Energy Department, OPEC and the International Energy Agency revised upward their forecasts of global oil demand for 2009 and 2010. Although the sizes of upgrades were different among these agencies, the common factor was heavy reliance on demand growth from China.

Macroeconomic data in China were broadly encouraging. Expansions in industrial outputs, power generations and retail sales accelerated in October, fueling speculations that the nation's GDP growth can reach +10% the first in more than a year in 4Q09. Moreover, robust industrial activities and electricity usage signaled strong demands for energy and base metals. However, as Chinese Premier Wen Jiabo said, there are still uncertainties for the road to recovery.

Natural Gas

Summary

Gas price slumped to 4.287 as the Energy Department reported +25 bcf (consensus: +20 bcf) rise in gas storage to 3813 bcf in the week ended November 6. Although the level of increase tightened the year-over-year surplus and the surplus as compared to 5-year average, it sent the absolute gas storage to a fresh record high. The benchmark NYMEX contract climbed +0.5% from Thursday but recorded a weekly drop of -4.4%.

We remain bearish on natural gas price as demand is still bottoming while supply continues to stay at record level. Warm weather serves to worsen the already-weak fundamentals and this should result in delay in recovery.

Analysis

According to Baker Hughes, the number of gas rigs dropped 6 units in the week ended November 13. However, it did not help resolving the problem of oversupply. Since mid-July, the US gas rig count has gained +9.5%. Industry data showed that the economic threshold for US shale plays has been declining, suggesting greater production per rig per USD spent. Rising production efficiency has encouraged E&P companies to increase investment budgets. This exacerbates the demand/supply imbalance.

Gold

Summary

Gold continued its journey to uncharted region and reached a fresh high at 1123.4 Thursday before retreat. However, the strong rebound at NY session Friday signaled investment demand for the precious metal remained robust and we expect the long-term uptrend should resume after consolidation.

Analysis

Gold price rebounded strongly in NY session Friday amid renewed weakness in USD. The benchmark contract surged to as high as 1119.7, just a few dollars below the record high, before settling at 1116.7. The Commerce Department reported that the nominal trade balance in goods and services widened to -$36.5B (consensus: -$31.7B) in September from -$30.8B in the previous month. Although both imports and exports increased significantly, growth in imports (+5.8% mom) outpaced that that In exports (+2.9% mom). The wider-than-expected trade deficits weighed on the dollar.

Although RSI (currently at 73) suggests that valuation of gold has been stretched and pullbacks or corrections cannot be ruled out in the coming week, prevailing dollar weakness, low real interest rate environment and strong investment demand should continue to support gold's uptrend towards end 2009.

IMF's gold sales to the Reserve Bank of India still positively affected gold price. India's gold purchase signaled the ongoing shift of central banks and governments as net gold sellers to net gold buyers. Speculations for further central bank buying boosted investment demand.

Real interest rate in the US remains low and this environment is supportive for gold.

Silver

Summary

Comex silver slid to as low as 17.03 before strong rebound Friday. The benchmark contract ended the week flat. Gold-to-silver ratio declined to 60-ish from above 80 at the end of last year. Although current level represents modest increase from 58 in September, it's still above historical average and suggests silver is modestly overvalued. While recent rally in silver has been driven by upsurge in gold, its fundamentals remain weak.

Analysis

On the supply side, key miners reported that silver mine supply increased +7% yoy in 3Q09. On the demand side, China's silver imports fell -23% to 421 metric tons in September while its exports rose more than 4 times to 455 metric tons, suggesting the country has shifted from a net importer to a net exporter of silver. Although industrial activities are expected to improve as global economic recovers, ample silver supply remains the key concern.

FOREX

Overview

The economic calendar heats up with a tremendous amount of data from across the globe and speeches by Fed officials. The major currency pairs are ready for a breakout and there is certainly sufficient catalyst to trigger one. The only question is, will these event risks kill the rally or pave the way for more gains.

THE event to watch this week: does the S&P 500 and EUR/USD form bearish double tops at their respective resistance levels and begin a period of consolidation, normal 10%-20% pullback, or something more severe.

Other Events to Sustain or Kill the March Rally

The most important: the U.S. retail sales report and speech by Fed Chairman Ben Bernanke on Monday.

If October retail sales are very weak or Bernanke talks up the dollar, the rally in equities and high yielding currencies could come to a screeching halt. However we believe that the chances of this happening are low.

--First, it's usually the Treasury Secretary and not the Federal Reserve Chairman that comments on the USD.

--Second, the Fed has been USD dovish.

If anything Bernanke favors a weaker dollar in this low inflation environment. The focus then turns to what he says about the economy and monetary policy. According to the last FOMC statement, there have been no meaningful improvements in the outlook for the U.S. economy since the previous meeting. Asset prices have moved higher but that does not always suggest a stronger outlook for U.S. companies. Recent comments from other Fed officials remain relatively downbeat as growing unemployment caps optimism.

Bernanke's likely tone will be continued caution, to remind us that the recovery is still vulnerable and therefore interest rates need to remain low for a very long and therefore implementing an exit strategy now is inappropriate. If Bernanke maintains this line, then the dollar will continue to be sold to fund carry trade.

--Retail sales may surprise despite the grim labor market

Despite a difficult labor market, both Redbook and the International Council of Shopping Centers (ICSC) reported a sharp rise in retail sales last month while similar results were reported by individual retailers. Good spending numbers would suggest that the economy is moving in the right direction even though the labor market is weak.

Also due this week is inflation, housing and manufacturing sector reports along with the Treasury International Capital flow report. Eight Federal Reserve Presidents are scheduled to speak on a variety of topics while Treasury Secretary Either will be testifying to the Senate Foreign Relations Committee on Tuesday. Don’t forget that President Obama will be in Asia until next Thursday. Watch for any market moving comments, particularly during the Asia-Pacific Economic Cooperation forum (APEC), but we don't expect any dramatic breakthroughs on currency.

USD

Possible S&P 500 Double Top Signaling the Risk Aversion Needed for US Dollar Rally?

Summary

US Dollar Outlook: Bullish if stocks drop, bearish if they don't

- Key Events: Monday-Core Retail Sales, Retail Sales, Tuesday- PPI m/m, TIC Long Term Purchases, Wednesday-Building Permits, Core CPI m/m

- S&P 500 possible double top around 1100 forming?

- IMF pegs the US dollar as the top funding currency for a yield hungry market

- Sharp rise in the trade deficit, drop in consumer confidence contradict the recovery story

- The US dollar to finally reverse course or once again collapse? COT reports reduction in USD shorts.

Analysis

This past week the dollar made its strongest rally in months against the euro, its prime counterpart, but the move faded. Lacking any reason to boost USD demand, the market kept the USD in its eight-month old bearish trend channel. To achieve a sustained reversal, the USD will need either:

• A sustained period of at least consolidation if not reversal in global stocks and other risk assets that drives up demand for safe haven currencies as carry trades unwind. The S&P 500 has twice backed off from the 1100 level. Failure to break through soon could lead to at least a consolidation period if not outright reversal.

• A fundamental improvement in the US economy that brings recovery in the critical jobs, banking, and housing areas, quite possibly in that order, that provides reason for markets to believe USD interest rates will rise sooner than currently expected and thus lift the dollar out of its current status as a prime funding currency for carry trades.

• A selloff in the EUR, because for every 3 Euros bought, a USD is sold, thus any selloff on one automatically helps the other. Since March, this relationship has been a key driver of the EUR's rally.

Events

For the coming week, the most pressing question for any trader is whether either of these drivers of dollar demand will step forward.

The above noted key USD events this week are unlikely to provide either of these reasons for a USD rally.

Therefore, the dollar's prospects for the coming week are likely to move with overall risk appetite through the global financial markets. Looking beyond US economic events, there seem to be few scheduled events or indicators from elsewhere that might alter the current level of fear or greed. In sum, another relatively quiet week of scheduled news releases.

That doesn't rule out the chance of a volatile trading week or trend shift.

When there is a major market-moving event due, the price action leading up to its release is often muted as traders do not want to increase risk. Moreover, if the news doesn’t fall far from forecasts or it otherwise doesn’t play into the larger market themes, then it fails to move markets. Actually, it is those light economic calendar weeks that we see sentiment build momentum and define new trends. The extended nature of the S&P's March rally and thus far firm resistance around 1100 may be all that is needed.

Retail sales will serve as a barometer for consumer spending (accounting for approximately three-quarters of GDP) and the October CPI numbers will reveal whether there is any merit to hawkish concerns through fears of looming inflation.

Given the continued hits to US jobs and wages, it is difficult to see how either will bring prospects for US rate increases and ensuing USD rally any closer.

EUR

Euro Remains Below 1.5050 - Is It a Double Top to Confirm that Forming on the S&P 500?

Summary

Euro Outlook: Neutral-Bullish if USD Continues Down, Bearish if Stocks Consolidate or Fall

- Key Events: Monday-CPI y/y, Thursday- Trichet speaks, Friday German PPI, Trichet speaks

- The German trade surplus expanded to 10.6B in September

- German GDP rose for a second straight quarter in Q3, but exports struggling under high EUR

- Euro-zone GDP figures worse than expected but better than Q2 and do show EZ growing again-Does ECB raise rates or leave them to help smaller nations still in recession?

- Did the EURUSD form a double top? The S&P 500 is forming one around 1100, and this pair strongly correlates to it. If it fully forms, this will be THE event for global markets in general, not just the EUR.

Analysis

The euro ended the past week slightly higher against the US dollar, but down significantly versus the commodity dollars as Credit Suisse Overnight Index Swap (OIS) rates shifted to price in fewer rate increases. Following the European Central Bank’s latest policy decisions, OIS rates eased back to pricing in 83.1 from 98.5 basis points worth of increases over the coming year. From a technical perspective, EURUSD remains in an uptrend, but 1.5050 is meaningful resistance and a failure to break above in the coming weeks may signal a double top for the pair.

Two offsetting events for the euro at the end of the week, as data showed that the Euro-zone’s third quarter recovery wasn’t quite as healthy as expected while there were some hawkish comments by an ECB official. Specifically:

• Euro-zone GDP rose by 0.4 percent from the second quarter, missing the 0.5 % expected increase. Since this was the advanced reading of the index, there was no breakdown available, but the increase was probably from a slight recovery in export demand. However, consumption may have remained weak, because services PMI for the euro-zone did not rise above 50 – signaling an expansion in business activity – until September.

• ECB Executive Board member Jose Manuel Gonzalez-Paramo said that he couldn’t rule out raising rates while some Euro-zone countries are still in recession, and while such a move would be “less fitting” for those countries, the national governments “will have to understand that.”

Events

In the coming week, only one indicator shows major market-moving potential: Euro-zone CPI. The annual rate of inflation growth is projected to rise to -0.1 percent from -0.3 percent. If the data shows that the euro’s appreciation has actually driven down import costs and price pressures more than expected; the currency could pull back because this could further undermine current market expectations for ECB rate increases.

JPY

Yen Likely to Range Trade vs. the US Dollar Given Lack of Market Moving News

Summary

Yen Outlook: Bearish/Neutral

- Key Events: Monday-BoJ Gov. Speaks, Tuesday-Tertiary Industrial Activity, Friday-BoJ Press Conference

- Yen looks increasingly vulnerable with growing risk appetite

- Yen outperforms against British Pound despite its lower yield

- Forex crowds pointed to potential for USDJPY losses

Analysis

Continued S&P 500 rallies made the safe-haven JPY the second-worst performing G10 currency to finish the week’s trade, beating out only the similarly-battered US Dollar. All major world equity indices finished anywhere from 2-3 percent above their weekly open except for the Japanese Nikkei 225—raising serious doubts on investor demand for Japanese financial asset classes, which reflected poorly on the domestic currency. Indeed, the fundamental arguments for Japanese Yen strengths are becoming increasingly scarce—especially through times of healthy financial market risk appetite.

We have long held that financial market risk sentiment and the trajectory of the S&P 500 would be the major determinant of USDJPY price action. Yet the US Dollar has now become the top funding currency for carry trades as it now carries the lowest overnight yield of any major world currency. This significant shift in interest rates has meant that the USDJPY’s correlation to risky assets has fallen considerably from its heights, and it is admittedly unclear whether the USDJPY would decline on S&P 500 tumbles. In fact, the rolling correlation between the US Dollar Index and S&P is very near record-highs—emphasizing the Dollar’s sensitivity to risk sentiment.

The Japanese Yen may struggle to find a bid against the US Dollar as it trades near substantive highs. This unclear US Dollar/Japanese Yen link to risk sentiment may explain low volatility expectations for the currency pair, and it seems traders are pricing in range trading for the often fast-moving USDJPY. This contrasts with the volatility expectations for other major currencies, and theoretically provides a safe haven for range traders and scalpers for the coming week.

GBP

Bullish Pound Forecast Versus Euro Subject to BoE Surprises?

Summary

Pound Outlook: Neutral

- Key Events: Mon.-Rightmove HPI m/m, Tue.- CPI y/y, BoE Inflation Letter, Wed.-MPC Meeting Minutes, Thur.-Retail Sales m/m

- GBP rally stops on Fitch concern on UK sovereign debt rating

- Similar caution from the Bank of England also hurts Pound, more could come from news this week

- Technical support still there for the GBP

Analysis

The British Pound survived a week of unimpressive news to trade a bit higher against the US Dollar, but a busy coming week of economic event risk may pose further challenges for the UK currency in the week ahead. Early prior-week news that Fitch Ratings took a “cautious” view on its outlook for the UK Government Bond’s AAA sovereign rating shook markets and sent the Sterling plunging about 200 bps. The following Bank of England Quarterly Inflation report expressed a similarly cautious outlook for economic growth, and it seemed like the GBP was headed for a break of key support against the US dollar. Yet the GBPUSD held key technical levels through the week’s close. Whether or not the pair can sustain its level will likely depend on events in the days ahead, setting the stage for another eventful week of British Pound price action.

Events

Consumer Price Index figures and mid-week Bank of England monetary policy minutes will be the major highlights in the week ahead, but traders should watch for UK Retail Sales results too.. Inflation and BoE outcomes are likely to cause volatility in UK interest rate expectations and thus the Pound. The currency rallied sharply through the Bank of England’s most recent interest rate announcement as officials boosted Quantitative Easing measures by only half of the expected £ 50 billion.. Traders will want to see the voting for that decision and general commentary on the future of monetary policy, while the previous day’s CPI data will likewise play a large part in determining monetary policy forecasts. Forecasts call for a modest rise in year-over-year inflation rates, and it is admittedly difficult to predict likely reactions to the event. Lofty expectations for later-week Retail Sales numbers, on the other hand, leave room for disappointment.

The Pound has been able to hold major technical and psychological support versus the Euro and US Dollar, but that will likely be tested in the week ahead. According to US CFTC Commitment of Traders data, Non-Commercial traders are still heavily long the EUR/USD and short the GBP/USD—giving us a fairly bearish EUR/GBP bias. Yet positioning has thus far eased considerably from previous extremes, and the British Pound is at clear risk for losses on continued disappointments in domestic fundamental developments. All else remaining equal, we expect the British Pound to break the psychologically significant 0.8900 mark against the Euro, but our forecasts will likely be put to the test in the week ahead.

CHF

SNB Pledge to Maintain Policy Suggests Range Trading Ahead, But Sudden Risk Aversion Might Overwhelm SNB Efforts to Keep the CHF Low

Summary

Swiss Franc Outlook: Neutral

- Key Events: Tuesday-Retail Sales y/y, Thursday-Trade Balance, SNB Chairman Roth Speaks

- Swiss Investor Confidence Weakens in November

- Producer & Import Prices Unexpectedly Contract in October

- Continued Dovish Policy May Leave the CHF Range Bound Barring any Positive Surprises From The Above Events

Analysis

The Swiss Franc ended the week higher against the U.S. Dollar and the Euro, with the USD/CHF continuing to push toward parity as the pair slipped to a low of 1.0034, just 2pips shy of the yearly low at 1.0032. The CHF appears likely to remain range-bound over the following week as investors weigh the outlook for future policy. SNB member Thomas Jordan made the following points:

• Reaffirmed the central bank’s policy stance during a speech earlier this week and said that the board has reached its goals and does not see any reason to shift policy.

• Continued to voice his concern about the marked appreciation in the Swiss franc, stating that “the exchange rate has quite an important impact” on the economy, and went onto say that the central bank’s efforts to stem the rise against the euro were successful.

• That the SNB will look to normalize policy over the medium-term as conditions improve, but noted that the outlook for the global economy remains highly uncertain and pledged to support the economic recovery in the short run.

Similarly dovish, SNB Governor Jean-Pierre Roth expects to see weaker growth following the crisis, and said that the slump in employment remains a concern as growth prospects remain subdued. As policy makers maintain a cautious outlook for the region and vow to prevent a further appreciation in the exchange rate, the franc seems likely to continue to range trading as markets consider the chance of another SNB intervention. Still, the economic calendar for the following week could spark volatility in the Swiss franc cross rates as the Swiss National Bank holds an improved outlook for growth and forecasts GDP to expand at an annual rate of 0.4% in 2010 amid an initial forecast for a 0.4% contraction.

CAD

Canadian Dollar Continues To Move With Oil, Then Stocks, Then Events

Summary

Canadian Dollar Outlook: Bullish Barring Stock Pullback

- Key Events: Monday-Manufacturing Sales m/m, Wed.- Core CPI m/m, Thurs. Leading Indexes m/m

- Is USDCAD bound to strengthen? Much depends on S&P 500, which drives oil

Analysis

The Canadian dollar was one of the strongest major currencies over the past week, but this was mostly the result of broad US dollar weakness rather than commodity prices, as oil continued to consolidate between $77/bbl and $80/bbl. Furthermore, there was no major economic data on hand. However, one significant indicator was released on Friday, when data showed that Canada’s trade deficit narrowed to a three month low in September. The deficit eased to C$927 million from C$1.99 billion in August due to a 3.5 % increase in exports, suggesting that foreign demand may ease some of the nation’s economic woes. As usual, a break in either direction for oil is likely to translate into a similar move for the Canadian dollar versus the US dollar, but the trend remains in favor of CAD strength and/or USD weakness, barring a significant stock pullback.

Events

Overall, upcoming economic reports out of Canada are anticipated to reflect improving conditions.

• Monday, manufacturing sales for the month of September are projected to rise by 1.7 percent following a drop of 2.1 percent in August, but the actual results could prove to be even better given the jump in exports during the same period.

• On Wednesday, the annual rate of Canadian headline CPI growth for October is projected to bounce back up to 0.1 percent from -0.9 percent, while the Bank of Canada’s core measure is projected to rise to 1.7 percent from 1.5 percent. Such results would suggest that higher commodity costs are providing some support for the headline CPI measures, while improving domestic demand has lifted broader prices. The Bank of Canada sees that “overall risks to its inflation projection are tilted slightly to the downside,” but if CPI climbs higher than expected, the Canadian dollar could rally on improved expectations for interest rate increases.

• Finally, on Thursday, international securities transaction may show that foreign demand for Canadian assets waned in September to C$3.0 billion from C$5.082 billion. On the other hand, wholesale sales are estimated to rise 1.0 percent for September, which would bode well for the November 23 release of retail sales as a gauge of domestic demand.

AUD

Australian Dollar Continuing Higher Barring New Risk Aversion

Summary

Australian Dollar Outlook: Bullish

- Key Events: Tues.-Monetary Policy Meeting Minutes, Wed.- Wage Price Index q/q (expected increase may fuel further rate increase expectations, AUD strength)

- Growing Interest Rate Advantage Feeding AUD Carry Trade Demand, AUD to rise with stocks

- Australian economy unexpectedly added 24,500 jobs in October, equaling a six year high, renews rate hike expectations, and AUD rally

- Westpac Consumer Confidence Fell for the first time in six months by 2.5%

- Consumer inflation expectations fall to 3.2% from 3.5% in October

Analysis

The Australian dollar hit another annual high of 0.9368 against the USD as continued risk appetite and unexpected job creation in October fed bullish sentiment. Equity markets continued push higher with the Dow setting a fresh yearly high as traders took comfort in the G-20’s pledge to maintain low interest rates and stimulus programs. However, the RBA isn’t expected to follow the pack as they have already raise rates at their last two policy meetings and markets are currently pricing in an 83% chance that they will continue to tighten at their December meeting. The prospect of higher borrowing costs led to 2.5% drop in consumer confidence, the first in six months. Confidence remains relatively high, but declining optimism could negatively impact domestic consumption which unexpectedly fell 0.2% in September.

The weak demand had raised the prospect that the RBA would take a break from their tightening policy at their December meeting as there are concerns that premature rate hikes could derail the recovery. Additionally, Governor Stevens last week signaled to markets that the strength of the Australian dollar would limit upside inflation risks and give him the scope to slow the pace of future rate increase. But the surprising job growth renewed expectations for an additional 25 bps hike as it confirmed Governor Stevens' statements following November’s meeting that “there have been some early signs of an improvement in labor market conditions. The rate of unemployment is now likely to peak at a considerably lower level than earlier expected.”

Events

The upcoming economic calendar may only add to the likelihood of a rate increase as the wage cost index is forecasted to show a 0.7% rise in the third quarter, adding to inflation concerns. Westpac’s leading index which tracks eight gauges of activity, such as company profits and productivity, to give an indication of how the economy will perform over the next three to nine months is also due for release. If it continues its current trend of improvement then the brighter outlook for growth will add to the case for future tightening. Rising interest rate expectations will continue to be a supporting factor for the Australian dollar which could see the com-dollar eventually look to test its all-time high. However, the RBA will release their minutes from their November meeting which could hint at the prospect of keeping rate steady at their next meeting which could weigh on the Aussie.

Additionally, the AUD could drop fast if risk appetite wanes which could be the case this week with equity markets up against technical resistance levels.

NZD

New Zealand Dollar Fundamentals To Overwhelm Risk Appetite?

Summary

New Zealand Dollar Outlook: Bearish

-Disappointing retail and manufacturing indicators bear out RBNZ Governor Bollards economic concerns

-Is NZDUSD setting up a bearish reversal of its eight month bull run? Watch to see if the S&P 500 rolls over at the forming bearish double top around 1100

Analysis

Even more than other high yield currencies, the NZD may be living on borrowed time, given the S&P's forming bearish double top. If 1100 indeed proves to be the end of the rally, the NZD would likely suffer more than most other currencies. Risk appetite alone lifted this currency from a six-year low, and it is only a matter of time before the aggressive rally collapses under its own weight.

The NZD's high yield and its mere presence among the list of most liquid currencies have made it a place to park idle cash. In fact, under most scenarios (even a revival in the demand for yield); the NZD may actually lead the over-due correction.

While it is possible that the New Zealand dollar could struggle or tumble even if sentiment is steady or rising; it is best to first cover the most direct fundamental scenario: a plunge in risk appetite. Though the S&P 500 and Gold closed their respective weeks at or near new highs for the year; there is growing skepticism among the trading ranks that the drive can hold up for much longer. As we noted in the above section on global stocks indexes, volume for the S&P 500 (and gold too) hit new monthly lows. From a more historical perspective, we haven’t seen a rally from equities of this magnitude in recent history.

We have argued for many months that from technical and fundamental perspective, values have run ahead of the economics that support them. The return of idled investor funds from the harbor of safe haven assets back into the speculative arena has filled in for the lack of reasonable yield income with the thrill of capital gains. However, eventually a balance will be struck where the speculators will be tapped and what remains to be invested will belong to those managers that are cautiously awaiting the return of dividends, yields and other stable rates of return. When the tides turn, the collapse from profit taking will likely be more severe (though perhaps not as deep) as the initial rally.

When carry trades begin to be unwound in masse, those securities with a weak fundamental foundation will see bleed capital the fastest. Therefore, a currency like the Australian dollar may see a retracement but it could well be relatively mild thanks to its ability to avoid recession and the promise of a hawkish rate regime. However, as we've noted repeatedly, the NZD lacks the fundamental strength of the AUD, even though it has risen in tandem with the AUD.

• The NZ economy is still struggling to recover.

• The central bank has vowed to hold its benchmark lending rate at its record low 2.50 percent until late 2010.

Thus any real retreat in risk appetite makes the overbought NZD a clear favorite for shorting, especially against the oversold USD. Meanwhile, we will keep tabs on the economy’s and central bank’s pace. Event risk over the coming week is relatively light but upstream inflation numbers and credit card spending figures will offer a look at two key concerns for the policy authority.

CONCLUSIONS

Watch the S&P 500 carefully to see if a sustained retreat or range trading stage below the bearish double top beginning to form around 1100 causes this to turn into a truly bearish formation. As noted above

The low volume nature of the March rally suggests there is plenty of short term money that is ready to take profits. If that movement develops, we suggest readers do the same and /or go long safety currencies.

If news events surprise to the upside, risk assets could once again hold on and move forward. Betting against the resilience of the market has been an expensive mistake overall since March. That's why we wait for various forms of confirmation of trend shifts before trading them.

RECOMMENDATIONS

Long risk assets when they hit support levels but be ready to close positions and go short if the double top in the S&P 500, EUR/USD, and other charts holds firm and develops into a pullback.

DISCLOSURE: AUTHOR HAS NO POSITIONS IN THE ABOVE INSTRUMENTS

BIWEEKLY GLOBAL MARKETS REVIEW & IMPLICATIONS 10/19-11/02: STOCKS, CURRENCIES, COMMODITIES

2009-11-03T01:47:00.000-08:00

Market Diary: What Happened Since Our Last Biweekly Review

Global Stock Markets

Because most major international stock indexes move with the S&P 500 Index, the chart below of the S&P 500 Index Futures Contracts gives us an overview of all major global stock indexes since our last Newsletter of 10/19.

Here's a chart of the S&P 500 Futures as of 10/19. At the time this image was made the market was climbing and would end the day closing at 1095, which would prove to be its very top close for the next two weeks.

The S&P 500 Futures 10/05—10/19

03 oct 19

Here's a chart of this bellwether index since then:

The S&P 500 Futures 10/19—11/02

Image: 04 Nov 02

As the chart above shows, the market began its pullback the very next day, erasing the gains of October 19th and beginning a 5.9% drop to a low of 1030 as of this writing.

This performance roughly reflects the direction and magnitude of losses across the spectrum of risk assets. Why the drop?

As we review our daily analyses from this period, the main reasons appear to have been:

• U.S. Q3 earnings reports showed stabilization but were not good enough to justify higher stock prices at this time. The signs have been there for those who willing to see them. For Q2, investors were satisfied that the threat of financial collapse appeared to have receded, and that companies managed to beat lowball earnings estimates even though businesses were clearly still getting worse. No longer. This time around, the media had been raising questions about whether companies could show actual growth of their sales and overall business that could justify the highest valuations the S&P has seen in years, despite the ongoing downturn. The doubts were more than legitimate. Historically, the average Price/Earnings ratio for the S&P is around 15-20. While the recovery is far from robust or even fully underway, the current figure is around an astounding 143. Yet all the fundamental problems in housing, banking and employment that caused the current downturn are still fully unresolved. Too many firms reported continued declines in revenues or profits based on unsustainable actions like cost cutting , asset sales, or accounting tricks.

• The balance of news over this period was the typical mixed bag that showed halting improvement but not enough to justify belief in further gains in risk assets. Meanwhile there was plenty of bad news to confirm that it was time to take some profits. Employment continues and housing continued to worsen, UK GDP showed continued contraction, and even the better than expected US GDP was discounted as the result of temporary government stimulus rather than genuine private sector recovery.

A Normal Retesting of Support or New Down Trend?

The big question is no longer whether the rally can continue—it can't, not until there are signs of further recovery. Instead, the focus is on whether the current pullback can stabilize soon as a normal pullback within a continuing uptrend, or whether we are beginning the next move down into a double dip "W" shaped recovery, or longer period of stagnation or decline.

The coming weeks will not give us the big picture, but are very likely to set the near term direction. This week is packed with central bank policy statements and employment figures, including the month's climactic US Non-Farms Payrolls and Employment rate figures for October.

Some Trading Opportunities Over the Past Two Weeks

Needless to say, this kind of volatility was trader's paradise, and much of it was in clear sustained directional moves or within identifiable ranges.

EUR/USD [200:1 leverage]

• Fell from 1.5041 to 1.4685, a move of 356 pips or 2.36%, in just 3 trading sessions from 10/26-10/28. Potential profit: 473%.

• On 10/29 rose over 1% on the positive US GDP surprise, then on 10/20 retraced the gain along with the rest of the markets for another 1%+ move on the way down, an over 2% round trip. Profit potential: over 400%.

The S&P 500 CFDs [100:1 leverage]

• Pulled back about 5.9% in 5 trading sessions from 10/22-28.Profit potential: almost a 600% in under a week.

• Within the past 2 weeks, it has also made no less than 5 moves of nearly 2% up or down over the past two weeks, each one potentially worth approximately 200% profit for those catching the entire move. Profit potential: nearly 1000% for the entire round trip.

Crude oil CFDs [100:1 leverage]

• Dropped over 5.5% in just 5 trading sessions from 10/23-10/28. Profit Potential: 550%.

• On 10/29 rose from $77-$80, 3.89%, following the positive US GDP surprise, then retraced the move back down with the rest of the markets, falling from $80-$77, a 3.75% decline, for a total round trip move of nearly 8%. Profit potential: nearly 800%.

Of course, few would be so lucky to catch even the majority of these moves, but even a very realistic fraction of these moves that one could expect to get using prudent risk management techniques would prove extremely rewarding.

Conclusion

In another two weeks we'll have seen the results of the above mentioned critical reports and events, and will know whether markets are just undergoing normal consolidation or making a deeper test of support

This is exactly why AVA FX strives to provide such a diverse range of trading instruments. While other markets are struggling, our clients can always find a bull market somewhere

Disclaimer and Disclosure: The opinions expressed do not necessarily reflect those of AVAFX. The author holds no positions in the above instruments.

GLOBAL OUTLOOK 11/03: Rally in US, But Asia, Europe Unconvinced

2009-11-03T01:26:00.000-08:00

SUMMARY

- Stocks: Monday: Asia down, Europe, US up, Tuesday morning Asia down, Europe opening down

- FX: Lower equities, bias to safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD gains against all majors except for JPY,

- Main events today: AUD: Cash Rate, RBA St., Wed: AUD: Building Approvals, Retail Sales, GBP: Halifax HPI, Services PMI, USD: ADP NFP, ISM Non-Mfg PMI, FOMC St., Fed Funds Rate, NZD: Employment Change q/q, Unemployment Rate

- Big Theme: Falling risk appetite – normal retest or the next leg down back to November or March support? See Conclusions below for trading opportunities as many assets approach or breaching key levels. Light news Tuesday could produce cautious tight ranges or more profit taking ahead of key news-packed Wednesday. TRADERS SHOULD HAVE TRADING PLANS READY FOR MOVES IN EITHER DIRECTION, MARKET REACTION TO NEWS WEDNESDAY-FRIDAY TO DECIDE

STOCKS

Better-than-expected economic data helped the S&P 500 ascend to a 1.5% gain. U.S. reports showed sharp improvements in manufacturing, construction and housing, encouraging investors to buy riskier assets with higher yields. As a result, U.S. stock indexes rose, though stocks later trimmed gains on concerns about banks' soured loans after a warning by the Fed about banks' loan losses and worries about whether the seven-month rally has run out of steam

News that the ISM Manufacturing Index for October came in at 55.7, construction spending in September spiked 0.8%, and pending home sales for September made a 6.1% monthly increase helped bring about some early, broad-based buying, which sent all 10 major S&P 500 sectors into the green.

Financials were a standout as the sector climbed to a 2.5% gain. Investors in the sector paid little attention to news that regional lender CIT Group will enter bankruptcy after weeks of struggling to secure financing and put together a plan for sustainability.

However, financial stocks soon saw their gains reverse as weakness among insurers spread to the rest of the sector. That took the financial sector to a 1.7% loss before buyers stepped back in and helped it finish with a 0.8% gain.

Midsession weakness among financials undercut the broader S&P 500, which was having trouble extending its gains past its 50-day moving average of 1052. Such technical resistance combined with weakness in one of the stock market's leading sectors eventually caused the broader market to roll over and surrender all of its gains.

Stocks were able to garner some support as an underlying bid limited the stock market's move to the downside. That support inevitably helped it settle the session with a gain.

Materials stocks finished the session with some of the strongest gains. The sector closed 1.0% higher, partly helped by a weaker dollar, which oscillated for the entire session before settling roughly 0.1% lower. The greenback's move lower helped the CRB Commodity Index climb 1.2%.

Other solid gains were made by consumer staples stocks (+1.0%) and consumer discretionary stocks (+0.9%), which were helped by strength in shares of Ford (F 7.58, +0.58). The automaker posted this morning better-than-expected earnings and also announced an increase in market share.

In other earnings news, Humana (HUM 37.01, -0.57) posted better-than-expected earnings of its own, but offered a mixed forecast that weighed on the stock. Managed care providers still advanced 1.5% as a group, though.

Advancing Sectors: Consumer Staples (+1.0%), Materials (+1.0%), Industrials (+1.0%), Consumer Discretionary (+0.9%), Financials (+0.8%), Health Care (+0.6%), Energy (+0.5%), Tech (+0.4%)

Declining Sectors: Telecom (-0.4%), Utilities (-0.3%)DJ30 +76.71 NASDAQ +4.09 SP500 +6.69 NASDAQ Adv/Vol/Dec 1277/2.43 bln/1414 NYSE Adv/Vol/Dec 1627/1.55 bln/1411

Asia: Asian stock markets fell Monday after grim news about American consumers sowed more doubts about the U.S. economic recovery and sent Wall Street tumbling last week.

Europe: European stock index futures fell on Tuesday, pointing to a weaker start for equities after Swiss lender UBS posted poor quarterly results and UK's Lloyds Banking Group expected pretax loss for 2009.

GLOBAL

MARKETS FRIDAY

ASIA- DOWN N225I -2.31% HS -0.61 % SSEC +2.71 FTSTI -0.22% AORD -2.16 %

EUROPE UP FTSE +1.18% DAX +0.29% CAC +0.88 %

US- UP S&P +0.65% DJIA +0.79% NASDAQ +0.20%

THIS MORNING

ASIA CLOSING DOWN

N225I -2.31% HS +1.71 % SSEC -0.61 FTSTI -0.45% AORD -2.16 %

EUROPE: OPEN DOWN

FTSE -1.02% DAX -1.04% CAC -1.10%

COMMODITIES: Down Friday with stocks as the dollar gained.

Oil: (AP) -3.61% Friday SINGAPORE (AP) -- Oil prices hovered near $78 a barrel Tuesday in Asia as investors welcomed new U.S. manufacturing and construction figures as positive signs of an economic recovery. The Institute for Supply Management said Monday that U.S. manufacturing activity grew in October at the fastest pace in more than three years, while the Commerce Department reported that September construction spending posted a better-than-expected performance.

And the National Association of Realtors said the volume of signed contracts to buy previously occupied homes rose for the eighth straight month in September. The question is, however, how much of that was a result of government stimulus in the form of $8K tax credits to first time homebuyers and very low mortgage rates.

The positive news help push stocks higher, with the Dow Jones industrial index up 0.8 percent on Monday. Asian stock indexes were mixed on Tuesday.

"Oil was just really following the equities markets and overall opinion on the future of the U.S. economy," Seattle-based Sander Capital Advisors said in a report.

Gold: Following stocks, up 1.00% in Monday US trade to 1064, Gold rose to its strongest in nearly two weeks on Tuesday, hovering within sight of last month's record, as the U.S. dollar dropped on data showing further evidence of an economic recovery. But trading was expected to be light, with Japanese speculators away for a holiday.

CURRENCIES: Bias to risk currencies with rising stocks

USD: Down against higher yielding currencies, but continuing recent gains against GBP, JPY

EUR: - Euro zone PMIs as expected Final German and Euro zone PMI manufacturing readings for October came in at 51.0 and 50.7 respectively, broadly in line with consensus expectations. The good PMI readings support our economists' recent upgrade of Euro zone growth forecasts.

JPY - Against the yen, the dollar gained 0.2 percent to 90.29 yen after falling as low as 89.18 yen per dollar on electronic trading platform EBS. The euro rallied 0.5 percent to 133.35 yen

GBP – Strong manufacturing PMI Manufacturing PMI was 53.7 for October, stronger than expectations of a 50.0 print. Expansion in manufacturing expanding again which raises hopes for the economy to finally recover from its longest ever post-war recession. While manufacturing headline PMI is at a 2-yr high, the services PMI, which is due on Nov 4, will be of more interest to the BoE's MPC. But nevertheless, more positive data could potentially signal a less than consensus expansion of the QE program. Consensus estimate is currently for an additional 50bn. Construction PMI is due next. We are more constructive on sterling in the longer-term but still think policy uncertainty could still weigh on sterling in the near-term..

AUD: Dropping against the USD despite the 25 bp rate rise on a buy the rumor sell the news move. Our economists now look for the RBA to complete a move away from the current 'emergency' 3.25% cash rate to a more 'normal' 4.25% by Q1 next year. The key catalysts are the improved business investment outlook and an improved global economy, reducing the significant downside risks to growth. We see the RBA hiking a further 50bp before Christmas to 3.75%. Later in 2010, as Q3 GDP shows a recovering consumer, renewed investment vigor and enough growth to see the unemployment rate falling, & inflation troughs, our economists expect the RBA will start the next phase of its tightening cycle, from 'normal' to 'neutral'. We look for the cash rate to end 2010 at 4.75%, rising to 5.5% in 2011.

NZD: Lost ground against the safe haven currencies last week like all the commodity and high yielding risk currencies. Attempting to come back as it rises off of $0.7170 support Sunday and early Monday.

CAD: As expected, gaining ground against the USD as oil and stocks rise.

CHF: Jordan points to inflation Swiss PMI was 54.0 for October, weaker than estimates for a 54.8 print and also a decline from last month's figure. The SNB's Jordan suggested that this is not the time to exit from loose monetary policy. Jordan said the main indicator for exiting current policies is inflation. He also said their intervention policy has helped lower volatility and has kept the franc from rising versus the euro.

CONCLUSIONS: Proceed w/ caution waiting until trend clarifies before entering new positions as S&P 500 sits at near term support. Bias still towards seeking risk aversion plays, but JPY and USD vs. riskier currencies when these breach resistance or support., short oil gold when breach support. See below for specific opportunities with the EURUSD,CRUDE, and NZDUSD

Trading Opportunities: Near term favors SAFE HAVEN currencies, shorting risk assets.. Thus: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Crude oil breaches key $74 resistance, implying more upside unless stocks pull back on earnings disappointments. Always use sell stop orders.

Crude Oil: Recovered support at its first Fibonacci retracement level at $77.83 yesterday, holding on near its 20 day MA. When/if risk appetite returns, next resistance is at last week's high and round price level of $80/bbl. If risk assets like stocks continue to drop, next support level is at the significant 38.2%/61.8% Fibonacci retracement level at $75.51, which is near the multi-month price support of around $74/bbl.

WTI Crude Oil Daily Chart

01 Nov 03

EURUSD: Continues holding just above strong support level of $1.4700 (50 day MA + 23.6% Fibonacci retracement from its June rally, also lower BB band around 1.4657). Look to play a break above this if there is bullish news to at least 1.4845, the high of the past few days, or if more bad news or drops in global equities, a break below to at least the lower Bollinger Band at around 1.4653, next support at around 1.4600, a convergence of past price support AND just above the 38.2% Fibonacci retracement from the June rally at 1.4565 .

EURUSD DAILY CHART

02 Nov 03

NZDUSD: THE TRADE FOR THE NEXT 2 DAYS

Background: Arguably one of the most overbought pairs because it moved up with the AUDUSD even though New Zealand's economic fundamentals and recovery story was not nearly as compelling as Australia's. Thus when the current pullback began, it was very vulnerable and came in hard and broke strong support near the $0.7250, where both its 50 day MA AND 23.6% Fibonacci retracement converged. Currently sitting on multiday support around 0.7160, it is currently falling (despite positive Labor Cost index q/q data this morning) and testing this level as Asian stocks pull back, apparently unimpressed by Wall Street's last minute rally on below average volume.

Recommendation: No real support until $0.7077, at which level converges both a minor price support level from September and the 38.2% Fibonacci retracement. No major NZD or USD news Tuesday, so this will move with overall market sentiment, which is currently down in Asia. However Wednesday is packed with top events in both the US and NZ (see Summary-Key Events at the top) to virtually guarantee volatility.

To play the further drop, entry near current levels as shown on the chart below while sufficient profit potential remains before the $0.7077.

To play the upside, wait until stocks start climbing on some substantially positive news that could sustain a multi-day bounce, and the pair breaks above $0.7160. Wednesday's packed calendar should provide clarification of the trend until Friday's US NFP comes out.

NZDUSD DAILY CHART

03 Nov 03

OTHER HEADLINES

(Seekingalpha.com)

Gold Is Not in a Bull Market

Cramer Does It Again with CIT Call

Wall Street Breakfast: Must-Know News

How Bloomberg Fabricates U.S. Housing Numbers

Property Values Set to Fall 43% from Current Depressed Levels

Michael David White

Bear Market Rallies and Lessons of History

DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS NO POSITIONS IN ABOVE INSTRUMENTS.

GLOBAL OUTLOOK CHEAT SHEET 11/03: Rally in US Unconvincing

2009-11-03T01:22:00.000-08:00

SUMMARY
Stocks: Monday: Asia down, Europe, US up, Tuesday morning Asia down, Europe opening down

- FX: Lower equities, bias to safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD gains against all majors except for JPY,

- Main events today: AUD: Cash Rate, RBA St., Wed: AUD: Building Approvals, Retail Sales, GBP: Halifax HPI, Services PMI, USD: ADP NFP, ISM Non-Mfg PMI, FOMC St., Fed Funds Rate, NZD: Employment Change q/q, Unemployment Rate

- Big Theme: Falling risk appetite – normal retest or the next leg down back to November or March support? See Conclusions below for trading opportunities as many assets approach or breaching key levels. Light news Tuesday could produce cautious tight ranges or more profit taking ahead of key news-packed Wednesday. TRADERS SHOULD HAVE TRADING PLANS READY FOR MOVES IN EITHER DIRECTION, MARKET REACTION TO NEWS WEDNESDAY-FRIDAY TO DECIDE

STOCKS

Better-than-expected economic data helped the S&P 500 ascend to a 1.5% gain. U.S. reports showed sharp improvements in manufacturing, construction and housing, encouraging investors to buy riskier assets with higher yields. As a result, U.S. stock indexes rose, though stocks later trimmed gains on concerns about banks' soured loans after a warning by the Fed about banks' loan losses and worries about whether the seven-month rally has run out of steam

Asia: Asian stock markets fell Monday after grim news about American consumers sowed more doubts about the U.S. economic recovery and sent Wall Street tumbling last week.

Europe: European stock index futures fell on Tuesday, pointing to a weaker start for equities after Swiss lender UBS posted poor quarterly results and UK's Lloyds Banking Group expected pretax loss for 2009.

ASIA- DOWN N225I -2.31% HS -0.61 % SSEC +2.71 FTSTI -0.22% AORD -2.16 %

EUROPE UP FTSE +1.18% DAX +0.29% CAC +0.88 %

US- UP S&P +0.65% DJIA +0.79% NASDAQ +0.20%

THIS MORNING N225I -2.31% HS +1.71 % SSEC -0.61 FTSTI -0.45% AORD -2.16 %

FTSE +0.16% DAX -0.41% CAC +0.24%

COMMODITIES: Down Friday with stocks as the dollar gained.

Oil: (AP) -3.61% Friday SINGAPORE (AP) -- Oil prices hovered near $78 a barrel Tuesday in Asia as investors welcomed new U.S. manufacturing and construction figures as positive signs of an economic recovery. The Institute for Supply Management said Monday that U.S. manufacturing activity grew in October at the fastest pace in more than three years, while the Commerce Department reported that September construction spending posted a better-than-expected performance.

Gold: Following stocks, up 1.00% in Monday US trade to 1064, Gold rose to its strongest in nearly two weeks on Tuesday, hovering within sight of last month's record, as the U.S. dollar dropped on data showing further evidence of an economic recovery. But trading was expected to be light, with Japanese speculators away for a holiday.

CURRENCIES: Bias to safe-haven currencies as last minute Wall Street Rally fails to convince Asia, Europe-Caution until Wednesday

USD: Down against higher yielding currencies, but continuing recent gains against GBP, JPY.

EUR: - Euro zone PMIs as expected Final German and Euro zone PMI manufacturing readings for October came in at 51.0 and 50.7 respectively, broadly in line with consensus expectations. The good PMI readings support our economists' recent upgrade of Euro zone growth forecasts.

JPY - Against the yen, the dollar gained 0.2 percent to 90.29 yen after falling as low as 89.18 yen per dollar on electronic trading platform EBS. The euro rallied 0.5 percent to 133.35 yen

GBP – Strong manufacturing PMI Manufacturing PMI was 53.7 for October, stronger than expectations of a 50.0 print. Expansion in manufacturing expanding again which raises hopes for the economy to finally recover from its longest ever post-war recession. While manufacturing headline PMI is at a 2-yr high, the services PMI, which is due on Nov 4, will be of more interest to the BoE's MPC. But nevertheless, more positive data could potentially signal a less than consensus expansion of the QE program. Consensus estimate is currently for an additional 50bn. Construction PMI is due next. We are more constructive on sterling in the longer-term but still think policy uncertainty could still weigh on sterling in the near-term..

AUD: Dropping against the USD despite the 25 bp rate rise on a buy the rumor sell the news move. Our economists now look for the RBA to complete a move away from the current 'emergency' 3.25% cash rate to a more 'normal' 4.25% by Q1 next year. The key catalysts are the improved business investment outlook and an improved global economy, reducing the significant downside risks to growth. We see the RBA hiking a further 50bp before Christmas to 3.75%. Later in 2010, as Q3 GDP shows a recovering consumer, renewed investment vigor and enough growth to see the unemployment rate falling, & inflation troughs, our economists expect the RBA will start the next phase of its tightening cycle, from 'normal' to 'neutral'. We look for the cash rate to end 2010 at 4.75%, rising to 5.5% in 2011.

NZD: Lost ground against the safe haven currencies last week like all the commodity and high yielding risk currencies. Attempting to come back as it rises off of $0.7170 support Sunday and early Monday.

CAD: As expected, gaining ground against the USD as oil and stocks rise.

CHF: Jordan points to inflation Swiss PMI was 54.0 for October, weaker than estimates for a 54.8 print and also a decline from last month's figure. The SNB's Jordan suggested that this is not the time to exit from loose monetary policy. Jordan said the main indicator for exiting current policies is inflation. He also said their intervention policy has helped lower volatility and has kept the franc from rising versus the euro.

CONCLUSIONS: Proceed w/ caution waiting until trend clarifies before entering new positions as S&P 500 sits at near term support. Bias still towards seeking risk aversion plays, but JPY and USD vs. riskier currencies when these breach resistance or support., short oil gold when breach support. See below for specific opportunities with the EURUSD,CRUDE, and NZDUSD

Trading Opportunities: Near term favors SAFE HAVEN currencies, shorting risk assets.. Thus: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Crude oil breaches key $74 resistance, implying more upside unless stocks pull back on earnings disappointments. Always use sell stop orders.

Crude Oil: Recovered support at its first Fibonacci retracement level at $77.83 yesterday, holding on near its 20 day MA. When/if risk appetite returns, next resistance is at last week's high and round price level of $80/bbl. If risk assets like stocks continue to drop, next support level is at the significant 38.2%/61.8% Fibonacci retracement level at $75.51, which is near the multi-month price support of around $74/bbl.

MY FAVORITE FX TRADE FOR THE NEXT 2 DAYS: THE NZDUSD

2009-11-03T01:12:00.000-08:00

Background: Arguably one of the most overbought pairs because it moved up with the AUDUSD even though New Zealand's economic fundamentals and recovery story was not nearly as compelling as Australia's. Thus when the current pullback began, it was very vulnerable and came in hard and broke strong support near the $0.7250, where both its 50 day MA AND 23.6% Fibonacci retracement converged. Currently sitting on multiday support around 0.7160, it is currently falling (despite positive Labor Cost index q/q data this morning) and testing this level as Asian stocks pull back, apparently unimpressed by Wall Street's last minute rally on below average volume.

Recommendation: No real support until $0.7077, at which level converges both a minor price support level from September and the 38.2% Fibonacci retracement. No major NZD or USD news Tuesday, so this will move with overall market sentiment, which is currently down in Asia. However Wednesday is packed with top events in both the US and NZ (see Summary-Key Events at the top) to virtually guarantee volatility.

To play the further drop, entry near current levels as shown on the chart below while sufficient profit potential remains before the $0.7077.

To play the upside, wait until stocks start climbing on some substantially positive news that could sustain a multi-day bounce, and the pair breaks above $0.7160. Wednesday's packed calendar should provide clarification of the trend until Friday's US NFP comes out.

NZDUSD DAILY CHART

03 Nov 03

DISCLOSURE: AUTHOR HAS NO POSITION IN THE ABOVE INSTRUMENTS

GLOBAL OUTLOOK 10/27 Cheat Sheet: TIRED RALLY TO HOLD GAINS?

2009-10-27T02:11:00.000-07:00

SUMMARY –NB SEE WEEKLY OUTLOOK FOR MORE ON ALL OF THE BELOW INSTRUMENTS

- Stocks: Monday: Asia up, Europe, US down Tuesday morning Asia down, Europe opening higher

- FX: Lower equities, bias to safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD gains against all majors

- Main events today: GBP: CBI Realized Sales, USD:CB Consumer Confidence, CAD: BoC Gov Carney Speaks, USD earnings: Baidu (BIDU), Bayer (BAYRY.pk), BE Aerospace (BEAV), Boston Properties (BXP), BP plc (BP), Canon (CAJ), Celanese (CE), Daimler AG (DAI), Honda (HMC), Valero Energy (VLO), Wynn Resorts (WYNN)

- Big Theme: Risk Appetite Becomes Nausea? High risk asset prices relative to growth prospects, a series of US bank downgrades oversold USD, uncertainty ahead of US GDP Friday In addition to earnings, Friday's US Advanced GDP, next Friday's NFP are the big events, though US Treasury bond auctions could create volatility if demand isn't good. So far, it's been fine.

STOCKS

US: Stocks fell under the combined weight of doubts about their valuations, disappointing earnings announcements from big names like VZ and BP, legislative threats to end house purchases, uncertainty ahead of Friday's US GDP report. Without any countervailing reason to go long, traders started taking profits, which scared others into also taking profits, etc. S&P is now showing lower highs, lower lows.

Asia: Asian stocks retreated Tuesday, following losses on Wall Street amid rising concerns the markets have gotten ahead of economic realities.

Europe: FTSE 100 share index ended 1% lower on Monday, with mining and energy stocks suffering as the U.S. dollar rose and commodity prices fell, while a sharp decline in ING put pressure on financials.

ASIA UP N225I +0.77% HS +1.71 % SSEC +0.06% FTSTI +0.05% AORD +0.85 %

EUROPE DOWN FTSE -0.97% DAX -1.71% CAC -1.68 %

US- DOWN S&P -1.17% DJIA -1.05% NASDAQ -0.59%

THIS MORNING N225I -1.45% HS -1.46 % SSEC -2.08% FTSTI -0.57% AORD -1.16 %

FTSE +0.20% DAX +0.13% CAC +0.14%

COMMODITIES: Down Monday with stocks as risk appetite retreated and the dollar gained. See weekly analysis for more on all of these.

Oil: Crude oil plummeted -2.3% to settle at 78.68 Monday as strong rebound in USD in NY session reduced appeals of commodity investments. Correction in US stock market with particularly weak financial sector diminished investors' risk appetite as strength in financial market is crucial for economic growth in the US.

Gold: Comex gold plunged to as low as 1038.1 before recovering to 1042.8. The benchmark contract slid -1.3% Monday. Although global economic environment has improved, the yellow metal needs new catalyst to excel further, net speculation long positions remained close to all-time high level. Gold may need to correct further to around 1026 support level in the near term.

CURRENCIES: Bias to safety currencies with falling stocks

USD: . Heavy short positioning on the USD made traders hesitant to continue selling it, and more inclined to unwind existing USD shorts, in the face of falling stocks and risk appetite, which heighten the USD's safe-haven appeal. Most USD crosses lost ground against it.

EUR- In late New York trading, the euro traded 0.9 percent lower at $1.4863 , on track for its worst day since Aug. 7. The single euro zone currency earlier hit a 14-month high at $1.5064 on electronic trading platform EBS. USD is at 1 week high vs. EUR

JPY - Against the yen, the dollar rose 0.1 percent to 92.18 , near a high of 92.29 yen hit earlier on EBS, the highest for the pair in about a month. The yen rose against 14 of the 16 most-active currencies on speculation Japanese companies are bringing back earnings on overseas assets before the end of the month, and retreating risk assets which prompted demand for the safe-haven JPY.

GBP – Stabilizing after Friday's plunge, and was one of the very few currencies to gain against the USD yesterday. Per Goldman Sachs the GBP is the most undervalued since 1999 based on purchasing power parity theory. However, dovish comments from BoE officials, that the economy still needs help and that inflation is not a concern, are undermining a GBP rally.

AUD: Down 0.7% against the USD as it the AUD drops with stocks and other risk assets.

NZD: New Zealand’s dollar, known as the kiwi, fell to the lowest level in almost one week against the U.S. dollar after Prime Minister Key said the very high exchange rate is “helping offset any imported inflation concerns.”

CAD: (fx360.com)Continues to lose ground to the USD after more dovish comments from BoC head Carney, lower oil and stock prices. According to Carney, the Canadian Dollar is resulting in a “significant drag on growth” and will continue to keep prices depressed. Perhaps even more importantly, Carney said that the current level of the Canadian dollar more than fully offsets the favorable developments since July. As a result, the BoC will most likely keep interest rates unchanged throughout the first half of 2010.

CHF: Moving with risk appetite, bias up as risk assets pull in, though SNB intervention remains a threat

CONCLUSIONS: New Trading Ideas: If stocks steady or falling, then continue to watch for USD rallies against the EUR and commodity currencies, GBP/USD for more pullbacks on a sustained break below 1.6300, and crude oil has begun to pull back, no strong support level until about $74 (see daily chart below) , look to trade at either extreme long or short depending on stocks. NB If continued pullback in stocks, expect other risk assets and currencies to follow, with biggest move from the most oversold (USD) and overbought (crude, gold, commodity currencies, stocks, in that order). SEE FULL VERSION FOR DETAILS, LATEST CRUDE OIL CHART.

Trading Opportunities: Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back, no trend continues forever. Thus: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Crude oil may be beginning pullback Always use sell stop orders.

Crude Oil

Made its first major move down Friday as it followed stocks lower, after it breached new annual highs around $82. Given the fast recent rise, no real price support before around the $74 level, though at $75.59 there is a convergence of a 38.2% Fibonacci retracement and a 1 standard deviation Bollinger Band. See chart.

Daily Chart Crude Oil Oct 27- No strong support until around $74, where we get a convergence of an established support/resistance price level, Bollinger Band, and 50% Fibonacci retracement. Until then, nothing but air. However, oil is likely to continue following stocks, so if stocks can hold steady, oil may well do likewise, though it does tend to be more volatile and exaggerate equity market moves, so oil could make some further declines on its own.

01 oct 21

OTHER HEADLINES

(Bloomberg)

India Begins Exit From Monetary Stimulus With Order to Buy Government Debt

•BP's Earnings Decline 34% on Lower Oil Prices Amid Weak Refining Margins

•Asian Stocks Fall on Commodity Price Decline, Hong Kong's Property Curbs

•Honda Triples Full-Year Profit Forecast on China, Japan Stimulus Measures

•Dollar Falls as China Output Report Sparks Demand for High-Yielding Assets

(Seekingalpha.com)

Is Obama Forcing Citigroup to Downsize?

Why Is the Market Going Up When Jobs Are Going Down?

Here's Why Asia Must Eventually Ditch the Dollar

Are Big Banks Better?

Sugar ETN Continues Its Wild Ride

(AP)

Barrage of earnings, economic data to drive market- AP

Beating the Street is an easy feat for companies- AP

Earnings reports to give picture of job market- AP

DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS POSITIONS IN ABOVE INSTRUMENTS.

GLOBAL OUTLOOK 10/27 Full Version: Has the Pullback Begun?

2009-10-27T02:09:00.000-07:00

SUMMARY –NB SEE WEEKLY OUTLOOK FOR MORE ON ALL OF THE BELOW INSTRUMENTS

- Stocks: Monday: Asia up, Europe, US down Tuesday morning Asia down, Europe opening slightly higher

- FX: Lower equities, bias to safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD gains against all majors

- Main events today: GBP: CBI Realized Sales, USD:CB Consumer Confidence, CAD: BoC Gov Carney Speaks, USD earnings: Baidu (BIDU), Bayer (BAYRY.pk), BE Aerospace (BEAV), Boston Properties (BXP), BP plc (BP), Canon (CAJ), Celanese (CE), Daimler AG (DAI), Honda (HMC), Valero Energy (VLO), Wynn Resorts (WYNN)

- Big Theme: Risk Appetite Becomes Nausea? High risk asset prices relative to growth prospects, a series of US bank downgrades oversold USD, uncertainty ahead of US GDP Friday In addition to earnings, Friday's US Advanced GDP, next Friday's NFP are the big events, though US Treasury bond auctions could create volatility if demand isn't good. So far, it's been fine.

STOCKS

US: Stocks fell under the combined weight of doubts about their valuations, disappointing earnings announcements from big names like VZ and BP, legislative threats to end house purchases, uncertainty ahead of Friday's US GDP report. Without any countervailing reason to go long, traders started taking profits, which scared others into also taking profits, etc.

The big name earnings announcement of the day came from telecom giant Verizon (VZ), which of course "beat earnings" – its Q3 profit fell only 9%--while its stock price is about the same that it was a year ago. Its price fell with the overall market. This has been a common kind of announcement, but it helped drive home the point that the stocks appear at best fully valued and probably overbought given current growth prospects. It also illustrated the waning effect of beating earnings estimates.

It's is no longer impressive to beat earnings estimates. More than ever, most companies control/manage/manipulate much of the information on which analysts base their estimates, so that, surprise, they beat these estimates. Because stock prices drop on earnings misses, companies do all they can to avoid these.

Downgrades of a number of banking stocks (from banking bull analyst Richard Bove) and BP plc's 34% earnings drop provided further though unsurprising excuses

Below is an excerpt from a popular media source that is a typical example of the non-explanations offered.

(Briefing.com) Stocks dropped in broad-based fashion after they failed to extend an early gain and the U.S. dollar made another strong move off of its yearly low.

The major indices were up solidly in the early going, but the S&P 500 struggled to break above the 1090 zone and the Nasdaq 100 ran into resistance when it approached the 2009 highs that it had set last week. As stocks stalled, sellers stepped in and undercut the early advance. That caused stocks to drop sharply and spend the rest of the afternoon trading in negative territory.

A stronger dollar also weighed on stocks. The greenback has now gained ground against a basket of foreign currencies for three straight sessions, the latest of which took it 0.7% higher in its best single-session percentage move of the past month. That made for particular trouble against multinationals and materials stocks, which dropped 2.5%.

Monsanto (MON 70.69, -4.54) created an additional drag on the materials sector. The stock was caught up in chatter that an analyst issued pessimistic comments about the chemical company's pricing efforts.

Financials were also among the worst performers this session. The sector sank 2.5% as bank stocks tumbled 4.1%, based on the KBW Banking Index. Weakness surrounding banking issues stemmed from a downgrade by Rochdale of regional lenders Fifth Third (FITB 9.52, -0.82) and SunTrust (STI 19.85, -1.14).

There weren't any real leaders for participants to follow this session. Dow component Verizon (VZ 28.64, -0.21) was one of the only widely-held companies to report its latest results this morning. The integrated telecom giant posted better-than-expected adjusted earnings of $0.60 per share for the third quarter, but they were largely dismissed, leaving telecom to fall to a 1.3% loss.

All 10 major sectors finished the session in the red. Seven of them suffered losses in excess of 1%.

Despite widespread weakness in the equity markets, Treasuries suffered. As such, the benchmark 10-year Note dropped roughly 18 ticks, which took its yield above 3.5% for the first time since August. Its weakness seemed to worsen in the wake of better-than-average results for an auction of 5-year TIPS.

Meanwhile, Rochdale Securities bank analyst Richard Bove lowered his ratings on Fifth Third Bancorp, SunTrust Banks Inc. and US Bancorp. Fifth Third fell 82 cents, or 7.9 percent, to $9.52 and SunTrust slid $1.14, or 5.4 percent, to $19.85. US Bancorp fell 80 cents, or 3.2 percent, to $24.15.

Advancing Sectors: (None)

Declining Sectors: Financials (-2.5%), Materials (-2.5%), Energy (-1.5%), Telecom (-1.3%), Utilities (-1.3%), Health Care (-1.1%), Industrials (-1.0%), Consumer Staples (-0.8%), Consumer Discretionary (-0.5%), Tech (-0.3%)DJ30 -104.22 NASDAQ -12.62 NQ100 -0.4% R2K -1.2% SP400 -1.1% SP500 -12.65 NASDAQ Adv/Vol/Dec 763/2.33 bln/1914 NYSE Adv/Vol/Dec 713/1.39 bln/2317

Asia: Asian stocks retreated Tuesday, following losses on Wall Street amid rising concerns the markets have gotten ahead of economic realities.

Europe: FTSE 100 share index ended 1% lower on Monday, with mining and energy stocks suffering as the U.S. dollar rose and commodity prices fell, while a sharp decline in ING put pressure on financials.

GLOBAL

MARKETS Monday

ASIA- UP N225I +0.77% HS +1.71 % SSEC +0.06% FTSTI +0.05% AORD +0.85 %

EUROPE DOWN FTSE -0.97% DAX -1.71% CAC -1.68 %

US- DOWN S&P -1.17% DJIA -1.05% NASDAQ -0.59%

THIS MORNING

ASIA DOWN

N225I -1.45% HS -1.46 % SSEC -2.08% FTSTI -0.57% AORD -1.16 %

EUROPE:

FTSE +0.20% DAX +0.13% CAC +0.14%

COMMODITIES: Down Monday with stocks as risk appetite retreated and the dollar gained. See weekly analysis for more on all of these.

Oil: Crude oil plummeted -2.3% to settle at 78.68 Monday (intra-day low: 77.97) as strong rebound in USD in NY session reduced appeals of commodity investments. Correction in US stock market with particularly weak financial sector diminished investors' risk appetite as strength in financial market is crucial for economic growth in the US.

Gold: Comex gold plunged to as low as 1038.1 before recovering to 1042.8. The benchmark contract slid -1.3% Monday. Although global economic environment has improved, the yellow metal needs new catalyst to excel further. Although gold price has been in consolidation for 2 weeks, net speculation long positions remained close to all-time high level. It's likely for the correction to take place for some more time and gold may need to correct further to 1026 to remove the positioning risk.

CURRENCIES: Bias to safety currencies with falling stocks. Heavy short positioning on the USD made traders hesitant to continue selling it, and more inclined to unwind existing USD shorts, in the face of falling stocks and risk appetite, which heighten the USD's safe-haven appeal. Most USD crosses lost ground against it.

Data on Friday showed currency speculators increased bets against the greenback, with the dollar's net short position rising to $18.65 billion in the week ending Oct. 20 from a $17.99 billion net short the prior week.

Commodity-linked currencies declined as oil fell to below $79 a barrel on concerns over a sluggish economic recovery.

The U.S. dollar rose 1.2 percent against the Canadian dollar , while the Australian dollar fell 0.7 percent against the greenback and the New Zealand dollar was down 0.9 percent.

Canada's central bank governor Mark Carney on Monday repeated concerns about the adverse impact of a strong currency on the economy.

USD: The U.S. dollar rose broadly on Monday, rebounding from a 14-month low against the euro as falling stock and commodity prices prompted investors to lock in recent gains in other currencies. It strengthened against all majors, driving the EURUSD down 125 pips in US trade

Traders were also reluctant to push the euro higher given the huge amount of bearish trades on the dollar, which suggests a near-term rebound in the U.S. currency could be on the horizon. It was a turnaround for the dollar, which struggled earlier partly due to a report saying China should increase holdings of euros and yen in its foreign reserves.

The dollar rose against 12 of its 16 major counterparts on speculation U.S. lawmakers will phase out a tax credit for homebuyers and Bank of America Corp. will sell shares to pay back its government bailout. Both are negative for risk appetite. However, the lack of a strong fundamental catalyst for the USD (stock market crash, heightened prospect of interest rate increase, very negative EUR news, significant new geopolitical threats), SUGGESTS THIS IS PROBABLY A RELIEF RALLY, though one that could last some weeks. Much depends on how stocks respond to news and earnings, especially the major events for the coming weeks: this Friday's US GDP and next Friday's US NFP report.

EUR- In late New York trading, the euro traded 0.9 percent lower at $1.4863 , on track for its worst day since Aug. 7. The single euro zone currency earlier hit a 14-month high at $1.5064 on electronic trading platform EBS. USD is at 1 week high vs EUR

Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, said the euro peaked after the Chinese reserves diversification story and that its failure to make new highs triggered selling, which accelerated after stops were hit.

"Today's price action is inflicting technical damage on the euro chart," he said. He added the next level of support for the euro is seen near the $1.4830-to-$1.4840 range and a convincing break of that area would open the way to $1.4675.

However, the EURUSD could drop to about 1.4600 and still have its uptrend intact.

JPY - Against the yen, the dollar rose 0.1 percent to 92.18 , near a high of 92.29 yen hit earlier on EBS, the highest for the pair in about a month.

The yen rose against 14 of the 16 most-active currencies on speculation Japanese companies are bringing back earnings on overseas assets before the end of the month.

Large Japanese manufacturers expected the yen to average 94.50 per dollar in the 12 months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released Oct. 1. The forecast in the previous report was for a rate of 94.85.

“There’s talk that exporters are buying the yen,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “This is causing the dollar-yen to dip.”

GBP – Stabilizing after Friday's plunge, and was one of the very few currencies to gain against the USD yesterday. Per Goldman Sachs the GBP is the most undervalued since 1999 based on purchasing power parity theory. However, dovish comments from BoE officials, that the economy still needs help and that inflation is not a concern, are undermining a GBP rally.

AUD: Down 0.7% against the USD as it the AUD drops with stocks and other risk assets.

NZD: Fell 0.9% to the lowest level in almost one week against the U.S. dollar after Prime Minister Key said the very high exchange rate is “helping offset any imported inflation concerns.”

“I would personally be surprised if they raise rates in 2009,” Key said, speaking of policy makers at the nation’s central bank.

The New Zealand dollar rose to a 15-month high of 76.35 U.S. cents last week.

The Reserve Bank of New Zealand, which acts independently of the government, will announce its next rates decision on Oct. 29.

CAD: USDCAD up 1.2% in US trade yesterday, trend up continues this morning. Losing ground to the USD due to declining stocks, more dovish comments from BoC head Carney, lower oil and stock prices. According to Carney, the Canadian Dollar is resulting in a “significant drag on growth” and will continue to keep prices depressed. Perhaps even more importantly, Carney said that the current level of the Canadian dollar more than fully offsets the favorable developments since July. As a result, the BoC will most likely keep interest rates unchanged throughout the first half of 2010. Of all the major central banks, the BoC has been the most vocal about the negative impact of a strong currency. These are the words of a dovish central bank who will most likely stall any plans to tighten monetary policy. If Carney’s main purpose was to talk down the currency, he may very well have been successful. The combinations of renewed talks on excessive CAD strength and keeping rates low should offer a one-two punch for the loonie. For the most part, Carney refrained from painting a “rosy picture”, but announced that they are “on track at the start of a very long road.” Canadian data will continue to be light for the next couple of days.

CHF: Despite poor fundamentals that include continuing deflation, rising unemployment, stagnant exports, and constant SNB intervention threats, the CHF has gained on the USD over the past months on sheer USD weakness from rising risk appetite and poor US employment figures which make US interest rate rises less likely. As of early Monday GMT the CHF is recovering most of its losses against the USD from Friday.

CONCLUSIONS: New Trading Ideas: If stocks steady or falling, then continue to watch for USD rallies against the EUR and commodity currencies, GBP/USD for more pullbacks on a sustained break below 1.6300, and crude oil has begun to pull back, no strong support level until about $74 (see daily chart below) , look to trade at either extreme long or short depending on stocks. NB If continued pullback in stocks, expect other risk assets and currencies to follow, with biggest move from the most oversold (USD) and overbought (crude, gold, commodity currencies, stocks, in that order).

Trading Opportunities: Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back, no trend continues forever. Thus: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Crude oil may be beginning pullback Always use sell stop orders.

Crude Oil

Made its first major move down Friday as it followed stocks lower, after it breached new annual highs around $82. Given the fast recent rise, no real price support before around the $74 level, though at $75.59 there is a convergence of a 38.2% Fibonacci retracement and and a 1 standard deviation Bollinger Band. See chart.

GLOBAL OUTLOOK 10/26:Full Version TIRED RALLY TO HOLD GAINS?

2009-10-26T01:43:00.000-07:00

SUMMARY –NB SEE WEEKLY OUTLOOK FOR MORE ON ALL OF THE BELOW INSTRUMENTS

- Stocks: Friday: Asia up, Europe, US down Monday morning Asia up, Europe up

- FX: Lower equities, bias to safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD gains against all majors

- Main events today: AUD:PPI m/m, EUR: Gfk Consumer Climate, USD earnings: Monday 10/26: Corning (GLW), Electrolux AB (ELUXY.PK), Lorillard (LO), Plum Creek Timber (PCL), RIOCAN REIT, SOHU.com (SOHU), Sunoco Logistics Partners LP (SXL), Verizon (VZ), Winn-Dixie Stores (WINN)

- Big Theme: Falling risk appetite indicate tired rally? In addition to earnings, Friday's US Advanced GDP, next Friday's NFP are the big events, though US Treasury bond auctions could create volatility if demand isn't good. So far, it's been fine.

STOCKS

US: (Briefing.com) Weekly Recap - Week ending 23-Oct-09 Following a volatile week of trade, U.S. equity markets closed with modest declines. Small cap stocks notably underperformed, though, as evidenced by a 2.5% decline in the Russell 2000. The S&P 500 lost a more modest 0.7%.

The declines were broad-based as nine of the ten sectors that make up the index ended lower, led by Materials (-1.8%). Only IT finished in positive territory (+1%), benefitting from blowout results from the likes of Apple (AAPL) and Amazon.com (AMZN).

Third quarter earnings results remained in focus, and the list of companies that surprised to the upside this week goes on and on, including names such as Amazon.com, American Express (AXP), Apple, AT&T (T), Capital One (COF), Caterpillar (CAT), McDonald's (MCD), Texas Instruments (TXN), UPS (UPS) and Yahoo! (YHOO). Overall, however, there was not enough top line revenue growth or sufficiently upbeat Q4 guidance to convince markets that stocks merited higher prices.

Thus, the better-than-expected results did not translate to market gains. Once again corporate America demonstrated a unique ability to wring out operating costs. In the process it also revealed just how chubby operating budgets had gotten in the credit-driven bacchanal of recent years.

Basically, it appears as if we're seeing a tired market. That was never more evident than on Wednesday afternoon when the market plunged in the final 45 minutes of trade, with the move attributed to a late-session downgrade of Wells Fargo (WFC).

The ease with which the market broke, however, suggested to us that investors knew they was operating on borrowed time, trying to climb a wall of worry while staring at $81 a barrel oil, digesting word of government mandated pay cuts for select companies receiving bailout funds and realizing that the 1,100 mark for the S&P 500 proved to be another tough nut to crack earlier that day.

There were also disappointing pieces of economic data this week, particularly Initial Jobless Claims, which after falling the prior two weeks climbed in the week ended Oct. 16 (531,000 vs. 515,000 consensus). Housing data was mixed, as a jump in Existing Home Sales in September (5.57 million vs. 5.35 million consensus) offset weaker-than-expected Housing Starts and Building Permits.

Looking ahead to next week, third quarter earnings results and economic data, particularly the Advance reading for third quarter GDP on Thursday (10/29), will be in focus. There is also another potential catalyst as the calendar is full of Treasury auctions -- 5-year TIPS reopening Monday (10/26), $44 billion in 2-year Notes Tuesday (10/27), $41 billion in 5-year Notes Wednesday (10/28) and $31 billion in 7-year Notes Thursday.

Stock bulls may hit the pause button again this week if a wave of earnings due from marquee names such as Exxon Mobil and a slew of economic data offer no new incentives to extend Wall Street's seven-month rally.

Even though the profits that have come in so far have proven to be surprisingly strong, U.S. stocks have made very little headway, as investors search for more definitive signs the economic recovery is gaining strength.

In a sign of growing uncertainty about the pace of the U.S. recovery, the market volatility index <.VIX> was up 7.64 percent on Monday.

Asia: Asian markets mostly rose Monday, shrugging off a fall on Wall Street as South Korea's fastest growth in seven years underscored the region's strengthening economic recovery.

Europe: Opening higher following Asia.

GLOBAL

MARKETS FRIDAY

ASIA- UP N225I +0.15% HS +1.71 % SSEC +1.85 FTSTI -0.10% AORD +0.85 %

EUROPE DOWN FTSE +0.68% DAX -0.39% CAC -0.33 %

US- DOWN S&P -1.22% DJIA -1.08% NASDAQ -0.50%

THIS MORNING

ASIA UP

N225I +0.15% HS +1.71 % SSEC +1.85 FTSTI -0.10% AORD +0.85 %

EUROPE: UP

FTSE +0.23% DAX +0.73% CAC +0.40%

COMMODITIES: Down Friday with stocks as the dollar gained. See weekly analysis for more on all of these.

Oil: Down 1.91% in Friday US trade, but up on the week. Oil fell for the third day, to below $80 a barrel on Monday, extending the previous session's decline, as investors took profit amid renewed concerns about the strength of the global economic recovery.

Buoyed by a rise in global stock indices and a weak dollar, oil prices rallied to a one-year high of $82 earlier last week.

But they wobbled and fell late in the week as weak earnings results from the U.S. and a rise in U.S. jobless claims drove investors to reconsider the pace of the economic recovery and its impact on energy demand.

"Asian speculators are cutting their positions after the fall on Wall Street last week. But a rebound in the Dow Jones futures this morning has helped limit the drop in oil prices," said Ryuichi Sato, an analyst at Mizuho Corporate Bank.

"But overall, the market is cautious about pushing oil prices higher because the demand fundamentals are still weak and the world economy is still fragile."

Comments from producer group OPEC last week that it would raise output targets at a December meeting has also cast a pall on the oil market, analysts said.

Gold: Down 0.38% in Friday US trade, Gold inched up towards $1,060 on Monday as the dollar fell to a 14-month low against the euro, but weak physical demand capped the upside for bullion. NB: Nuriel Roubini was quoted this weekend that he believes gold prices are at "bubble levels" since it is only in demand when markets collapse or there is extreme inflation.

After hitting record highs above $1,070 per ounce on Oct. 14, gold prices have traded in a narrow range, centering around $1,060, with support near $1,040.

Gold has gained on the dollar's decline because a weaker dollar boosts investor interest in gold as a hedge and makes bullion cheaper for non-dollar holders, but buying momentum has lost some of its steam given weak jewellery demand and high prices spurring scrap sales.

"Gold remains in an uptrend as long as the dollar is in a downtrend, but with physical demand weak, bullion lacks incentives to test new highs," said Koichiro Kamei, managing director at financial research firm Market Strategy Institute.

"The market is moving in tandem with the euro/dollar moves."

Expectations for U.S. interest rates to stay low well into next year will likely push the euro higher, with some forecasting the single currency to reach $1.52 in the coming three months.

The euro may hit $1.52 and even higher in the coming three months and euro zone officials may not express serious concerns, as the single currency is not extremely strong on the basis of a trade-weighted average, said Masafumi Yamamoto, chief foreign exchange strategist for Japan at Barclays Capital

CURRENCIES: Bias to safety currencies with falling stocks, … START W CURRENCIES

USD: Risk aversion, coupled with speculation that U.S. interest rates could be headed higher sooner than expected, saw the U.S. dollar stretch some of its modest gains made late last week.

Against a basket of currencies, the dollar <.DXY> was at 75.078, having hit a fresh 14-month low of 74.94. The next key level is seen at 74.50, the intra-day low hit on Aug 8 last year. Despite the greenback's battering over the past few months, U.S. officials have stepped up rhetoric about a strong dollar. But they also want to see a correction in imbalances between exporter and importer nations, a move analysts felt would require the greenback to fall even further.

Yields on Treasuries spiked late last week ahead of record issuances this week and on speculation the Federal Reserve may change its tenor to a slightly more hawkish bias.

That view got a boost from a Financial Times article highlighting discomfort among some Fed officials with language that U.S. interest rates would remain low for an extended period.

EUR- Edging lower in Monday morning trade, after recovering Friday's small pullback after a Chinese report saying China should raise holdings of EUR and JPY in its foreign currency reserves prompted dollar selling, currently hovering around $1.5030. The report noted, however, that the USD should remain the principal currency in Chinas fx reserves.

JPY - The U.S. dollar rose to 92.14 yen from 92.08 yen late on Friday in New York, with traders expecting the Japanese currency to stay on the defensive as U.S. Treasuries yields rose.

GBP – The pound extended losses on Monday after data showed the UK economy was still struggling, disappointing investors who had been paring short positions betting for an early return to growth. Traders say investors are set to aggressively sell the pound on expectations that a sluggish road to recovery would prompt the Bank of England to keep rates near zero for a long period of time.

The drop in the pound, along with speculation that U.S. interest rates could be headed higher sooner than expected, saw the U.S. dollar stretch some of its modest gains made late last week.

Data this week could show the U.S. economy grew more quickly than forecast in the third quarter, which could raise speculation that the Federal Reserve may tighten monetary policy sooner than previously thought.

"Maybe the advance GDP will help bolster the dollar, where nothing else could," RBC currency strategist David Watt said.

"But, after the UK GDP surprise last week one has to be wary of undershooting the consensus."

The data which is out on Thursday, is expected to show U.S. gross domestic product (GDP) grew 3.3 percent in the third quarter.

The pound broke past support at $1.6300 to fall to $1.6272 from $1.6313 late on Friday when it lost nearly 1.9 percent.

Last week, sterling enjoyed a reprieve after minutes from the Bank of England's latest meeting stirred hopes that policy rates could be pushed up from record lows in coming months amid worries about inflation.

AUD: The Australian dollar edged lower to $0.9211 amid growing speculation on whether rates will move up by 25 or 50 basis points next month. Third-quarter producer price index (PPI) numbers were lower than expected, reducing the threat of inflation and pressure to raise rates. These figures come ahead of consumer price numbers on Wednesday.

NZD: Continuing to pull back against the USD in early Monday GMT trade, bank holiday leaves NZD to move with broad market sentiment. Given the very light news day, US earnings are likely to provide the main events to move markets Moday

CAD: Continues to lose ground to the USD after dovish BoC comments, lower oil and stock prices.

CHF: Despite poor fundamentals that include continuing deflation, rising unemployment, stagnant exports, and constant SNB intervention threats, the CHF has gained on the USD over the past months on sheer USD weakness from rising risk appetite and poor US employment figures which make US interest rate rises less likely. As of early Monday GMT the CHF is recovering most of its losses against the USD from Friday.

CONCLUSIONS: New Trading Ideas: If stocks steady or falling, then continue to watch USD/CAD for more rally, GBP/USD for more pullbacks if break below 1.6300 from recent news driven moves, crude oil has begun to pull back, no strong support level until about $74, look to trade at either extreme long or short depending on stocks. NB If continued pullback in stocks, expect other risk assets and currencies to follow, with biggest move from the most oversold (USD) and overbought (crude, gold, commodity currencies, stocks, in that order).

Trading Opportunities: Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back, no trend continues forever. Thus: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Crude oil may be beginning pullback Always use sell stop orders.

Crude Oil

Made its first major move down Friday as it followed stocks lower, after it breached new annual highs around $82. Given the fast recent rise, no real price support before around the $74 level, though at $75.59 there is a convergence of a 38.2% Fibonacci retracement and and a 1 standard deviation Bollinger Band. See chart.

Daily Chart Crude Oil

01 oct 26

OTHER HEADLINES

(Bloomberg)

Geithner Making Bills-to-Bonds Yield Gap Unprecedented by Increasing Sales

(Seekingalpha.com)

Carlos Valdecantos We're Living Through the Best of Times

John Mauldin Too Big to Fail: Now It Gets Interesting

Jason Schwarz Nouriel Roubini, One on One: More Doom and Gloom

(AP)

Barrage of earnings, economic data to drive market- AP

Beating the Street is an easy feat for companies- AP

Earnings reports to give picture of job market- AP

DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS POSITIONS IN ABOVE INSTRUMENTS.

GLOBAL OUTLOOK CHEAT SHEET 10/26: TIRED RALLY TO HOLD GAINS?

2009-10-26T01:38:00.000-07:00

SUMMARY –NB SEE WEEKLY OUTLOOK FOR MORE ON ALL OF THE BELOW INSTRUMENTS

- Stocks: Friday: Asia up, Europe, US down Monday morning Asia up, Europe futures pointing higher

- FX: Lower equities, bias to safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD gains against all majors

- Main events today: AUD:PPI m/m, EUR: Gfk Consumer Climate, USD earnings: Monday 10/26: Corning (GLW), Electrolux AB (ELUXY.PK), Lorillard (LO), Plum Creek Timber (PCL), RIOCAN REIT, SOHU.com (SOHU), Sunoco Logistics Partners LP (SXL), Verizon (VZ), Winn-Dixie Stores (WINN)

- Big Theme: Falling risk appetite indicate tired rally? In addition to earnings, Friday's US Advanced GDP, next Friday's NFP are the next big events, though US Treasury bond auctions could create volatility if demand isn't good. So far, it's been fine. See weekly

STOCKS

US: Following a volatile week of trade, U.S. equity markets closed with modest declines. It appears as if we're seeing a tired market. That was never more evident than on Wednesday afternoon when the market plunged in the final 45 minutes of trade, with the move attributed to a late-session downgrade of Wells Fargo (WFC). The ease with which the market broke, however, suggested to us that investors knew they was operating on borrowed time, trying to climb a wall of worry while staring at $81 a barrel oil, digesting word of government mandated pay cuts for select companies receiving bailout funds and realizing that the 1,100 mark for the S&P 500 proved to be another tough nut to crack earlier that day. The S&P 500 lost a more modest 0.7%.

Asia: Asian markets mostly rose Monday, shrugging off a fall on Wall Street as South Korea's fastest growth in seven years underscored the region's strengthening economic recovery

Europe: Higher opening following Asia

ASIA- UP N225I +0.15% HS +1.71 % SSEC +1.85% FTSTI +1.24% AORD +0.85 %

EUROPE – DOWN FTSE +0.68% DAX -0.39% CAC -0.33 %

US- DOWN S&P -1.22% DJIA -1.08% NASDAQ -0.50%

THIS MORNING N225I +0.77% HS +1.71 % SSEC +1.85 FTSTI +0.04% AORD -0.56 %

FTSE +0.29% DAX+0.73 % CAC 0.40% %

COMMODITIES: Down Friday with stocks as the dollar gained. See weekly analysis for more on all of these.

Oil: Down 1.91% in Friday US trade, but up on the week. Oil fell for the third day, to below $80 a barrel on Monday, extending the previous session's decline, as investors took profit amid renewed concerns about the strength of the global economic recovery, weak US stocks, rising jobless claims, comments from OPEC that it might raise production

Gold: Down 0.38% in Friday US trade, Gold inched up towards $1,060 on Monday as the dollar fell to a 14-month low against the euro, but weak physical demand capped the upside for bullion. NB: Nuriel Roubini was quoted this weekend that he believes gold prices are at "bubble levels" since it is only in demand when markets collapse or there is extreme inflation.

CURRENCIES: Bias to safety currencies given falling stocks, oil. See Full Version of Daily, Weekly analysis for more.

USD: Risk aversion, coupled with speculation that U.S. interest rates could be headed higher sooner than expected, saw the U.S. dollar stretch some of its modest gains made late last week.That view got a boost from a Financial Times article highlighting discomfort among some Fed officials with language that U.S. interest rates would remain low for an extended period.

EUR- Edging lower in Monday morning trade, after recovering Friday's small pullback after a Chinese report saying China should raise holdings of EUR and JPY in its foreign currency reserves prompted dollar selling, currently hovering around $1.5030. The report noted, however, that the USD should remain the principal currency in Chinas fx reserves.

JPY - The U.S. dollar rose to 92.14 yen from 92.08 yen late on Friday in New York, with traders expecting the Japanese currency to stay on the defensive as U.S. Treasuries yields rose.

GBP – The pound extended losses on Monday after data showed the UK economy was still struggling, disappointing investors who had been paring short positions betting for an early return to growth. Traders say investors are set to aggressively sell the pound on expectations that a sluggish road to recovery would prompt the Bank of England to keep rates near zero for a long period of time.

The pound broke past support at $1.6300 to fall to $1.6272 from $1.6313 late on Friday when it lost nearly 1.9 percent.

AUD: The Australian dollar edged lower to $0.9211 amid growing speculation on whether rates will move up by 25 or 50 basis points next month. Third-quarter producer price index (PPI) numbers were lower than expected, reducing the threat of inflation and pressure to raise rates. These figures come ahead of consumer price numbers on Wednesday.

NZD: Continuing to pull back against the USD in early Monday GMT trade, bank holiday leaves NZD to move with broad market sentiment. Given the very light news day, US earnings are likely to provide the main events to move markets Monday

CAD: Continues to lose ground to the USD after dovish BoC comments, lower oil and stock prices.

CHF: Despite poor fundamentals that include continuing deflation, rising unemployment, stagnant exports, and constant SNB intervention threats, the CHF has gained on the USD over the past months on sheer USD weakness from rising risk appetite and poor US employment figures which make US interest rate rises less likely. As of early Monday GMT the CHF is recovering most of its losses against the USD from Friday.

CONCLUSIONS: New Trading Ideas: If stocks steady or falling, then continue to watch USD/CAD for more rally, GBP/USD for more pullbacks HAS BROKEN $1.6300 SUPPORT, crude oil has begun to pull back, no strong support level until about $74, look to trade at either extreme long or short depending on stocks. NB If continued pullback in stocks, expect other risk assets and currencies to follow, with biggest move from the most oversold (USD) and overbought (crude, gold, commodity currencies, stocks, in that order). SEE DAILY FOR MORE ON CRUDE, CHART, HEADLINES

Trading Opportunities: Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back, no trend continues forever. Thus: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Crude oil may be beginning pullback Always use sell stop orders.

Crude Oil

Made its first major move down Friday as it followed stocks lower, after it breached new annual highs around $82. Given the fast recent rise, no real price support before around the $74 level, though at $75.59 there is a convergence of a 38.2% Fibonacci retracement and a 1 standard deviation Bollinger Band. See chart.

Daily Chart Crude Oil

01 oct 26

OTHER HEADLINES

(Bloomberg)

Geithner Making Bills-to-Bonds Yield Gap Unprecedented by Increasing Sales

(Seekingalpha.com)

Carlos Valdecantos We're Living Through the Best of Times

John Mauldin Too Big to Fail: Now It Gets Interesting

Nouriel Roubini, One on One: More Doom and Gloom

(AP)

Barrage of earnings, economic data to drive market- AP

Beating the Street is an easy feat for companies- AP

Earnings reports to give picture of job market- AP

DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS POSITIONS IN ABOVE INSTRUMENTS.

Global Markets Outlook Oct 26-30 Full Version: Markets Reversing?

2009-10-25T04:10:00.000-07:00

STOCKS

Last week we questioned whether last Friday's market pullback, despite overall upbeat earnings reports, suggested that the risk appetite was losing steam, if for no other reason than that stock prices were already high and that the recovery picture was already priced in. This week's action seems to confirm our impression that at minimum the market needs some time to digest gains and/or get some news to raise expectations further. While we believe a pullback is due, markets have been very resilient, and so a period of range trading rather than strong pullback is quite possible as well if nothing comes along to move sentiment in either direction.

GOLD AND OIL

Gold

Gold continues to rally, though at a slowing pace. It has yet to significantly retrace its surge over the past two weeks and yet neither have we seen a new record high after the $1,070.80 benchmark was set back on the 14th. A steady, rising trend channel calls up congestion at the end of a very prominent bull run.

This is the same general chart pattern that can be seen in the Dow Jones Industrial Average and (the inverse of) the US dollar. From this, it is clear that all three are responding to the same driver: sentiment. Should optimism give way, the lack of any yield income to offset the potential capital losses will likely mean a sharp correction from profit taking. At these levels, demand is largely speculative. According to the COT figures, commercial positioning is 383,718 short contracts to 86,225 long. Non-commercial long positions, however, have hit a record high of 286,864 contracts.

Oil

Crude closed its fourth consecutive bullish week, extending the initial surge sparked last week, pushing to new 12-month highs. A closer look at market’s health however, reveals that doubts and suspicions may have started to weigh on the steady rally. We can see the hesitation to carry prices to new highs, with congestion below the recent high of $82 and the trend low $80. A break is inevitable; but direction is uncertain.

The affects of fundamentals on oil has not been very clear lately. If underlying supply and demand were the only facet of price determination, crude would likely have collapsed these past two weeks rather than rally to new highs. This past week’s US Energy Department inventory figures reveal the glut of supply that has refiners reducing imports. Through the week ending October 16th, crude stockpiles rose 1.31 million barrel to 339.1 million – 9.4 percent above the average levels for this period over the past five years. Further down the refinement line, gasoline supplies unexpectedly contracted 2.3 million barrels to 8.95 million; yet supplies are still significantly higher than the five year average. If demand were robust enough to absorb excess inventories while production levels continued unchanged, there would be a reasonable argument to be made for further appreciation. However, demand for fuel actually dropped 1.4 percent last week and consumption has largely struggled to recover despite the consensus that an economic recovery is underway.

Clearly the true driver for price action will almost certainly be risk appetite and the pace of the US dollar. With the broader market recovery, confidence has led funds not only to yield bearing assets but also to those that can only provide capital gains. An optimistic outlook for steadily advancing markets is the foundation to stability. Should risk appetite falter, profit taking and a fundamental equilibrium set well below current price would act to accelerate crude’s plunge.

CURRENCIES

USD

Ready to Rise on Tired Stock Market?

Summary

Outlook for US Dollar: Bullish/Neutral

- The Fed’s Fisher maintains the bank’s efforts to deflate any and all rate speculation

- Risk appetite continues to drive the USD

- Is there an extreme to the dollar’s steady tumble?

Analysis

Now considered the ideal funding currency to the recuperating carry trade, the USD continues to move in the opposite direction of risk appetite, and is unlikely to shake that role and its downtrend until there is a fundamental reason to hold the currency, or to dump its chief crosses. While the downtrend to new lows with rising risk appetite continues, this week’s action in equities could signal the first stage of a reversal in yield appetite, recovery in the US dollar, and allow a positive surprise for the Q3 GDP to raise hopes for US recovery, an increase in US interest rates, and provide fundamental justification to hold the USD.

The Big USD Event – Advanced GDP

We’ve just seen two very contrasting third quarter growth readings from major economies. China missed expectations with annual growth of “only” 8.9%. while, the UK surprised the market by reporting “only” a 0.4 % contraction through Q3, extending the economy’s worst recession on record. This Thursday the US reports Q3 GDP. If it can meet the projected 3.2% annualized pace of growth, which would be the best in 2 years, it might show the markets that it really is shaking the recession and boost hope for a solid recovery.

To determine whether the US is really growing, we need to see the breakdown of growth in the major sectors. While government spending can temporarily fill a gap, recovery in jobs, consumer spending, house prices and the financial sector are essential for real sustained growth. Housing sales are improving and construction activity is stabilizing. Earnings through the second and third quarters suggest businesses will pick up production and start spending once gain. Yet consumer spending is about 70% of US GDP. Confidence seems to have already turned the corner; but without substantial improvement in employment and personal income, consumption and planned purchases will remain weak, and so will the banks that ultimately depend on these.

Adding another complication to the high level release, we need to determine whether the dollar will respond in its usual safe haven role (down on good US news, up on bad), or based on how the GDP result depicts the underlying US economy. The answer depends as much on what is happening in the markets heading into the release as on the data itself. For example, if risk appetite is in retreat and GDP disappoints, the USD would likely rally as a needed safe haven and repayment currency to unwind carry trades. If there is some other mix of sentiment and GDP result, the affect on the USD will be harder to divine.

Remember that the dollar does not have the characteristics of a long-term funding currency. Depressed market rates and benchmark yields are temporary; and policy officials will eventually be able to work down deficits when they have the will to do so. Also, the US is not an export based economy and thus does not depend on a cheap currency as part of its basic business model. Should the US return to growth with this 3Q reading, roles will start to reverse as fundamental realism dawns. On the other hand, a disappointment like of the UK’s GDP could strengthen the unwanted inverse correlation to risk appetite in the short-term.

Note that whatever happens with the advanced GDP reading, the following week climaxes with Non Farms Payrolls. Even if GDP this week meets expectations, the NFP report can outweigh it, especially if it disappoints again. Sustained US GDP growth requires consumer spending, which in turn requires improving employment and incomes. No one will believe in sustainable GDP growth if unemployment stays dismal.

T-Bond Auctions

Note also that it's a busy week for Treasury bond auctions, and any signs of slackening demand could quickly introduce volatility, though it's unclear how the scenario would play out. Would markets see rising rates and thus a rising USD? Would they see another blow to US recovery, falling stocks, and a flight to safe haven currencies like the dollar? Or would the blow to the underlying fundamentals of the US economy hurt the dollar further still?

Prominent earnings announcements for the coming week include:

Monday 10/26: Corning (GLW), Electrolux AB (ELUXY.PK), Lorillard (LO), Plum Creek Timber (PCL), RIOCAN REIT, SOHU.com (SOHU), Sunoco Logistics Partners LP (SXL), Verizon (VZ), Winn-Dixie Stores (WINN),

Tuesday 10/27: Baidu (BIDU), Bayer (BAYRY.pk), BE Aerospace (BEAV), Boston Properties (BXP), BP plc (BP), Canon (CAJ), Celanese (CE), Daimler AG (DAI), Honda (HMC), Valero Energy (VLO), Wynn Resorts (WYNN)

Wednesday 10/28: Aflac (AFL), Coca-Cola Ent. (CCE), ConocoPhillips (CON), Eni (E), General Dynamics (GD), GlaxoSmithKline (GSK), Goodyear Tire & Rubber (GT), SAP (SAP),

Thursday 10/29: Aetna (AET), Colgate-Palmolive (CL), France Telecom (FTE), Hertz Global (HTZ), Hitachi (HIT), MetLife MET), Moody’s Corp. (MCO), Motorola (MOT), Proctor & Gamble (PG), Taiwan Semiconductor (TSM), Waste Management (WM),

Friday 10/30:

EUR

The EURUSD Continues to Defy Expectations for a Pullback, Awaits ECB Rate Forecasts

Summary

Outlook for Euro: Bearish on overextended rally

- Riding Risk Sentiment Higher

- Hits fresh annual highs on bullish Euro Zone economic data

- European Central Bank (ECB)on alert as key indicators continue to show recovery

- EUR, Dow stay above key levels

Week’s Recap

The Euro finally broke above the psychologically significant $1.50 mark for the first time in 14 months. Unlike previous weeks, however, the EUR held up against the safe-haven US Dollar despite a struggling S&P 500 and other key risk sentiment barometers. We have repeatedly said that the EURUSD needed support from risky assets to continue its impressive rallies. Yet the S&P 500 finished the week 0.75 percent lower and yet the Euro traded higher.

A surprisingly bullish run of key European economic data seems to have made the difference, and fundamental forecasts for domestic growth remain bullish. A relatively important string of economic releases could force shifts in Euro forecasts.

Solid German IFO Business Confidence figures and Euro Zone Purchasing Manager Index numbers have supported optimistic growth forecasts which in turn have led traders to price in rate hikes from the European Central Bank.

Events

The lure of higher yields has undoubtedly played a part in Euro/US Dollar rallies, but the extent of Euro appreciation leaves it at clear risk of pullback. ECB watchers will keep a close eye on the coming week’s German and Euro Zone Consumer Price Index figures for important surprises. Current consensus forecasts call for yet another negative year-over-year change in Euro Zone Consumer Prices, but the rate of contraction is expected to narrow to a meager 0.1 percent. Suffice it to say, any material disappointments could make a considerable dent on ECB interest rate expectations. Wednesday’s German CPI figures could subsequently set the tone for near-term Euro/US dollar trading.

Traders will otherwise keep a close watch on global risky asset classes—especially with the Euro’s correlation to the S&P 500 trades near record highs. The US Dow Jones Industrial Average’s close below the psychologically significant 10,000 mark suggests that financial market risk appetite is not quite as robust as previously believed. Yet we would hardly call for a market top without a more substantive pullback across a broad swath of indicators. FX Options market volatility expectations have come down since last week’s peak, but it should be yet another week of eventful price action out of the Euro and US Dollar in the face of noteworthy event risk.

JPY

Losing Ground on EUR, USD

Summary

Outlook for Japanese Yen: Bearish

- USDJPY rises as stocks fall now that USD is new safe haven king

- Is the dollar to remain the top funding currency?

- Key Events: Retail Trade m/m, Industrial Production m/m, Jobless rate, Housing Starts

The Japanese Yen fell against major forex counterparts for the third week in a row, slipping further on outperformance across key risky asset classes. Yet the 20-day correlation between the US Dollar/Japanese Yen pair and S&P 500 actually turned negative for only the second time in two years—emphasizing the dollar’s new role as premier safe haven and funding currency for carry trade. Until recently, the Yen was the reigning safe haven currency and, by extension, the first to fall through financial market booms. As the lowest-yielding currency in the industrialized world, investors aggressively borrowed JPY to fund investments in sources of higher income. The surprising shift is the central reason for the USDJPY pair’s new inverse correlation to key risky assets, and it will likely remain a major factor for the Japanese Yen through the foreseeable future.

We have repeated that financial market risk sentiment, as perhaps best represented by the S&P 500, would be the major determinant of USDJPY price action. With stocks moving down, and the USD as the new prime safe haven currency, the USDJPY should indeed rise.

Against other counterparts, the Yen’s continued losses are typical for the lower yielding currencies when risk sentiment is up. FX traders avoid buying Yen unless they absolutely must, that is, when they are forced to cover JPY short positions. Then, they typically do so in a hurry. Thus we believe that the Japanese Yen is likely to continue drifting lower against the Euro, British Pound, Australian Dollar, and New Zealand Dollar, though there may be some hard fast rallies when fear takes over. The wildcard remains whether we can expect a noteworthy correction in broader financial market risk sentiment.

Impressive performance and fresh highs across key barometers leaves markets at prime risk of pullback and likely yen rally against the higher yielders. However, until we see plausible signs of market turnaround, we have little reason to believe in a yen recovery. The admittedly unpredictable dynamics between the US Dollar and Japanese Yen make the USDJPY an especially challenging pair to trade. If nothing else, however, its recently bullish momentum is likely to keep it aloft through the coming week of trade.

GBP

BoE “Hawk Talk” is Not Enough-GBP Jawbone Driven Rally Collapses Under the Weight of Reality

Outlook for British Pound: Neutral

Summary

- GBP rallied on pure BoE spin, plunges when Q3 GDP shows “hawk talk” is just that

- Bank of England’s October meeting minutes signal neutral interest rate policy

- The UK economy unexpectedly contracted in Q3, dashing hopes for recovery

- GBPUSD rallied too far, too fast, on too little. What is the technical picture of this major pair?

Analysis

When currencies (or any assets) are badly oversold, they can rally on the slightest good news because there are usually some nervous traders ready to take profits ahead of the growing herd. That’s the main explanation for the pound’s recent rally. All the BoE did was restate the obvious, that one day, it too would raise interest rates. However, once confronted with actual facts to the contrary, the deception fails and the real trend resumes. In this case, the unpleasant reality was that UK GDP stank and rate increases still lay in the distant future.

When the news came out, the reaction was immediate and the candlesticks got very red, very long, very fast. The British pound racked plunged 1 % against the Japanese yen and nearly 2 % against the US dollar, after UK GDP unexpectedly showed that the nation did not emerge from recession during Q3, and instead, the economy contracted for the sixth straight quarter at a rate of -0.4 percent. Likewise, the annual rate of growth edged up to -5.2 percent from -5.5 percent, falling short of expectations for a move to -4.6 percent.

A breakdown of the GDP report showed that nearly every UK business sector remained in recession, as the services industry component fell by 0.2 percent while the production industry component tumbled 0.7 percent.

Note that GDP is a lagging indicator and the release’s impact on interest rate expectations is the most important part. Indeed, the British pound fell sharply because Credit Suisse overnight index swaps shifted to price in a 10 percent chance of a 25 basis point cut by the BOE during their next meeting. Furthermore, expectations for rate increases over the next 12 months fell to 88.1 basis points from 93.4 basis points.

The Monetary Policy Committee (MPC) is looking for reasons to justify either winding down or expanding their target level of asset purchases. The minutes from their October policy meeting showed that the "forecast round ahead of the November Inflation Report would provide an opportunity to assess more fully how the medium-term outlook for activity and inflation had evolved since August," and if the latest economic data has any bearing on the MPC’s bias, it looks there is still some bearish potential for the British pound.

Events

Looking ahead to the next week, UK data shouldn’t have too much of an impact on rate expectations, but there is always the lingering risk that BOE MPC members will make comments that could impact trade. Thursday is really the only day with scheduled indicators on hand. Net consumer credit in the UK is anticipated to remain negative for the third straight month at -0.2 billion pounds, but on the other hand, UK mortgage approvals are projected to hit a more than one-year high of 53,600, suggesting that lending levels remain low but housing demand is growing. Meanwhile, GfK consumer confidence is forecasted to climb to a nearly two-year high of -14 from -16, indicating that sentiment is still pessimistic but improving, albeit at a slow pace. The GBPUSD’s direction in the coming week will likely have more to do with US dollar trends than UK fundamental forces, but a break below the 50 SMA at 1.6265 opens the door to much steeper declines.

CHF

Will SNB Intervene or Let the CHF Hit Parity with the USD?

Summary

Outlook for Swiss Franc: Bearish/Neutral

- Rising with risk appetite, likely to fall with it if stocks continue down

- Swiss exports fell 2.3% in September following a 2.0% rise the month prior

- Technical outlook calls for potential USD/CHF reversal

Analysis

The Swiss Franc trended higher against the dollar over the past week as risk sentiment continued to drive price direction. Strong corporate earnings from Apple, JP Morgan and DuPont sparked risk appetite to start the week but concerns over valuations led to diminishing returns for bullish investors as equities struggled to hold onto gains. A disappointing U.K.3Q GDP reading, -0.4% versus 0.2%, has raised concerns that other G-7 nations will follow with dour growth results. The U.S. GDP report will cross the wires next week and a similar result could lead to support for the pair. Although Swiss fundamentals have little sway over Franc direction, the 2.3% drop in exports and 3.1% gain in imports during September could be influential if they lead to more SNB intervention.

Events

Two significant fundamental releases are on this week’s economic docket with the UBS consumption indicator and the KoF leading indicator on tap. Rising unemployment hurt domestic demand as the labor market remains weak as declining orders keep companies in cost cutting mode. Nevertheless, the outlook for the next six months is forecasted to rise to 1.10 from 0.85 on the back of an improving global economy. Regardless, traders should take their cue from risk sentiment as depicted by the S&P 500,

If risk appetite returns the pair could test parity, but reversals can often follow tests of significant psychological levels. Also, traders must beware of possible intervention from the Swiss National Bank as they continue to fight against Franc appreciation and its negative implications for the economy.

CAD

Moving with Oil, then Risk Appetite, But May Feel Pressure from BoC Decision

Summary

Outlook for Canadian Dollar: Bearish

- How far can the USDCAD rally?

- The Bank of Canada warns interest rates will held “until the end of the second quarter of 2010,” but its Monetary Policy Report raises its exchange outlook, warns of intervention

Analysis

What has been the fundamental basis for the Canadian dollar’s strength over the past weeks and months? Most analysts will say:

• Rising energy prices

• Much stronger underlying economy than most

• USD weakness prompting US capital to head north

However, the comprehensive assessment from the central bank indicates that growth seems to be at the heart of the matter.

Referring to the central bank’s forecasts this past week, it seems the world’s eighth largest economy is on track for an impressive recovery. A 2 %annualized pace of growth in the third quarter and 3.3 percent in the fourth quarter is a considerable improvement over Canada’s performance through the first half of the year, much of it due to rising energy prices. As domestic conditions further improve and the US enjoys its own recovery, the economy is seen further expanding 3 percent through 2010 and 3.3 percent in 2011.

Events

This Friday, Canada will report its GDP report for the month of August. A modest 0.1 percent increase is projected for the August reading; but there were hurdles to overcome over this period.

• The US ‘Cash-for-Clunkers’ program expired during this month and the impact on Canadian manufacturing will be significant

• the economy ran a record trade deficit

• the unemployment rate hit an 11 year high

Scanning the rest of the Canadian economic calendar, there are no other major market moving economic indicators to be concerned with; but that doesn’t mean fundamental activity will start and end with the Friday release. It is important to recall two more highlights from this past week’s policy announcements.

Interest rate plans: The first is the reiteration by the Bank of Canada that the benchmark lending rate would be maintained at its current level “until the end of the second quarter of 2010”on the condition that inflation does not force their hand. While inflation is at a 56-year low and core pressures are tame, overnight index swaps are pricing in 85.4 basis points of tightening over the coming 12 months. This is generally on the same level as the dollar, euro and pound; and yet the Canadian dollar is still showing general strength against these counterparts.

Intervention threats: Repeating concerns from the past; the central bank said the high level of the national currency could offset other, positive growth factors going forward. This is a relatively weak effort to talk the currency down – one that speculators have become acclimated to. So, to increase pressure on the CAD, BoC Governor Mark Carney said in commentary following the release of the Monetary Policy report that “intervention is always a possibility.” While the threat remains low for now, this stronger language suggests a level of frustration that could lead to action later.

AUD

Expectations for Coming Rate Increases Keep AUD Rising

Summary

Outlook: Bullish/Neutral

- Events could keep AUDUSD confined to narrow range

- RBA Minutes Spark Speculation For Further Rate Hikes

- Keep watch on the S&P, the pair continues to follow it regardless of other news events

The Australian dollar rose to a fresh yearly high of 0.9326 against the USD and the Aussie may continue to appreciate going into the following month as investors speculate the Reserve Bank of Australia to tighten policy throughout the second-half of the year. Credit Suisse overnight index swaps shows market participants are pricing a 131% chance for a 25bp rate hike in November and expect the central bank to raise borrowing costs by more than 200bp over the next 12-months, and the Aussie may continue to retrace the sell-off of the prior year as policy makers hold and improved outlook for the economy.

The Reserve Bank of Australia Minutes has plenty of hawk talk to please Aussie bulls. Saying:

• the “very expansionary setting of policy was no longer necessary”

• it may be “imprudent” for the central bank to hold the interest rate at the 49-year

• keeping borrowing costs at “very low levels” could raise the risks for inflation

• the “trough in inflation was significantly higher than earlier thought”

Moreover, RBA Assistant Governor Philip Lowe stated that the rebound in economic activity would “gradually lead to a normalization of interest rates,” and said that the country is likely to have “a higher average exchange rate than we’ve had over the past couple of decades.” However, the central bank expects the marked appreciation in the Australian dollar to temper the risks for inflation, and the central bank may adopt a wait-and-see approach over the remainder of the year as the outlook for global growth remains uncertain.

Events

The following week is likely to spark increased volatility for the Australian dollar and may drag on the exchange rate as market participants anticipate price pressures, and thus the need to raise rates, to weaken further in the second-half of the year. Consider:

• economists forecast consumer prices to grow at an annual pace of 1.2% in the third quarter after rising 1.5% during the three-months through June

• producer prices are project to fall to an annualized rate of 0.5% from 2.1% in the second-quarter

• private-sector credit is anticipated to increase 0.2% in September following the 0.1% rise in the previous month

• bank lending is expected to grow at an annualized pace of 2.0% from the previous year

As a result, the slew of mixed data may leave the AUD/USD confined in a narrow range as investors weigh the outlook for future policy but nevertheless, as risk trends continue to dictate price action in the currency market, a rise in risk appetite may lead the Aussie to hold above 0.9300 over the following week.

NZD

Rally Vulnerable to Pullback in Stocks, or Rate Disappointment

Summary

Outlook for New Zealand Dollar: Neutral/Bullish

- Weekly Technical Outlook: New Zealand Dollar Top May Be Ahead – Depends on Global Stocks

- Sentiment Outlook Undecided as Speculators Vacillate

Analysis & Events

The interest rate announcement tops the news calendar. As is so often the case, the market moving news or surprises will be in the accompanying policy statement, which may provide hints about future rate hikes. Few believe a rate hike is coming, with a Credit Suisse index of priced-in expectations showing traders see no chance of a hike this time around.

Specifically, traders will be looking to gauge whether the timetable for the withdrawal of monetary stimulus has been accelerated from the previously given “latter part of 2010” estimate after consumer prices unexpectedly surged in the third quarter.

The hawks may be in for a disappointment however considering policymakers will be wary of acting on rates to protect the still very fragile export sector. As we have noted in the past, New Zealand is not Australia in that its recovery is not as robust. Indeed, both the central bank and government have warned about the detrimental effects of a higher Kiwi dollar in driving away foreign demand. Overseas sales make up over 30% of the economy’s total output, so any policies that stand to hurt firms catering to foreign markets will likely stunt the fledgling economic recovery of recent months.

September’s Trade Balance figures are set to be released less than two hours after the central bank announcement crosses the wires, with exports expected to match the 23-year record drop recorded in the previous month even as the overall deficit narrows on lackluster import demand.

In fact, the RBNZ may have already embarked on a somewhat covert tightening campaign aimed at checking inflationary pressure while minimizing the impact on the NZD exchange rate. The central bank “leaked” an announcement that it would end some of its emergency lending programs enacted amid the credit crunch in November, a fact that it did not officially confirm via an official news release until about a day later. This move will gradually slow the flow of liquidity into the economy, reduce the pace of money supply growth and act against inflation.

This subdued approach suggests that they were consciously trying to avoid sending the New Zealand Dollar higher. It also hints that perhaps this approach to tightening will be seen as sufficient to keep rates at current levels until the second half of next year as scheduled.

Looking beyond the economic calendar, the outlook for risk sentiment is likely to remain a key catalyst for price action. Indeed, a trade weighted average of the New Zealand Dollar’s value remains over 95% correlated with the MSCI World Stock Index as traders’ appetite for returns boosts stocks, commodities and high-yielding currencies alike. Thus traders should keep an eye on a handful of high profile third-quarter earnings reports including those from consumer goods giant Procter & Gamble, big oil names including Exxon Mobil and Chevron, and US Steel.

Conclusions

Barring major news surprises, expect risk assets and currencies to follow market response to the big name earnings announcements detailed above. If stocks can beat estimates AND grow top line revenues, risk appetite could continue to rule the day. Anything less makes the long extended rally in stocks, commodities, and higher yielding and commodity currencies very vulnerable to short squeeze driven pullbacks. The signs of waning risk appetite have already been showing for the past week, as earnings beat estimates but revenues and valuations remain a concern for stocks and other risk assets.

With US GDP this coming Friday, and Non Farms Payroll the next, earnings news has another few days to hold center stage before regular news events once again hold sway over global markets.

For now, stay with the rising trends, but be ready to take profits and / or take short positions on most risk assets and get long on the safe haven currencies.

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

Global Markets Outlook Oct 26-30 Short Version: Markets Reversing?

2009-10-25T04:08:00.001-07:00

GBP/USD Rally RIP: Much Ado About Nothing from the Bank of England

2009-10-23T05:38:00.000-07:00

OR: What Happens to Baseless Short Squeeze Moves

Last week the GBPUSD was the star fx trade of the week, moving up about 10% in 3 days. The beauty of this move was that it was – and remains as of this writing – as obvious a temporary short squeeze move up that could not sustain itself for long.

Why, as I wrote in my instablogs on Seeking Alpha, the pair moved up on the basis of a non-event. Bank of England officials simply noted that they would have to end stimulus and raise rates at some point in the future – no time limit given. This is just a restatement of the obvious. Yet it worked, for a short time.

Why? This kind of jawboning can work when the currency in question is extremely oversold, because the latecomers or other nervous sorts (or traders anticipating them) get scared and unwind their short position by buying back the currency. Once the ignorant and nervous are gone, the longer term trend resumes as everyone calms down and realizes that the move was much ado about nothing.

It also worked a few weeks ago when Fed officials did the same thing, just restating the obvious point that eventually they'd raise rates. The USD is (and remains) so oversold that any minor news like this can shake out some shorts.

Then too, however, everyone soon realized that any real support (i.e. cutting back stimulus, raising rates) was not on the way because the underlying economy is too weak to absorb such a move without getting worse. The dollar soon resumed its swoon as there was no reason to hold it.

What made this retracement of a nonsense rally even easier to call was that the GBPUSD pair quickly hit two important resistance points, as one can see on the below chart. First, it hit its upper Bollinger band, and has behaved fairly predictably whenever it has done so in the recent past. Note in the daily GBPUSD chart below, how quickly and steeply it tends to retreat when this upper band is hit.

Daily Chart GBPUSD as of Oct 23, 2009.

Note also how that upper band converged neatly near the 1.6700 price level, a strong resistance point in the past.

If these technical indicators weren't enough, there was the fairly predictably disappointing UK GDP reading today, and was more than enough catalyst to get the baseless recent rise of the pair in full retreat.

Looking at the chart, the pair is now sitting at near term support around 1.6390.

Any break below that level should present another safe entry point to short the pair. If stocks pull in, that would just make the trade that much more obvious, since the USD the pair tends to drop with stocks. As the chart shows, there's plenty of retracement left.

Disclosure: No positions held by the author in the GBPUSD.

GLOBAL OUTLOOK Cheat Sheet 10/23: Stocks Up Despite Valuations, Crude in New Range?

2009-10-23T02:41:00.003-07:00

SUMMARY

- Stocks: Thursday: Asia, Europe, down, US up, Friday morning Asia up, Europe futures point higher

- FX: Higher equities, bias to safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD drops along with stocks against most fx on data, BoE remarks

- Main events today: EUR: German Ifo Business Climate, GBP: Prelim GDP q/q, USD Fed Chairman Bernanke speaks, Existing Home Sales, Earnings: EXC (utilities), HON (tech), IR (industrial), WHR (consumer durables)

- Big Theme: Rising risk appetite despite P/E's highest since 1999 prices? So far, buying on dips overcomes "sell on news. Is Oil in New Range, which in turn pushes EUR/USD higher?

STOCKS

US: (Briefing.com) Stocks stumbled in the early going, but strength among blue chips and financials helped the broader market to fight its way back to log an impressive gain for the session.

Asia: Asian stock markets rose Friday, spurred by another batch of optimistic quarterly reports from major companies in the U.S. and Asia even as worries remained that this year's rally has overshot reality.

Europe: LONDON, Oct 23 (Reuters) - Stock index futures pointed to sharp gains for European shares in early trade on Friday, after a rise in financial stocks helped the Dow close back above 10,000.

ASIA- DOWN N225I -0.64% HS -0.48% SSEC -0.62 FTSTI -0.39% AORD -0.57 %

EUROPE DOWN FTSE -0.96% DAX -1.21% CAC -1.35 %

US- UP S&P +1.06% DJIA +1.33% NASDAQ +0.68%

THIS MORNING N225I +0.15% HS +1.27 % SSEC +1.74 FTSTI +1.03% AORD +0.85 %

FTSE +1.20% DAX +1.17% CAC +1.04%

COMMODITIES: The dollar tumbled in Friday US trade to a fresh 52-week low at 75.21, giving a lift to commodities (+5.2%), lifting oil and gold.

Oil: SINGAPORE (AP) -- Oil prices rose to near $82 a barrel Friday in Asia, just below a one-year high, as signs the global economic recovery is gathering pace fueled investor optimism. "We think the market is transitioning to a higher range But we don't think an explosive move will be sustained," Barclays Capital analyst Yingxi Yu said. "We have broken the $65-$75 range seen in most of the third quarter and we now see prices consolidating." Oil's Break Over $75 – Another Nail in the USD's Coffin? (see http://seekingalpha.com/article/168303-technical-parameters-in-equities-oil#comment-726545 ) for full details. *

Gold: TOKYO, Oct 22 (Reuters) - Spot gold was steady near $1,060 an ounce on Thursday as it continued to draw investors seeking a hedge to a weak dollar and to inflation concerns stemming from a rally in oil prices.

CURRENCIES: Bias to risk currencies with rising stocks, but USD falling on BoE minutes which restate the obvious that GBP rates will rise at some pt – no deadline, of course. Pure short seller reaction, unlikely to sustain – suggests go short GBPUSD for short term traders. Nb move appears to be happening as we speak

USD: The AUD, NZD, and CAD vs. USD finished a bit weaker than their previous day's closes against the USD, EUR gaining.

EUR- EURUSD finished Thursday up at 1.5036, many traders believe there is strong support around $1.50

JPY - The yen weakening for the 4th day in a row in Friday morning GMT trade. The yen could come under a bit of pressure on expectations Japanese investors will step up overseas bond purchases. Traders are eyeing support at 91.75 and then at around 92.30 per dollar.

GBP – dropping against USD Friday. Weak data overnight and an unexpected dovish shift by MPC member Paul Tucker. Having previously voted against an expansion in QE, Tucker said overnight that it would be possible to increase quantitative easing if necessary. In addition to Governing King, David Miles and Adam Posen who have either voted for or are in favour of a QE extension, a fourth vote would mean Governor King, who remains intrinsically bearish on the UK economy, would need one final vote to secure a GBP25bn expansion.

AUD: The Australian dollar inched up to $0.9284, recovering from lows after stock markets bounced <.SPX> on strong U.S. corporate results, with the undertone bullish on expectations of steep Australian rate rises in coming months.

NZD: Continuing to rise against the USD to around 0.7560

CAD: The U.S. dollar held on to gains at C$1.0467 . It had risen to C$1.0545 on Thursday but eased back after the Bank of Canada's quarterly monetary policy report suggested officials think the economy can cope with a stronger currency.

CHF: Despite poor fundamentals that include continuing deflation, rising unemployment, stagnant exports, and constant SNB intervention threats, the CHF has gained on the USD over the past months on sheer USD weakness from rising risk appetite and poor US employment figures which make US interest rate rises less likely.

CONCLUSIONS: New Trading Ideas: Watch USD/CAD, GBP/USD for pullbacks from recent news driven moves, crude oil still in strong rising channel on daily charts, look to trade at either extreme long or short depending on stocks. EURUSD but on dips to 1.500

Trading Opportunities: Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back, no trend continues forever. Thus: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Crude oil breaches key $74 resistance, implying more upside unless stocks pull back on earnings disappointments. Always use sell stop orders.

for Wednesday.

Crude Oil

Breaches new highs at $82, up from $74 at the start of the week. OPEC officials have said before they are comfortable with up to $80/barrel, suggesting that playing the pullback is the higher probability play ONCE IT BEGINS (NOT BEFORE).

OTHER HEADLINES

(Bloomberg)

•China's Economy Expands 8.9%, Increasing Pressure for an End to Stimulus

•Credit Suisse Posts Third Straight Quarterly Profit on Gains From Trading

•Stocks Decline Around World on China's Growth, Ericsson as Dollar Rallies

(Seekingalpha.com)

10 Most Important Earnings Reports for This Upcoming Week

Fadel Gheit: Oil Prices to Remain Inflated but Don't Pass on Gas

Crude Oil and Gasoline Prices: Like Déjà Vu All Over Again

Oil Prices, Natural Gas Futures and Speculators

Is Crude Oil Breaking Out?

DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS POSITIONS IN ABOVE INSTRUMENTS.

GLOBAL OUTLOOK Cheat Sheet 10/23: Stocks Up Despite Valuations, Crude in New Range?

2009-10-23T02:41:00.001-07:00

GLOBAL OUTLOOK 10/23: Stocks Up Despite Valuations, Crude in New Range?

2009-10-23T02:40:00.000-07:00

SUMMARY

- Stocks: Wednesday: Asia, Europe, US down Thursday morning Asia down, Europe down

- FX: Lower equities, bias to safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD drops along with stocks against most fx on data, BoE remarks

- Main events today: GBP: Retail Sales m/m, CAD: Core Retail Sales m/m, BoC Policy Report, Press Confr., Leading Indicators, House Price Index USD earnings: AMZN (ecommerce), AXP (financial), BDK (consumer/construction), BGG (light gas engines), BMY (drugs), BRCM (tech), DAL (airlines), DO (oil drilling), ESV (oil drilling), MCD (consumer), MRK (drugs), PNC (financial), POT (fertilizer), HOT (hotel), DOW (chemicals), UNP (railroad), UPS (freight), GRA (chemicals)

- Big Theme: Rising risk appetite despite P/E's highest since 1999 prices? So far, buying on dips overcoming "sell on news, Oil in New Range, which in turn pushes EUR/USD higher?

STOCKS

US: Stocks stumbled in the early going, but strength among blue chips and financials helped the broader market to fight its way back to log an impressive gain for the session.

Note: My fellow Seeking Alpha colleague David Fry [http://www.etfdigest.com/index.php] notes that P/E's (price earnings ratios) are now at levels not seen since the 1999 dot com bubble. For example: AMZN: Rev. Up 28%, Earnings Up 62% (implies cost cutting) Stock price up72%

Participants appeared unfazed by a large batch of better-than-expected earnings reports this morning. In turn, stocks found little support and traded lower during the first few minutes of the session. (compare earnings/rev s w/ q3 of 08)

Despite the downward drift by the broader market, blue chips showed resilience. Travelers (TRV 51.70, +3.68) and 3M (MMM 78.79, +2.46) were consistent leaders in the Dow Jones Industrial Average after posting positive earnings surprises. Fellow Dow components AT&T (T 26.10, +0.16), McDonald's (MCD 59.50, +1.17), and Merck (MRK 32.87, +0.19) also posted better-than-expected earnings for the latest quarter. Their collective strength helped the Dow outperform the other headline indices throughout the session.

Financials emerged with strength to provide the broader market with leadership. The sector settled 2.9% higher as regional banks surged 6.1%. Pleasing quarterly reports from PNC (PNC 50.65, +5.69), SunTrust (STI 21.85, +1.09), and Fifth Third (FITB 10.80, +0.69) helped garner support for the group.

Retailers also fared well. They finished the session with a 1.7% gain with help from J Crew (JCG 43.49, +5.75), which made its best single-session percentage gain in nearly five months after providing upside guidance.

Materials stocks also provided support to the broader market. They netted a 1.4% gain as the sector rallied on a pullback by the U.S. dollar. The Dollar Index had been up solidly in the early going, but it pulled back to book a 0.1% loss, just above its 52-week low. Additional support was provided by Freeport-McMoRan (FCX 82.98, +3.26), which was upgraded by analysts at Deutsche Bank, and Dow Chemical (DOW 26.46, +0.96), which posted better-than-expected adjusted earnings for the third quarter.

Steel stocks struggled to match the performance of other members in the materials sector. As a group, steel finished with a 2.8% loss, though Nucor (NUE 44.18, -1.82) and Reliance Steel (RS 42.24, -1.43) both posted positive earnings surprises.

In economic news, the latest weekly jobless claims came in at 531,000, which is worse than the 515,000 that had been widely expected. Continuing claims came in at 5.92 million, which is a tad worse than was expected. Leading indicators for September increased 1.0%, which is better than the 0.8% increase that was widely expected. Home prices for August fell 0.3% month-over-month, which missed the 0.3% month-over-month gain that was widely forecast.

Advancing Sectors: Financials (+2.9%), Consumer Discretionary (+1.7%), Materials (+1.40%), Health Care (+0.8%), Energy (+0.8%), Industrials (+0.8%), Tech (+0.6%), Telecom (+0.5%), Utilities (+0.3%), Consumer Staples (+0.2%)

Declining Sectors: (None)

Asia: Asian stock markets rose Friday, spurred by another batch of optimistic quarterly reports from major companies in the U.S. and Asia even as worries remained that this year's rally has overshot reality.

Europe: LONDON, Oct 23 (Reuters) - Stock index futures pointed to sharp gains for European shares in early trade on Friday, after a rise in financial stocks helped the Dow close back above 10,000.

GLOBAL

MARKETS THURSDAY

ASIA- DOWN N225I -0.64% HS -0.48% SSEC -0.62 FTSTI -0.39% AORD -0.57 %

EUROPE DOWN FTSE -0.96% DAX -1.21% CAC -1.35 %

US- UP S&P +1.06% DJIA +1.33% NASDAQ +0.68%

FRIDAY MORNING

ASIA CLOSING UP

N225I +0.15% HS +1.27 % SSEC +1.74 FTSTI +1.03% AORD +0.85 %

EUROPE: OPEN UP

FTSE +1.20% DAX +1.17% CAC +1.04%

COMMODITIES: The dollar tumbled in Friday US trade to a fresh 52-week low at 75.21, giving a lift to commodities (+5.2%), lifting oil and gold.

Oil: SINGAPORE (AP) -- Oil prices rose to near $82 a barrel Friday in Asia, just below a one-year high, as signs the global economic recovery is gathering pace fueled investor optimism. Investors have taken heart from evidence that recovery from the global recession is gathering pace. China said Thursday that its economy grew 8.9 percent in the third quarter, building on recent improvements in industrial production, retail sales and commodity imports. Crude traders are also eyeing gains on global stock markets, which tend to reflect overall investor sentiment. The Dow Jones industrial average jumped 1.3 percent on Thursday and most Asian indexes rose in early trading Friday.Prices soared to $82 a barrel earlier this week, the highest since October 2008, from $32 in December. "We think the market is transitioning to a higher range But we don't think an explosive move will be sustained," Barclays Capital analyst Yingxi Yu said.

"We have broken the $65-$75 range seen in most of the third quarter and we now see prices consolidating."

Oil's Break Over $75 – Another Nail in the USD's Coffin? (see http://seekingalpha.com/article/168303-technical-parameters-in-equities-oil#comment-726545 ) for full details. Currency and intermarket analaysis guru Ashraf Liadi wirites that oil's break over $75, in addition to repeated Fed PR blunders, is the main reason for the EUR/USD's break over $1.50. Concise and insightful, though we continue to believe that the likely near term salvation for the USD is a multiweek pullback in stocks, given the numerous reasons stocks are due for a pullback, including: high valuations relative to likely performance, intractable employment/consumer spending/banking/default risk and ultimately rising interest rates from other major central banks (which will hit their own stock markets and likely ultimately Wall Street too).

Gold: TOKYO, Oct 22 (Reuters) - Spot gold was steady near $1,060 an ounce on Thursday as it continued to draw investors seeking a hedge to a weak dollar and to inflation concerns stemming from a rally in oil prices.

CURRENCIES: Bias to safety currencies with falling stocks, but USD falling on BoE minutes which restate the obvious that GBP rates will rise at some pt – no deadline, of course. Pure short seller reaction, unlikely to sustain – suggests go short GBPUSD for short term traders.

USD: The AUD, NZD, and CAD vs. USD finished a bit weaker than their previous day's closes

SYDNEY, Oct 23 (Reuters) - The U.S. dollar surrendered slim gains on Friday, resuming its fall towards 14-month lows against a basket of currencies on expectations interest rates will remain low in the U.S.

Traders expect some position-squaring to continue, with the dollar vulnerable on expectations of low rates, a view reinforced after Chicago Federal Reserve President Charles Evans said on Thursday the Fed's focus remained on an accommodative rate policy.

Evans, who is a voting member, added that a recovery is going to be unsatisfactory in 2010 and the Fed will be monitoring dollar movements.

"The U.S. dollar looks vulnerable to a short, brutal move to the spring 2008 lows," said David Watt, senior currency strategist at RBC Capital. The dollar index had hit of a low of 70.7 in March 2008.

Watt added a pullback in demand for riskier assets and higher-yielding currencies was likely to be temporary and the dollar index would struggle to stay above the 75 level.

The index was down 75.046, just above a 14-month low of 74.94 struck earlier in the week.

Since April, the dollar index has lost around 12 percent with selling picking up in recent weeks as Asian central banks diversified into other currencies, and on growing talk that the U.S. dollar was fast emerging as the funding currency for leveraged carry trades.

In recent days, U.S. officials have stepped up rhetoric about a strong dollar while European officials have fretted over the euro's appreciation.

But with U.S. unemployment near 10 percent, investors expect rates to remain anchored at record lows while signs of stronger growth prompt central banks elsewhere in the world to raise rates.

Low rates make the U.S. dollar less attractive than higher-yield currencies more closely correlated with economic recovery.

US Job Losses Reduce Risk Appetite (from fx360.com)

After declining for two consecutive weeks US jobless claims rose an unexpected 11,000 to 531K from 515k projected. The less volatile four week average of initial claims continued to decline albeit at a glacial pace as it moved from 533K to 532.5K.

The jobless numbers have become a key data point of concern for the currency market as they represent the main impediment to any Fed action on the monetary front. The Fed has never raised rates until the unemployment rate has peaked and given the fact that this week is the sample for the monthly Non Farm payrolls report due November 6 th it suggests that US may lose another -150K jobs in October.

The data was a mild blow to the recovery trade as euro sold off modestly on the news, dropping below the 1.5000 level after rallying back to that point in early morning New York session. However, overall the market showed little reaction to the numbers given the week to week volatility of the data.

Nevertheless, the currency traders are unlikely to change their anti-dollar bias until the weekly jobless numbers drop below the key 500K level suggesting that the contraction in the US labor market is over. Only then will the Fed be able to adopt a more assertive monetary posture providing a modicum of support for the greenback.

A Bleak Beige Book (from fx360.com)

Wednesday’s release of the Federal Reserve’s Beige Book, which analyzes economic conditions across the Fed’s 12 districts, left little to get excited about. Stock market rallies did not fare well in light of an economy that does not look as upbeat as everyone had hoped. The Fed notes that even when they saw improvement, it was “either small or scattered.” They did give credit to residential real estate and manufacturing for its improvement over the summer, but there was far too much cause for concern to signal any change in monetary policy would be required. The Fed indicated that the worst performing sector by far was commercial real estate, which weakened across all regions. The report also brought the weakness in the labor market back into market consciousness. Consumer spending as a result was mixed as job uncertainties continue to curtail expenditures. The list of problem spots goes on with continued softness in the financial services industry followed by little to no increase in prices. Even though the Fed indicated that all districts reported “stabilization or modest improvement,” the question is whether or not we can expect a sustainable return to growth in the third quarter with these weak spots. It is possible, that as fiscal stimulus starts to unwind the economy could hit a wall like what the Beige Book seemed to demonstrate. In any event, today’s release was a real wakeup call that indicated that we are not as far along the road of recovery as expected.

EUR- EURUSD finished Thursday up at 1.5036, many traders believe there is strong support around $1.50

Can the EUR Keep Rising? (fx360.com) Now that the euro is at the highest level since August of 2008, the obvious question that is circulating through the markets is whether it will be able to maintain its performance. The answer seems to depend on two factors: whether the improvement in data will be sustained and the threat of an ECB reaction. It is undeniable that with Germany returning to growth, economic data has picked up lately. However, not all things look too impressive, especially in light of the growing ranks of the unemployed. Furthermore, the ECB may be the next impediment for the pair to face. The sheer velocity in which the euro has appreciated would pose a great threat to any central bank, especially to one that is highly concerned with the health of the region’s exports. Such a strong currency could eventually serve to cut off growth and send the unemployment rate skyrocketing further. It would be hard to believe the ECB would let this happen, leaving the possibility of intermittent verbal interventions a real threat to continued rallies. Data was at a minimum today and will be for tomorrow as well except for the Euro-zone Current Account. We will be able to better assess the euro’s sustainability after some critical data expected Friday.

JPY - The yen weakening for the 4th day in a row in Friday morning GMT trade. The yen could come under a bit of pressure on expectations Japanese investors will step up overseas bond purchases. Traders are eyeing support at 91.75 and then at around 92.30 per dollar.

GBP – weak data overnight and an unexpected dovish shift by MPC member Paul Tucker. Having previously voted against an expansion in QE, Tucker said overnight that it would be possible to increase quantitative easing if necessary. In addition to Governing King, David Miles and Adam Posen who have either voted for or are in favour of a QE extension, a fourth vote would mean Governor King, who remains intrinsically bearish on the UK economy, would need one final vote to secure a GBP25bn expansion.

On the data front, retail sales were much softer than expected at 0.0% (vs. 0.6%) on the month and 2.4% annualized (0.5%m/m, 2.8%y/y expected), but last month's print was revised slightly higher.

DMO Chief Executive Stheeman, speaking before a parliamentary committee, said that when the time comes for the BoE to shrink its balance sheet by disposing of assets, the BoE will "co-ordinate" with the DMO so as not to "upset" the market.

On balance we still expect a ?25 bn increase in November as part of a phased easing in the QE programme. In our view the committee is divided with some such as the governor likely looking for at least another ?25 bn of QE and others holding the view that the current total of ?175 bn is adequate for now at leas

AUD: The Australian dollar inched up to $0.9284, recovering from lows after stock markets bounced <.SPX> on strong U.S. corporate results, with the undertone bullish on expectations of steep Australian rate rises in coming months.

NZD: Continuing to rise against the USD to around 0.7560

Hawkish Central Bank Comments Boost NZD: (fx360.com) Much of the rallies seen in the commodity currencies dried up by the end of trading thanks to the sharp reversal in US stocks. Nevertheless, the New Zealand dollar was a particular outperformer, surging about 80 pips to retake 15-month highs. Oil prices definitely did not hurt, rising to a fresh one-year high. Recent comments from RBNZ Governor Alan Bollard were received with excitement by kiwi traders. Bollard said that the strong rallies in the currency do not particularly prevent them from raising rates. Since many expected that this was perhaps the one major reason keeping rates low, the outlook for future decisions changes dramatically. The hawkish comments confirm a similar move earlier this month when the RBNZ ended certain relief programs like the Term Auction Facility. Even though Bollard said rates would be on hold until late 2010 as recently as September, the latest course of action may have signaled a shift in the banks outlook. Unfortunately, today’s surprise was met with one piece of bad news in that Credit Card Spending declined for ten out of the last eleven months

CAD: The U.S. dollar held on to gains at C$1.0467 . It had risen to C$1.0545 on Thursday but eased back after the Bank of Canada's quarterly monetary policy report suggested officials think the economy can cope with a stronger currency.

CHF: Despite poor fundamentals that include continuing deflation, rising unemployment, stagnant exports, and constant SNB intervention threats, the CHF has gained on the USD over the past months on sheer USD weakness from rising risk appetite and poor US employment figures which make US interest rate rises less likely.

CONCLUSIONS: New Trading Ideas: Watch USD/CAD, GBP/USD for pullbacks from recent news driven moves, crude oil still in strong rising channel on daily charts, look to trade at either extreme long or short depending on stocks. EURUSD but at new1.500 support

Trading Opportunities: Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back, no trend continues forever. Thus: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Crude oil breaches key $74 resistance, implying more upside unless stocks pull back on earnings disappointments. Always use sell stop orders.

for Wednesday.

Crude Oil

Breaches new highs at $82, up from $74 at the start of the week. OPEC officials have said before they are comfortable with up to $80/barrel, suggesting that playing the pullback is the higher probability play ONCE IT BEGINS (NOT BEFORE).

OTHER HEADLINES

(Bloomberg)

•China's Economy Expands 8.9%, Increasing Pressure for an End to Stimulus

•Credit Suisse Posts Third Straight Quarterly Profit on Gains From Trading

•Stocks Decline Around World on China's Growth, Ericsson as Dollar Rallies

(Seekingalpha.com)

10 Most Important Earnings Reports for This Upcoming Week

Fadel Gheit: Oil Prices to Remain Inflated but Don't Pass on Gas

Crude Oil and Gasoline Prices: Like Déjà Vu All Over Again

Oil Prices, Natural Gas Futures and Speculators

Is Crude Oil Breaking Out?

DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS POSITIONS IN ABOVE INSTRUMENTS.

GLOBAL MARKET OUTLOOK Full Version 10/21:Bubble, Bubble, Valuation Trouble?

2009-10-21T05:06:00.000-07:00

SUMMARY

- Stocks: Tuesday: Asia up, Europe, US down, Wednesday morning Asia closing lower, Europe opening higher

-FX: Tuesday lower US, Europe equities, bias to safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD gains against most currencies though still near lows

-Main events today: GBP: MPC Meeting Minutes, USD EIA Crude Oil Inventories, Fed Beige Book:, major earnings Wednesday: : MO (consumer), AMGN (biotech), AMR (airlines), EBAY (ecommerce), LLY(drugs), FIADF.pk (int’l autos), FNF (financial services), FCX (copper), GNZ (biotech), NVLS (chips), BA (aerospace), USB (financial)

- Big Theme: Consolidating risk appetite as latest US big name earnings and economic data prompt profit taking. Further gains in risk assets will depend on how mkt responds to earnings & if leaders can show increasing revenues and upbeat Q4 guidance, as markets are continue to shake off bad US employment and banking news. Thus far, many companies still failing to grow revenues, beating already conservative estimates on cost cutting.

STOCKS – Too Expensive?

US: (Positive earnings surprises from Apple (AAPL), Texas Instruments (TXN), Caterpillar (CAT), Pfizer (PFE), Yahoo (YHOO) and UnitedHealth (UNH) couldn't keep the broader market from slipping to a loss as a stronger dollar pressured stocks and commodities alike. NB: TXN, CAT earnings and sales were down from q3 08, PFE also had lower sales but managed to raise income from $0.34-0.43 EPS by slashing costs in manufacturing, marketing, R&D, and more. Share prices of TXN, CAT and YHOO are all substantially higher than in Q3 of 08. For example, CAT was at $38.83/sh last year, $57.85 as of yesterday, TXN: $16.85 a year ago, $23.66 today, the price for PFE's weaker business rose more modestly from $17.34, now $17.93 YHOO tripled profits but on cost cutting and sales down 14% but in line w/ analyst expectations. Stock price is up over the past year from $12.07 to $17.17

Stocks looked poised to start the session on strong footing and extend the previous session's gains, but the positive tone among participants dwindled in the opening minutes as enthusiasm faded for the strong earnings of several widely-held companies. A bounce by the U.S. dollar also undercut stocks; basic materials stocks (-1.1%) and energy stocks (-0.9%) were hit particularly hard, given their correlation to commodity prices.

Health care stocks also struggled this session. The sector shed 1.0% as Boston Scientific (BSX 8.57, -1.59) slumped in the wake of its quarterly earnings report, which actually contained a positive earnings surprise and an in-line earnings forecast. That couldn't stop a Wells Fargo downgrade from dragging down the stock, though.

Meanwhile, managed care providers (+2.2%) looked strong following better-than-expected earnings and reaffirmed upside guidance from UnitedHealth, but their gains couldn't overcome weakness in the rest of the health care sector.

Tech stocks settled as the best performing sector, even though it closed unchanged. The sector found strength as participants flocked to shares of Apple in the wake of its strong quarterly results. Apple was also a primary leader in the Nasdaq.

In economic news, the Producer Price Index for September made a surprise month-over-month drop of 0.6%, while core producer prices made a surprise 0.1% slip. Housing starts for September came in at an annualized rate of 590,000, which is below the rate of 610,000 units that was widely expected. DJ30 -50.71 NASDAQ -12.85 NQ100 +0.0% R2K -1.4% SP400 -0.9% SP500 -6.85 NASDAQ Adv/Vol/Dec 726/2.14 bln/1965 NYSE Adv/Vol/Dec 1051/1.24 bln/1996

Asia: Down on Wednesday profit taking prompted by mixed earnings news and weak US home and producer price data.

Europe: Down Tuesday led by weaker financials on profit taking after mixed earnings news and weak US home and producer price data

GLOBAL

MARKETS YESTERDAY

ASIA- UP N225I 0.98% HS +0.83 % SSEC +1.52 FTSTI +0.13% AORD +1.06 %

EUROPE - DOWN FTSE -0.72% DAX -0.70% CAC -0.24 %

US- DOWN S&P -0.62% DJIA -0.50% NASDAQ -0.59%

THIS MORNING

ASIACLOSING DOWN

N225I -0.03% HS -0.28 % SSEC -0.45 FTSTI -0.21% AORD -0.14 %

EUROPE: OPENING UP

FTSE +0.31 % DAX +0.26% CAC +0.13%

COMMODITIES: With the Dollar Index climbing 0.4% this session, the CRB Commodity Index retreated to a 0.5% loss

Oil: Oil futures prices in US trade Tuesday fell 0.7% to $79.09 per barrel. Oil prices fell for a second day Wednesday in Asia to below $79 as investors eyed a bigger-than-expected U.S. crude inventory increase and weak economic data.

There is plenty of oil around at the moment and the current price is associated with tight supply so I am a little bearish and I suspect it will adjust lower," said David Moore, commodities strategist at Commonwealth Bank in Sydney.

"However the market sentiment is still very positive and it's hard to dispel that without a trigger. The API data showed a large stock build and if confirmed by the Energy Information Administration, that could be bearish in the very short term."

But pullbacks should be seen as buying opportunities as crude heads back to $100 a barrel, Richard Ross, global technical strategist at Auerbach Grayson in New York, said.

The persistent weakness in the U.S. dollar, global strength in equities, absence of overhead resistance, powerful momentum and mounting evidence of real economic recovery pointed to a bullish outlook for crude, he said in a research note.

(fx360: Will $100/bbl Oil Kill the Recovery?) Oil hit $80/bbl in overnight trade reaching that level for the first time since November. The rise in crude has been sparked by a combination of expanding risk appetite and a surprising decline in gasoline inventories last week that prompted the breakout from the $70-$75/bbl consolidation channel.

If oil holds these levels for the rest of the year or worse tries to gun towards the $100/bbl barrier, it could prove to be a massive drag on the nascent US recovery. The gas pump will become the primary point of pain for the US consumer if price begins to creep towards the $3.00/gallon level. For the time being national gas prices continue to hover around the $2.50/gallon level but the recent spike in oil triggered the biggest jump since Aug. 10, as price climbed 8.5 cents to $2.574 a gallon.

The rise in gasoline prices and the concomitant increase in heating oil bills would come at the worst possible time of the year, cutting into US consumers discretionary income just ahead of the key Christmas shopping season. Furthermore, energy costs are the single greatest transmitter of inflation throughout the economy and if oil price heads towards $100/bbl the Fed may be facing a devils dilemma as price pressures escalate at the same time as consumer demand cools. In short, a sudden spike to $100/bbl could be the catalyst for a double dip recession in the US economy and is clearly a scenario that US policymakers will want to avoid.

Many analysts have made the point that oil prices these days are driven primarily by the weakness in the US dollar rather any underlying fundamental factor. With supplies plentiful and global demand still relatively contained, the run up in oil clearly appears to be speculative in nature. However, if US monetary officials do not nip this move in the bud, the economic ramifications for the US economy going into 2010 could be very significant.

Up to now the US policy of benign neglect towards the dollar has not had any meaningful negative impact on US economic activity and has in fact helped fuel growth in exports. However, the current situation could quickly get out of hand by dampening domestic demand at a time when US economy could least afford it. Therefore, instead of focusing strictly on economic data, it would behoove the Fed to consider the rising price of oil as the greatest threat to US recovery. Trichet & EU officials will travel to China soon to push China to revalue the yuan, a move which China thus far has resisted.

Gold: Gold prices were able to recover in US trade Wednesday from negative territory to finish fractionally higher at $1058.60 per ounce,.

CURRENCIES: USD up slightly 0.4% as stocks pull back on mixed earnings and weak economic data.

USD: USD up slightly 0.4% Tuesday as stocks pull back on mixed earnings and weak economic data. EURUSD fell to a low of 1.4883 before recovering some ground, and spent the session in the range 1.4883-1.4994. Treasury Secretary Geithner warned that the recovery was still in its early stages and that, given that the economy has still some excess leverage to wind down, the recovery is going to be a slow one. He re-iterated his view that a strong USD is important to the US.

The U.S. dollar consolidated in Asia on Wednesday after rebounding from 14-month lows against a basket of currencies in the previous session, with investors taking a breather from high-yielding currencies.

EUR- More warnings on the EUR French presidential advisor Henri Guaino said that with EURUSD at 1.50, it is a 'disaster' for European industry and the economy. The Finnish finance minister said the Eurozone is very happy about US statements that a strong dollar is in the US' interests, but warned that a strong EUR is a worry for the Eurozone. Rhetoric from both policy- and lawmakers in the Eurozone has risen over the past few weeks but we expect the ECB to maintain its current policy of focusing on appreciation in Asia and acting on FX within the G7 framework. Spain expressed calm over a strong euro. Overnight Trichet said the Eurogroup did not discuss an alternative forum for FX discussions to the G7. On the data front, German PPI was weaker than expected at -0.5%m/m (cons. -0.1%). Eurozone construction output also fell further, by 0.4% on the month and 11.3% on the year.

Inflating Public Debt: U.S. officials have said they want a strong dollar but France's Guaino accused the United States of having a policy aimed at inflating away the public debt. Guaino said the United States was "flooding the world with liquidity" and said eventually Europe would be forced to react.

"When the Americans create dollars and the dollar falls, there is a point at which you cannot take it any more," he said. "What do you do? Either you create liquidity to bring the euro down, or you let the euro rise, rise, rise and then you are completely suffocated."

The euro zone single currency has strengthened 6.6 percent against the U.S. dollar since the start of this year.

JPY - In Japan the BoJ's facility for purchasing Japanese corporate debt may be folded away soon. Given the relatively small size of the program, its retirement would be largely symbolic, but would nonetheless help to provide another tangible sign that the world economy is returning to some form of normality, bringing a significant boost to risk appetite. Yet even though the BoJ is clearly leaning towards ending these unconventional measures, it is equally clear that officials from the newly elected DPJ have deep misgivings about such a course of action. Banking Minister Kamei last week openly accused the BoJ of "talking in its sleep" when it became known that possible exit strategies were being discussed. So although the CP and CB purchasing schemes are due to expire naturally in December, this is by no means certain The dollar was down 0.3 percent at 90.60 yen. Tuesday morning, as BoJ minutes suggest it's considering exit strategies. One of the big breakout moves in the currency market this week was the rally in USD/JPY. The currency pair has been tracking U.S. bond yields for the past year and the recent uptick in 10 year bond yields coincided perfectly with the breakout in USD/JPY. It may be fruitful for USD/JPY traders to keep an eye on this correlation. Reasons to question yen strength going forward include:

• Policy makers' conflicting statements about favoring or discouraging yen strength

• Stronger risk appetite

• Growing interest rate differentials as other G10 central banks get closer to rate increases

• Increasing demand by Japanese banks and investors for higher yielding currencies

• Recent moves by competing Asian exporters to weaken their currencies against the USD to gain cost advantage for their exports may lead Japan to do likewise.

GBP – Borrowing and M4 figures mixed Public finance figures were worse than expected as the net cash requirement came in at GBP19.4bn vs. cons. 19bn. Net borrowing was better than expected at GBP14.8bn. M4 growth was stronger at 0.7% on the month (cons. 0.5%). This may cool expectations of an asset purchase program expansion by the BoE but the risks are finely balanced. In his speech later, BoE Governor King said that the UK economy is likely to return to growth in H2, but that it still faces two major long-term challenges: re-balancing the economy and reforming the banking sector. He predicted that CPI would be volatile into next year, but that it would rise in the coming months. King cautioned however that it choosing the correct course for monetary policy is difficult due to supply and demand uncertainties, a weakened banking sector, and uncertainties surrounding the fiscal tightening measures likely to be introduced next year.

All eyes are now on the Bank of England's minutes of its last policy meeting, due for release later in the day. At the meeting held on Oct. 7-8, it held rates at a record low of 0.5 percent and kept its 175 billion pound ($287 billion) asset-buying programme in place, as expected.

Sterling came under pressure on Tuesday after Bank of England Governor Mervyn King said that Britain is likely to return to positive growth in the second half of this year, but output will remain below its year-ago level for for some time [ID:nLAG003851].

Sterling was at $1.6370, broadly unchanged from late on Tuesday when it lost 0.26 percent.

AUD/NZD : The Bank of Canada's move to keep rates steady at record lows led to some selling in other commodity-linked currencies, particularly the New Zealand dollar and to a lesser extent the Australian dollar. The kiwi, however, erased some of those losses after the central bank chief, Alan Bollard said a high currency was not necessarily an obstacle to raising the cash rate. Regarding the Aussie, RBA minutes continued to reflect inclinations to raise rates soon.

CAD: Boc Says strong C$ could hurt economy, C$Falls 2% on BoC Dovishness: As expected, the BoC voted to leave the overnight rate on hold at a record low of 0.25%. More significantly, the accompanying statement was surprisingly dovish in its content and tone, saying that no change in the overnight rate should be expected before the end of Q2 2010. The statement also noted that persistent CAD strength, accompanied by higher volatility, was acting to slow growth and depress inflationary pressures, adding that aggregate demand would be more heavily skewed towards domestic demand as a result. The bank repeated that it retains "considerable flexibility" in how it conducts monetary at low interest rates, a hint that unconventional policy measures could still be used if required. The October Monetary Policy Report will be released on Thursday.

CHF: The USD slipped 0.6 percent lower to 1.0124 Swiss francs Tuesday morning. Despite poor fundamentals that include continuing deflation, rising unemployment, stagnant exports, and constant SNB intervention threats, the CHF has gained on the USD over the past months on sheer USD weakness from rising risk appetite and poor US employment figures which make US interest rate rises less likely.

CONCLUSIONS: Stocks pull in a bit but within rising channel Stay w/ trend, but be ready for pullback (still pulling back, GBP/USD breaking higher towards next resistance around 1.6700, USD/CAD continuing to bounce higher on dovish BoC comments yesterday

Trading Opportunities: Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back, no trend continues forever. Thus: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Crude oil breaches key $74 resistance, implying more upside unless stocks pull back on earnings disappointments. Always use sell stop orders.

Crude Oil

Near new highs at $80, up from $74 at the start of last week. OPEC officials have said before they are comfortable with up to $80/barrel, suggesting that playing the pullback is the higher probability play- beginning pullback Tuesday morning- watch it. ONCE IT BEGINS (NOT BEFORE).

FX Pair of the Day: GBP/USD

Made huge 10% + move, consolidating at upper BB, higher probability of some kind of pullback test (note on daily chart how the pair rarely stays long at the upper BB. News today for both pairs, earnings is the big one, though, and the GBP isn't much of a risk appetite play. Now that the short squeeze that fueled the move up is done, is overbought per the BBs AND if stocks pull in could GBP could drop hard against USD.

GBP/USD DAILY CHART OCT 21- NOTE: BREACHING TOP OF BB, FROM WHICH IT USUALLY RETREATS, AND AT UPPER END OF NEAR TERM TRADING RANGE

01 OCT 21

Also: USD/CAD: IF BoC st. does not show concern about CAD rise, the pair could drop about 300 pips to parity.

OTHER HEADLINES

(Bloomberg)

Trichet, Europe Finance Ministers Urge Stronger Dollar After Euro Advances

Financial Armageddon in Alabama Proving Parable for Local U.S. Governments

(Seekingalpha.com)

Jim Rogers on the Next 10 Years

The Greatest Depression Is Coming

How to Play the Next Great Bull - Matt McCall

Readers Pick the Top 20 5-Year Horizon Stocks

Is Crude Oil Breaking Out?

DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS POSITIONS IN ABOVE INSTRUMENTS.