Of swine and writedowns

The markets got spooked by the swine flu yesterday. Stock markets from Asia to NY were invariably sold off, pulling higher yielding currencies and the yen crosses down with them.

Today, risk aversion stayed but the attention has shifted over to the results of the US banks' stress test results.

WSJ reported that the Fed will try to get Boa and Citi to raise capital to buffer further writedowns in the future.

I guess uncertainties will linger until a resolution is confirmed related to the stress tests. The Dow futures stayed in negative territory throughout the Asian trade on the news as the familiar sense of banking worries came flooding back.

To think of it, these 2 banks seem to be the more probable 'victims' of the stress tests judging from the gigantic amount of loan/real estate assets on their b/s which risk non-performance.

The Fed also added results will be out in the 7 May week, not revealing the exact time of the release.

EURUSD got a pounding yesterday as ECB's Nowotny said the ECB might consider implementing some form of QE.

If you look at the EURUSD daily chart, you can see it trading in a downward channel. I expect it continue to trade within this channel where 1.2840 will provide some real support.

That is a support line that stretches all the way from earlier in the decade, with prices having bounced up and down from here. The market has extraordinary memory as it re-visits previous support/resistance lines and I trust this will be no different.

Unless of course, the ECB does QE, Rambo style.

My EURUSD Call

This past week, we've seen some correction taking place for the EURUSD.

The pair surged 197 pts or 1.51% after a thorough whacking the previous week.

The pair had been driven higher by better than expected German ZEW and IFO results which point to a stabilizing economy in the EZ. That saying, we should take this with a pinch of salt as these indicators are measured from a very low base well within the contractionary territory.

I don't see good fundamental reasons for the EURUSD to climb much higher given uncertainties still surrounding the EZ economy and european banking sector.

IMF this week deduced that european banks are facing up to USD 750 bn in writedowns and although these are disputed by economic figures like Trichet and Lagarde, a portion of that estimated amount still create a lot of worry. Plus, jobless rates are growing at a quick pace. Spain just hit 4m.

One major ECB event the market is looking forward to is the 7 May ECB meeting in which ECB members have previously indicated the council will announce 'unconventional methods' to ease credit conditions. Potential wildcard.

If they decide to move to purchase european debt assets in a big way, then it will further hurt the euro. But chances are that they will merely expand their current credit easing programs, given the conservative nature of the ECB on fiscal measures. Nothing much changes.

I'd look for opportunities to sell the EURUSD these coming 2 weeks.

On the daily chart, we see there's a downward channel in which the EURUSD currently trades. in. I'll be looking to sell at the top of the channel, naturally.



However, at what level to sell at is a dilemna for me. I drew two channels on the daily chart and the weekly chart. The tighter channel which is very close to the current price. is from the daily chart. The other channel is wider and more generous spans is drawn in the weekly chart.

Still, being one who always strive for a better risk-reward position, I'd target my order at an appropriate higher price.

Judging from the weekly chart, last week's closing was a bullish engulfing pattern, which may mean further upside.


My call for EURUSD for the next 2 weeks is:

Sell from 1.3400 - 1.3450 (top end of downward channel)

Stop loss: 1.3550

Take profit: 1.3000

My USDJPY call

This week, we've seen the USDJPY fall approx 2% from an open of 99.15 to 97.17 (a 198 pips drop).

It is interesting to observe how the USDJPY - stock correlation continue to play out. Historically its always been when stocks decline, USDJPY will too, as investors flock to the safe haven status of the yen.

This week, we did see a little bit of that, especially from yen cross selling (e.g. EURJPY, GBPJPY, AUDJPY) which depicts escape from the carry trade, but only for the first day of the week.

But cross selling did not prove to be convincing as the EUR, GBP and AUD all climbed higher later in the week but still USDJPY continued to fall.

Well, there isn't much carry trade to unwind in the first place as a lot of de-leveraging had been done in Q4 08.

It is too, especially counter-intuitive as Japanese investors are continuing to pour money out of the country to buy foreign bonds and stocks. The Japanese have a penchant for US securities.

USDJPY should go up in this case.

MOF data indicated that for the week ending 19 Apr 09, net outflow to foreign bonds and stocks were JPY 1,564 bn or approx USD 1.6 bn.

So why is there still downward pressure on the USDJPY?

I feel that the market was a little too quick to push the USDJPY up to beyond 100. Even though Japan's economy is suffering from the exports collapse and perceived fiscal deterioration (bond issue supported stimulus), Japan still stand in good stead as it should continue to run a trade surplus when the global economy recovers and will still be an investment income nation.

March trade surplus showed a rebound into positive territory from the previous months' crash.

Furthermore, MOF estimates that the market still has appetite to absorb the increased JGB issuance to fund the USD 140 bn stimulus package announced by Aso's government.

With the USDJPY yield differential as they are, there isn't much difference for investors to heavily favour USD based assets right now.

Things aren't so bad as it seems for the yen.

From a technical standpoint, the weekly chart below shows a three outside down candlestick formation which means bears having a strangle hold on the market. This means further downside is possible.

I fear that this piece is one week late because I noticed the outside red bar last weekend which means the bears are taking control but did not write. Nevertheless, as the week progressed, there seem to be more fundamental reasons for selling UDJPY. The ethos for my calls have always based on fundamentals. Technical analysis help me to confirm sentiments.

I favour selling on upward moves, near the 50 day moving average at 98. 40 (see chart below).

My call is for the next 2 weeks is:

To sell USDJPY from 98.40 - 99.00

Stop loss: 99.85 (above recent overbought moves)

Take profit: 95.50 - 96 (near neckline of recent double top formation)

Scalping the FX market

Just thought I should share this piece on scalping the FX market.

I think it makes sense because if you are a scalper trying to profit from smaller number of pips e.g. 10-30 pips, it is safer to trade in a directionless market where the big players aren't moving the markets.

Otherwise you might get stopped out very easily.

Enjoy.. http://club.ino.com/trading/2009/04/how-to-scalp-the-forex-without-getting-burned/

Snippets of the day - Wed 22 Apr 09

GBPUSD crashed today because the UK announced a record external debt position. It fell 200 pts into the 1.44 handle at print and has been bouncing up and down since.

Besides the USD, investors fled into the EUR as well. The EURGBP surged to a 6 day high at high 0.89.

With a large external deficit, it would be harder for the UK to implement yet another stimulus package through the issuance of government bonds or gilts. This is because they are already in heavy debts and will face a lot of political resistance trying to push this through.

BOE governor King, has also previously indicated his concerns about the country's bugeoning debts and opposed another stimulus package.

In effect, policymakers' hands are tied. There are less options to boost the economy now. Interest rates are already at an all time low at 0.5%, this means they can't cut much further. They have already tried Quant Easing (plain printing of money to purchase gilts), and this is no quarantee to succeed.

QE = GBP devaluing.

In fact, yesterday, a BOE member mentioned that they might implement more QE if this round does not work as well as expected. By June we can see if the current round of QE is working.

If so, I see another sell off in GBPUSD and GBP crosses.

Snippets of the day - Tue 21 Apr 09

As I mentioned in a previous post, sometimes the asian trade tend to extend the sentiments from the overnight session.

During the NY trade last night, higher yielding currencies and their crosses were sold ernestly as the asian market woke up in 'risk aversion' mode.

Carry trades like EURJPY and GBPJPY fell about 100 pts in the early morning before rebounding higher.

But these eventually turned positive in the evening, helped by a surprisingly good Apr ZEW survey outcome (+11 vs -2 expected if my memory serves me right).

The ZEW measures investor or business sentiment and is an important forward looking data for the German economy and is usually one of the more important economic data.

EURUSD, GBPUSD and their crosses surged, recouped all losses and went beyond thereafter.

If one manages to follow and trade the general trend down and up, it can be very rewarding as the mentioned currency pairs remained in defined channels for large parts of the day and did not turn up nasty surprises suddenly.

Snippets of the day - Mon 20 Apr 09

Earlier in the Asian trade today, currency movements gave the market a taste of what was to come in the overnight market.

Higher yielding currencies were sold in droves.

At print, the EURUSD lost 96 pips or 0.74%, the GBPUSD an even larger 234 pips or 1.58%.

EURJPY was down 262 pips or 2.03% and the GBPJPY 421 pips or 2.88%.

The Dow is tradding 221 pts or 2.72% lower.

Earlier in the day, UK Investment and Trade minister Davies said that export competitiveness via a cheaper GBP could pull the UK out of the recession, sending the GBPUSD and crosses spiralling lower.

He said the exact same thing on Friday but he was in Hong Kong. Today he is in Singapore.

You could make the same point in two different places, like holding a concert.

Again.. the market reacted. And EURGBP surged higher for the first time in days.

I guess the FX moves today pre-empted the selloff in stocks.

Being in the office staring at the interbank rates, I could almost feel risk aversion rearing its ugly head again. Just a few days ago, the NYSE CEO said the recent stock surge was not sustainable as 'real money' through the likes of pension funds are not yet back in the market.

Perhaps he is right. There will be a further stock correction coming in the next few days if so.

B0A announced better than expected earnings but this was a non-event as the market already priced in the 'good news'.

The mini bull run could very well be over.

The EUR and ECB speak

Yesterday, the EUR plummeted again. The single currency fell 1.21% or 159 pips to 1.3026 to the dollar.

I covered my half short position for a 323 pips profit. (The other half profit was taken at 1.3174 as written in a previous post).

I will explain in another post why I took my proft earlier than initially planned (though I had expected EURUSD to drop to below 1.30 before the end of next week).

Last Sunday, I judged that EURUSD might take a hit, and it did, but not without the help of ECB speak.

ECB PresTrichet spoke yesterday in Tokyo saying that the ECB will do everything it can to stop the rot in the EZ (read: cut interest rates again), albeit inflation expectations having been already anchored.

The recent inflation reading was 1.9%, under the 2% standard the ECB set. So the need for keeping higher interest rates is less now.

Recent statements by members like Provopoulos, Orphanides, Nowotny and Vice Pres Papademous also spoke out in support of purchasing debt assets to ease credit conditions. Of course, this would tantamount to a move in the direction of QE and will be devaluating to the currency.

Those statements took confidence out of the EUR, thus, throughout the week, the EUR was consistently sold against the USD, JPY and the GBP.

It is also funny how when stocks are rising, the EURJPY, often a barometer of risk taking, declined. It lost 2.16% or 289 pips to close at 129.34.

Two things, either investors have lost confidence in the recent stock rally in the view that it does not have legs to go much further and are unwinding their long EURJPY positions, or that the market is pricing in a rate cut by the ECB AND some QE measures in the May ECB meeting.

Where are we now?

The past week had been a highly anticipated one, with Q1 bank earnings in the offing. As you might already know, the banks, namely Goldman Sachs, JP Morgan and more critically, Citigroup have all announced better than expected earnings.

On any other week, this would have caused a larger stock rally than what we have witnessed. The Dow moved higher by just over 100pts or 1.3% on the week to close above 8100 pts.

I guess this was because the market had already more or less prepared itself for the results, which, to the admission of many now, was greatly helped by AIG's unwinding of huge credit positions to the benefit of these banks and lossening of accounting standards on hard to value assets.

Nothing much has fundamentally changed.

Next week we will have BoA announcing Q1 earnings on the 20 Apr, Bank of NY Mellon, US Bancorp and State Street Corp (large investment firm) on the 21 Apr and Wells Fargo on the 22 Apr.

I feel that even if one or two of the banks report poorer than expected earnings, the stock market will take it on its stride as it has already looking beyond these earnings.

Because the recent stock surge was predicated by economic data that proved the US economy is no longer in free fall. Stocks have always been a leading indicator of economic recovery and it is trying to do its job now.

That saying, the next question is whether stocks will go much higher from there or consolidate is a hard call. I feel the latter is more plausible.

Even though economic data have stabilized, but the US is still at a very low level in terms of industrial production, home prices, still rising unemployment and of course is still in the midst of develeraging, which in turn will further pressure asset prices e.g. real estate.

Until these pan out properly over the next few months, I don't expect to see stocks making a marathon higher again.

I might go the way of range trading.

Profit taken from half of position on EURUSD

Following my post on Sunday 11 Apr 09 My EURUSD forecast, my order to sell EURUSD 1.3349 was filled on Monday as the EURUSD surged to high 1.33 from high 1.31.

Tue and Wed saw this gain wiped out as deflation concerns coming out of the EZ caused the market to price in further cuts and speculation on asset purchases by the ECB in May gained traction.

As part of my usual strategy, I closed half the position at 1.3184 (165 pips profit) and decided to let the other half run, in the hope that EURUSD will continue to decline to below 1.30 before the end of next week where I will take profit again.

To prevent this remaining half position from turning into a loss, I placed a stop at 1.3349, exactly where I opened the position. So effectively, I have a free trade. The maximum I can lose on this trade is zero.

USDSGD blindsiding

Some market players had been blindsided by the MAS' latest monetary guidance released early this morning.

On the back of collapsed exports demand, the market had expected the MAS to devalue the SGD in a more aggresive form, some were even hoping for a path of depreciation of the SGD to help exports (70% of GDP).

However, the MAS' stance was different. Their published statement emphasized their focus on maintaining domestic price stability, and to do that, the SGD is kept at a zero appreciation path and the trading band in which the SGD trades in was re-centred to the current SGD NEER level which they deemed appropriate to keep prices stable.

And as a parting shot at the end of the statement, it says 'there is therefore no undue reason for SGD weakening'.

Upon the news release, USDSGD fell approx 200 pts to 1.4950 from 1.5150 in thirty minutes, clearing all stops along the way.

I got stopped out.

To be fair, the WSJ praised the MAS for taking a more prudent step this time. Even though Singapore's exports have been severely curtailed by the economic crisis, not allowing a sharper depreciation of the keeps investments in Spore more attractive. Afterall, the city state is a fund management hub in S.E. Asia, with USD 800 bn AUM.

Furthermore, competitive devaluation of the currency will not guarantee an increase in exports.

When I have a view on the USDSGD, I'd post something.

My EURUSD Call

As an Easter day gift, Well Fargo reported Q1 results on Thur 9 Apr to be much better than expected. That helped the Dow to surge a whopping 246 pts and the S&P 500, 3.81% higher.

Looking at the charts of those indices that day, the indices never looked like even making a convicted correction. The market is happy to stay long, I guess as there could be more surprises in the other banks' Q1 announcements coming up ahead.

But I still prefer to be cautious. JP Morgan said March was a 'tough' month. I'm keeping my emotions neutral before the next few announcements.

Over to currencies, EURUSD took a good amount of correction this week. The lure of the yield differential against the USD seems to have diminished as investors sold EUR to buy USD, JPY and GBP. Charts of EURJPY and EURGBP have shown obvious declines..

Case for a weaker EUR going forward

Perhaps, this was profit taking. Perhaps, people are judging the ECB to be behind the curve in boosting the economy. Perhaps the IMF euphoria is dying down and investors are sitting up to notice the huge amounts of potential bad loans and burden in the CEE - central and eastern Europe.

Afterall, an ECB member said the IMF idea of pumping USD 100 bn into the kitty to aid emerging economies was more like creating 'helicopter money'.

This year, the EUR has depreciated just 6% against the greenback. Its strength has contributed to a worse than expected drop in exports in Germany and France. Eventually the EUR might come to terms with itself, that it cannot stay so strong indefintely.

Even an ECB member on Thur said 'a cut beyond 1% could very well be in discussion soon'.

ECB has also started to talk about asset purchases, which more often than not, will devalue the currency. Maybe they'll have something concrete in May.

Looking at the daily chart of the EURUSD, we can see that the it has been making lower lows.

It has quite assuredly broken below the 23.60% retracement at 1.3270. The candlestick hammer formation formed on the 9 Apr signals some buying interest though, but its hard to imagine it is a big one.

Then on the weekly chart, it seems the bears have taken control of EURUSD as seen from the bearish engulfing pattern. This pattern shows that selling pressure is stronger than buying pressure from the previous week as bears took the higher opening and closed it lower than the low of the previous week.

But the volatile nature of FX being that is it, next week might be a week of a small move up if Q1 earnings are good and more risk appetite returns.

Even better, I'd sell at a higher level.

With that, here's my call for the next two weeks:

Sell from 1.33 - 1.3350 (near 23.60% retracement)

Stop loss 1.3450

Take profit at 1.2800 - 1.2991 (congestion in Nov 08 period)

Huge swings in EURJPY & GBPJPY

The 200 pt swings in forex these 2 days have been breathtaking.

I have observed that the Asian trading sessions do tend to extend the sentiments from the US close the previous night.

Take the overnight NY session for example, following the IMF saying that total toxic assets might hit USD 4 trn earlier in the day and Alcoa's poorer than expected Q1 earnings after the close compounding investor sentiment, Dow futures and higher yielding currencies declined.

Then Sydney, Tokyo and Spore opened a few hours later, picked up the ball and kept it rolling in the same direction. Stocks were sold, and crosses like EURJPY and GBPJPY, classic barometers of risk taking, fell about 280 points from high to low. (see chart)

Hang Seng, following the Dow's 2.34% decline, tumbled 3% and Nikkei about 2%.

This momentum from the NY to asia trade is actually good for traders who are willing to leave their positions to tag along the 'flow'.

When London came in, there seems to be a magical calm settling into the market. Stock futures recovered in positive territory, and EURJPY & GBPJPY bounced up at least 200 pts from their lows.

The moves are pretty sweet, and when you sense that the market may be oversold, taking the opposite position can be rather rewarding.

USDSGD call

Come Thursday 9 Apr '09 *correction: Tue 14 Apr 09*, the Monetary Authority of Singapore or MAS will end their bi-annual meeting and issue a statement of currency guidance for until the next meeting.

Usually guarded and secretive, officials usually don't speak to the press like their foreign counterparts, but this time around, there is some market expectations for a statement of SGD depreciation.

In official terms, there could be a re-centering of the band lower.

Right now the SGD trades just slightly below the middle of the SGD NEER band (which is a measure of the strength of the SGD against a basket of currencies Singapore trades mainly with). The lower the SGD is in the band, the weaker it is. Re-centering the band lower effectively depreciates the SGD a tad.

With demand for Singapore's exports having crashed to the ground, as seen in the last 3 NODX measures, the government can ease the difficulties faced by exporters by helping them to be more competitive. Exports make up 70% of the island state's GDP.

Last year, when inflation was sky-rocketting, the MAS steepened the band and then lifted it higher to contain price rises, a drastic move by any count.

This year, inflation has declined sharply led by oil prices, so the need to keep the SGD at a high level is reduced.

My call for the USDSGD for the next week is to buy on dips (as the EUR makes its move higher) from 1.4950 (support level from mid Jan to early Feb), with stop loss at 1.4880. Take profit at around 1.5200.

Of course, if the MAS does not re-center or mention anything about depreciation, I'd revise this view.

Bottoming out

What a week we've had. Euphoria overcame everyone during the stock surge of Wed and Thur this week.

Stocks ended the fourth week of gains. Currencies made huge moves to reflect fundamental changes in the economy. Will blog on this later.

I think we're seeing some sure signs of bottoming in this economic crisis. Things aren't so much better than where they were in late Q4 or Jan -Feb, but I think the market has been trying to price in the worse.

But let's leave GM bankruptcy for another time.

Here are the whys for the bottoming argument:

Tue - Japan's Feb Tankan was very bad. But manufacturing showed a clearing out of inventory, which points to bottoming out. Some large Japanese companies are expecting a pick up in orders from as soon as Q3

Thur - G20 members agreed to double IMF's its kitty to USD 1.1 trn, USD250 bn for trade financing, USD 250bn worth of new SDRs and USD 100 bn to aid economies that need financing. G20 leaders put in strong words to agree to stop the rot in developing economies, hence lifting fears of more loan writedowns. If this comes to fruition, then confidence in the EZ will climb.

US ISM improved, with New Orders showing a strong move higher. Pending Home Sales better than expected. All these tell you the worse numbers might have already been published.

Fri - Non Farm Payrolls (US unemployment rate) coming in line with expectations (u/e rate at 8.5%). The market was worried about a more drastic deterioration.

EZ manufacturing indicators also showed improvement across the board. EZ CPI supported - indicating risks of deflation is contained.

Early signs of stabilization? I sure hope so. Even if it is true, I think I the bottoming process will take some time to pan out because of continued deleveraging and confidence in not yet back in the market, albeit the recent stock rally.

And I think next quarter should not be much worse than this.

Of ECB, FASB and NFP

The ECB just announced a cut of 25 bps on its key rate, when the market expected a more urgent 50bps. Bank deposit rate is cut to 0.25% from 0.5%.

Within an hour, the EURUSD shot up a whopping 150 pips to 1.3490 from 1.3323. But as Trichet comes out to say there would be another cut coming, EURUSD retraced back to 1.3401.

I think the market is pricing EURUSD based on its interest rate differential against the dollar, which of course makes it attractive.Also, given the recent buoyant news that the IMF could double its reserves to USD 500bn and aid emerging European countries, alot of pressure is taken off from the EURUSD, given the EZ has a total bank exposure of USD 3.3trn to these countries.

In the medium term, EUR might be able to keep its shine against the USD as there are signs in economic data around the world that the crisis is bottoming out. I'll come to that in another post.

The FASB or Financial Accounting Standards Board in the US has gone to the vote today to loosen 'mark-to market' rules regarding accounting for troubled assets. This controversial transition has dragged on for a while now but with political pressure, these changes were passed.

Did Obama's admin say they'd do 'everthing' to save the economy?

The banks will definitely stand to gain, and an FT article today mentioned this could lead to an increase of up to 20% in quarterly profits of large banks. Sounds to me like this is stock positive.

Last week's continuing jobless claims in the US came in poorer than expected (above 650k), lending to fears that tomorrow's Non Farm Payroll will be bad.

Let's just keep the party going for today.

Market in dire need of good news now

As reports of Pending Sales of Existing Homes in the US turned in an uptick of 2.1% in Feb, stocks rallied.

Like totally.

The Dow was trading over -100pts in the red and shot right up to +50pts in 20 odd mins for a 150 pts surge.

The Pending Home Sales report tells you how many contracts are signed for the purchases of homes for 'delivery' in the future.

It also tell you that homes are really cheap in the US nowadays.

What's really going on?

In the office, my colleagues circulated an interesting email that contains a blog entry by this Correlation Trader at what I suspect is one of the bulge bracket investment bank. This correlation trader's work involves CDSes and other credit related securities.

Sorry that I couldn't locate the blog link to paste here but I'll try to regurgitate the main content.

He surmised that the recent 20% rally in stocks based on the very positive news that banks have turned profitable in Jan and Feb is a giant scam.

The profits are in fact due to just AIG's unwinding of their huge credit related positions. The company has in fact, over the years, accumulated thousands of such trades, worth alot (read: billions and billions) of dollars.

But as AIG is faced with immense political pressure to change itself and remove such exposure from its books, the company approached a few big banks, and eventually reaching the writer's trading desk, to unwind these securities; but at a huge cost to AIG.

Alas, AIG can afford to do this only because they have previously received USD 140 billion in taxpayers' money to cushion themselves and ease through transactions like these.

This was also possible because in effect, AIG was willing to take the losses, and the other banks were happy to do the business - all to the expense of the US taxpayer.

Today bankers are still screwing the public.

The banks that unwound these trades with AIG, thus, reported very favourable trading profits over the 2 months - and the writer estimates that each bank profited at least USD 1 -2bn each just from this. Think BoA, Citi, etc.

To me, it is indeed hard to conceive that in this economic environment where corporations cut down on business flows, M&A and credit related deals and interbank trading being strangled, banks can turn in such good results, seemingly out of thin air.

They aren't really as robust that you might think.

The equity rally hype that followed is the classic work of politics and the media, where policy makers gloried in their efforts to save the economy, and the media, playing along as cheerleaders.