The mother of all economic data, the non farm payrolls figures showed that the US lost 190k jobs, slightly above the 175k expected. However, the real wet blanker to risk sentiment is that the official unemployment rate surged to 10.2% from 9.7%, a shocking deterioration of the labor market. Estimates are for a decline to 9.9%.
What do I see for the next few weeks for the markets?
- The USD will remain on the defensive as expectations are growing that the Fed will push back hiking rates.
- US stocks to pull in more of a correction as high unemployment will hurt consumer spending and investors' sentiments, but rangey trade overall expected . Only outperforming economic data can move stocks another leg higher. I think the S&P500 might hit a peak of 1,225 (and I mean the peak) as highlighted in a previous post 'How high can stocks go?'; before we see a 15-20% correction like in previous recessionary recoveries
- The fact that stocks remained bouyant inspite of the NFP outcome goes to show that the level of liquidity in the financial system is enough to float anything you throw into it at the moment. It takes tightening expectations for this liquidity to be drawn out, which might take place during Q1 '10
- Gold and AUD to maintain attractiveness, with the latter expecting to enjoy further rate hikes going forward (as indicated by the RBA in its minutes today). This too, to take place as long as the fed doesn't give a stronger hint to raising rates/ or when the US unemployment rate improves
Showing posts with label Market opinion. Show all posts
Showing posts with label Market opinion. Show all posts
Friday, November 6, 2009
Thursday, November 5, 2009
Post FOMC
The Federal Reserve's rate decisions and statements are very important for the markets and cannot be underestimated. Their actions determine to a good extent the amount of liquidity that remains in the system and this will affect risk assets i.e. stocks.
The fed funds rate decision or statements about impending changes affect yields on US treasuries, which ultimately influences the decisions of central banks around the world because US treasuries are the mainstay of global central banks' reserves.
As expected, the FOMC kept its key rate at 0 - 0.25% for an 'extended period' in order to nurture the still fragile economy, citing that credit to households is still tight and that labor markets isn't yet in recovery. This 'extended period' phrase is key to the outlook of any rate hike - and it seems the FOMC has pointed out that it will look to inflation and the unemployment rate to improve before changing the phrase.
A change in the phrase to perhaps 'considerable period' (ala Greenspan some years ago) will have the most impact on USDJPY as the USD and JPY have the closest (and lowest) yields. It will surge on a fed funds rate hike.
Japan's inflation (or deflation) report out this week indicated that the government expects deflation until 2011, meaning the BoJ will likely not raise interest rates until then, so the yen will be the last in the developed world to enjoy a rate hike, putting the currency firmly as the ultimate funding (carry trade) currency for the foreseeable future.
Going back to the fed, even when they are focusing on both the inflation and unemployment rate for monetary guidance, I feel the bottleneck for a rate hike will be unemployment. Because it is hard to determine the peak and the fed historically wait a while longer after the peak before indicating a willingness to raise rates, there is likely to be a good time of waiting - which, to pro dollar investors, is really an 'extended period'. In another words, this fed looks to me to be a pretty dovish one for now, disregarding the change of incoming hawkish voting member(s) next year.
Friday's expected NFP figure is 175k job losses and a rise to 9.9% in the official unemployment figure. The government said unemployment rate is expected to peak above 10%.
Hence, for now, as long as stimulus is in place and extended by governments supporting risk sentiment, I feel the dollar will remain on the defensive and perhaps decline further against its major counterparts going into 2010.
The fed funds rate decision or statements about impending changes affect yields on US treasuries, which ultimately influences the decisions of central banks around the world because US treasuries are the mainstay of global central banks' reserves.
As expected, the FOMC kept its key rate at 0 - 0.25% for an 'extended period' in order to nurture the still fragile economy, citing that credit to households is still tight and that labor markets isn't yet in recovery. This 'extended period' phrase is key to the outlook of any rate hike - and it seems the FOMC has pointed out that it will look to inflation and the unemployment rate to improve before changing the phrase.
A change in the phrase to perhaps 'considerable period' (ala Greenspan some years ago) will have the most impact on USDJPY as the USD and JPY have the closest (and lowest) yields. It will surge on a fed funds rate hike.
Japan's inflation (or deflation) report out this week indicated that the government expects deflation until 2011, meaning the BoJ will likely not raise interest rates until then, so the yen will be the last in the developed world to enjoy a rate hike, putting the currency firmly as the ultimate funding (carry trade) currency for the foreseeable future.
Going back to the fed, even when they are focusing on both the inflation and unemployment rate for monetary guidance, I feel the bottleneck for a rate hike will be unemployment. Because it is hard to determine the peak and the fed historically wait a while longer after the peak before indicating a willingness to raise rates, there is likely to be a good time of waiting - which, to pro dollar investors, is really an 'extended period'. In another words, this fed looks to me to be a pretty dovish one for now, disregarding the change of incoming hawkish voting member(s) next year.
Friday's expected NFP figure is 175k job losses and a rise to 9.9% in the official unemployment figure. The government said unemployment rate is expected to peak above 10%.
Hence, for now, as long as stimulus is in place and extended by governments supporting risk sentiment, I feel the dollar will remain on the defensive and perhaps decline further against its major counterparts going into 2010.
Saturday, September 5, 2009
Aug 09 Non Farm Payrolls
The marquee event of the week is of course the non farm payrolls release. Coming in at -216k, it represents the slowest decline in the layoff rate in several months. However, the official unemployment rate rose to 9.7% from 9.5%.
My initial reaction was of a bearish one as I thought, ok, so even if the NFP fell less than expected but the labor force could not build on its improvement in the last release, so the market will have to bear the brunt of what even the fed feels is the biggest headwind facing the US economy today.
My feeling was proven right in the first hour and half after the release. The FX majors sold off against the safe havens of the USD and the JPY. Futures traded lower. I rode on a little bit of gains but of course, in hindsight, my view was wrong.
The market decided to see the brighter side of the NFP release and risk taking came back, pushing stocks and higher yielding currencies higher against the dollar. By the end of the night, the dow added about 100 pts.
I guess the market, taking a forward looking view, felt that the slowing job losses is a good sign - that the worse of the US consumer is a passing phase and that now that the overall unemployment rate is closer to it's peak, things might get better from here.
In FX, my bias-ly favoured market, the dollar index lost ground. Looking at price action in the past week, I failed to analyze one thing. The fact that the majors were decidedly rangey was because traders were wary of a more firmly better than expected NFP which will cause a sell off in this currencies against the dollar.
This was what happened in the last NFP release in July. The thinking goes: if the US u/e improves faster than expected then the fed might hike rates earlier, making the dollar a lot more attractive to investors at current price levels. Especially against the yen, as yields on JPY assets are and will be kept low for a longer time.
And now that the thinking has to be shelved for the time being, I am biased to think that the major currencies would build on friday's momentum and advance against the dollar. Especially the Aussie, the only currency whose central bank has given hints interest rate might be hiked going forward.
What do you think?
My initial reaction was of a bearish one as I thought, ok, so even if the NFP fell less than expected but the labor force could not build on its improvement in the last release, so the market will have to bear the brunt of what even the fed feels is the biggest headwind facing the US economy today.
My feeling was proven right in the first hour and half after the release. The FX majors sold off against the safe havens of the USD and the JPY. Futures traded lower. I rode on a little bit of gains but of course, in hindsight, my view was wrong.
The market decided to see the brighter side of the NFP release and risk taking came back, pushing stocks and higher yielding currencies higher against the dollar. By the end of the night, the dow added about 100 pts.
I guess the market, taking a forward looking view, felt that the slowing job losses is a good sign - that the worse of the US consumer is a passing phase and that now that the overall unemployment rate is closer to it's peak, things might get better from here.
In FX, my bias-ly favoured market, the dollar index lost ground. Looking at price action in the past week, I failed to analyze one thing. The fact that the majors were decidedly rangey was because traders were wary of a more firmly better than expected NFP which will cause a sell off in this currencies against the dollar.
This was what happened in the last NFP release in July. The thinking goes: if the US u/e improves faster than expected then the fed might hike rates earlier, making the dollar a lot more attractive to investors at current price levels. Especially against the yen, as yields on JPY assets are and will be kept low for a longer time.
And now that the thinking has to be shelved for the time being, I am biased to think that the major currencies would build on friday's momentum and advance against the dollar. Especially the Aussie, the only currency whose central bank has given hints interest rate might be hiked going forward.
What do you think?
Trading is a discipline
On hindsight, we are all geniuses. The investor who predicts market behavior correctly after the releases of big news stand to make the money. But, its probably very hard to do that.
The market, being the brain of thousands of investors making decisions to buy / sell at the same time can be very unpredictable, fickle and often both. But, the market is still the most efficient machine to determine what prices of assets should be.
This is the giant machine that I have come to respect and behold.
I used to be a hit and hope, impatient, emotional investor. And hence I have lost a lot of money. And more than what I've planned for.
But I guess this experience in losing has taught me valuable lessons, which I guess I wouldn't internalize as much as if the money was not mine or it was a substantially smaller sum.
Number 1: Be happy to cut losses while they are small. Ironic but I guess this is the most important to me. Its all about the maths, if I can keep my losses contained, I will have a chance of making an net profit at the end of the day. I try to keep my losses limited to 50-100 pips per FX trade.
Number 2: Perceiving the right risk-reward positions gives me a competitive edge. I strive to determine where supply and demand imbalances are and then leave orders at levels which I think are reversal points or, a floor/ceiling in the case of a continuing trend. Technical Analysis is very useful for this. If you ask me, circa 200 pips of an FX profit is pretty decent, or 2-4x your loss limit. You can see a few of these moves within a week in the FX market.
Number 3: Be very patient for the right opportunities. In the market, opportunities will present themselves often. I won't want to chase a price after it has gone higher because I think I've missed out on a good entry. As I said, trading is a discipline, literally.
Number 4: Take profits. 'Nobody ever loses by taking a profit'. Greed is probably the only thing which makes an investor think the price will always continue to go in his favor. In volatile markets like now, I take profits unless there is a good fundamental reason for me to not do so.
The market, being the brain of thousands of investors making decisions to buy / sell at the same time can be very unpredictable, fickle and often both. But, the market is still the most efficient machine to determine what prices of assets should be.
This is the giant machine that I have come to respect and behold.
I used to be a hit and hope, impatient, emotional investor. And hence I have lost a lot of money. And more than what I've planned for.
But I guess this experience in losing has taught me valuable lessons, which I guess I wouldn't internalize as much as if the money was not mine or it was a substantially smaller sum.
Number 1: Be happy to cut losses while they are small. Ironic but I guess this is the most important to me. Its all about the maths, if I can keep my losses contained, I will have a chance of making an net profit at the end of the day. I try to keep my losses limited to 50-100 pips per FX trade.
Number 2: Perceiving the right risk-reward positions gives me a competitive edge. I strive to determine where supply and demand imbalances are and then leave orders at levels which I think are reversal points or, a floor/ceiling in the case of a continuing trend. Technical Analysis is very useful for this. If you ask me, circa 200 pips of an FX profit is pretty decent, or 2-4x your loss limit. You can see a few of these moves within a week in the FX market.
Number 3: Be very patient for the right opportunities. In the market, opportunities will present themselves often. I won't want to chase a price after it has gone higher because I think I've missed out on a good entry. As I said, trading is a discipline, literally.
Number 4: Take profits. 'Nobody ever loses by taking a profit'. Greed is probably the only thing which makes an investor think the price will always continue to go in his favor. In volatile markets like now, I take profits unless there is a good fundamental reason for me to not do so.
Tuesday, September 1, 2009
Sentiments have changed
The market sentiment has turned for the worst. Dow now trades -160 points or -1.61%. I guess the illiquid situation isn't helping. And also some players (hedge funds story in bloomberg today?) are really putting expressing their bearish views. Dang! On hindight, my sell order at 9460 that wasn't hit really hurt now.
Friday, August 21, 2009
Elliot wave theory - downard momentum for the USDJPY
Just another note:
The Elliot wave also can be applied to the USDJPY monthly chart. The Elliot wave is made up of 5 mini waves, which stages I've highlighted in the chart above.
Usually, the final wave (5) tends to be stronger as by the commencement of wave 5, the buyers in the market (waves 2 and 4) have already been exhausted, leaving more selling power in the market.
If this were true, wave 5 might have good momentum in the run down towards to 90.
The Rate of Change component also point out that any buying in the previous months has lacked the strength to even come close to overturn the overall downward move, having been capped at the zero level and still heading downwards.
Monday, August 10, 2009
Story of the week
Lets see if the latest theme in FX has got the legs.
With the US enjoying an improvement in residential property sales, better than expected construction of single family homes, GDP outpacing expectations of -1% vs -1.5%, it seems now that the US economy is on the cusp of recovery ahead of the EZ and the UK.
And then, the Fed will raise rates, making dollar assets more attractive that Euro denominated ones as USD yields outperform.
That's why the dollar has seen good strength against the single currency Euro and Sterling Pound. The GBP of course, is still reeling from the BOE's decision to increase the printing of an additional GBP 50 bn for QE - to ease monetary conditions in the UK.
A few banks have been calling for a stronger dollar on the back of the US' recovery story, but none has predict this to happen so soon. In fact, 1.47 - 1.50 is a popular target for the EURUSD pair before analysts see a return to 1.30 by start - mid 2010.
Anyway, let's see how far will the current theme run.
Good support for the EURUSD and GBPUSD should come at 1.40 and 1.63 - the support line of the congestion trading in Jun-Jul 09.
I'd be buying from these levels as I see that there are still headwinds facing the US economy - declining commercial real estate values, rising unemployment and already high valuations of stocks.
With the US enjoying an improvement in residential property sales, better than expected construction of single family homes, GDP outpacing expectations of -1% vs -1.5%, it seems now that the US economy is on the cusp of recovery ahead of the EZ and the UK.
And then, the Fed will raise rates, making dollar assets more attractive that Euro denominated ones as USD yields outperform.
That's why the dollar has seen good strength against the single currency Euro and Sterling Pound. The GBP of course, is still reeling from the BOE's decision to increase the printing of an additional GBP 50 bn for QE - to ease monetary conditions in the UK.
A few banks have been calling for a stronger dollar on the back of the US' recovery story, but none has predict this to happen so soon. In fact, 1.47 - 1.50 is a popular target for the EURUSD pair before analysts see a return to 1.30 by start - mid 2010.
Anyway, let's see how far will the current theme run.
Good support for the EURUSD and GBPUSD should come at 1.40 and 1.63 - the support line of the congestion trading in Jun-Jul 09.
I'd be buying from these levels as I see that there are still headwinds facing the US economy - declining commercial real estate values, rising unemployment and already high valuations of stocks.
Saturday, July 18, 2009
Its not all that rosy in the banking sector
Yes its not all that rosy.
No doubt every major bank that reported Q2 results had reason to be proud of itself as the earnings easily beat estimates; there's little reason to be upbeat about future earnings.
This is especially so for the banks which has big consumer businesses like Citi and BoA. Firstly, Citi and BoA avoided losses in Q2 only because respectively, they sold Smith Barney brokerage and China Construction Bank stakes profitably.
They took more credit losses in the last quarter for the consumer businesses and expects this part of their business model to remain weak for the forseeable future. And that means, improving next few quarters' earnings will be challenging.
FT says Citi and BoA suffered USD 12.4 bn and USD 16.4 bn in credit costs in the last quarter.The economy must pick up fast for them to continue to do well but I think there's more de-leveraging to be done by the US consumer, the recession will be around for some time.
In contrast to investment banks like Goldman and JP Morgan, whose capital markets businesses are their earnings lynchpins, have lesser consumer related baggage.
So that doesn't sound too upbeat for stocks to me. Afterall, the S&P500 is made up of a larger group of firms that has little to do with the investment banking giants like GS and JPM and if earnings don't look too good, the euphoria will not last long.
Stocks will need more other reasons other than the bank-led surge to move another leg higher.In the following days, regional banks will too, announce Q2 earnings and these banks being more exposed to the American consumer would likely not do so well.
But the good news is... Initial Jobless Claims on Thur point to a firming to some extent of the labour market. The claims fell at a record pace as sackings in the auto and manufacturing industries have already been carried out earlier in the year.
Although Continuing Claims, an estimate of still unemployed people is at a record high, Non Farm Payrolls numbers should improve going forward.
Till then, the market is still focused on the rest of the earnings season.
No doubt every major bank that reported Q2 results had reason to be proud of itself as the earnings easily beat estimates; there's little reason to be upbeat about future earnings.
This is especially so for the banks which has big consumer businesses like Citi and BoA. Firstly, Citi and BoA avoided losses in Q2 only because respectively, they sold Smith Barney brokerage and China Construction Bank stakes profitably.
They took more credit losses in the last quarter for the consumer businesses and expects this part of their business model to remain weak for the forseeable future. And that means, improving next few quarters' earnings will be challenging.
FT says Citi and BoA suffered USD 12.4 bn and USD 16.4 bn in credit costs in the last quarter.The economy must pick up fast for them to continue to do well but I think there's more de-leveraging to be done by the US consumer, the recession will be around for some time.
In contrast to investment banks like Goldman and JP Morgan, whose capital markets businesses are their earnings lynchpins, have lesser consumer related baggage.
So that doesn't sound too upbeat for stocks to me. Afterall, the S&P500 is made up of a larger group of firms that has little to do with the investment banking giants like GS and JPM and if earnings don't look too good, the euphoria will not last long.
Stocks will need more other reasons other than the bank-led surge to move another leg higher.In the following days, regional banks will too, announce Q2 earnings and these banks being more exposed to the American consumer would likely not do so well.
But the good news is... Initial Jobless Claims on Thur point to a firming to some extent of the labour market. The claims fell at a record pace as sackings in the auto and manufacturing industries have already been carried out earlier in the year.
Although Continuing Claims, an estimate of still unemployed people is at a record high, Non Farm Payrolls numbers should improve going forward.
Till then, the market is still focused on the rest of the earnings season.
Wednesday, July 8, 2009
Risk aversion in FX
Stocks were mixed at print - 11:48 est time. The dow is slightly sub zero but the S&P500, down 0.74%, below the all important head and shoulders neckline of 880.
The S&P 500 is currently trading at 877. Another's day close below this level could open the way for further declines. Poor economic outlook by companies which report Q2 earnings in the coming days will kill the market.
As this point, we need more convincing evidence of economic growth before risk appetite receives another leg up, but it doesn't look like it at all.
Shorting on strength of risk assets remain my strategy unless Q2 earnings tells us things are not as bad as they seem.
As I have mentioned in my previous post, the yen has emerged as the favoured safe haven currency of choice instead of the dollar. Cross yen currency pairs have sold off massively at print. EURJPY and GBPJPY have lost massively - at least 3% each.
USDJPY is 2.6% lower as well.
Wow.
The S&P 500 is currently trading at 877. Another's day close below this level could open the way for further declines. Poor economic outlook by companies which report Q2 earnings in the coming days will kill the market.
As this point, we need more convincing evidence of economic growth before risk appetite receives another leg up, but it doesn't look like it at all.
Shorting on strength of risk assets remain my strategy unless Q2 earnings tells us things are not as bad as they seem.
As I have mentioned in my previous post, the yen has emerged as the favoured safe haven currency of choice instead of the dollar. Cross yen currency pairs have sold off massively at print. EURJPY and GBPJPY have lost massively - at least 3% each.
USDJPY is 2.6% lower as well.
Wow.
Tuesday, July 7, 2009
Rangey day
Risk aversion is seeping back into the market. The Dow now trades -80 (11:16 est) even in the absence of bad econ data. European trading were tepid as well.
Even last night's positive close in the US stock markets were due to defensive stocks moving higher e.g. consumer staples. Breadth of the move was poor as well, meaning the upmove appears weak.
I heard that speculative accounts have been selling risk assets recently so as to lock in profits ahead of the US Q2 earnings season. There're risks of poorer performance as compared with Q1.
Alcoa, the belweather commodities firm will report after the bell on Wed 8 Jul.
As one analyst put it, the market is likely to react more strongly to bad news now than good news. I feel that in this non trending environment, this is likely to happen as well.
Some TA analysts say 890 is the neckline support for the head and shoulders pattern formation for S&P 500. If broken, prepare for another surge downwards.
In FX, the majors traded rangey against the dollar in spite of the decline in US stocks and the looming sense of risk aversion.
This is because tonight, the Treasury will sell about USD 30 bn worth of treasuries, worsening the fiscal position of the US and pressuring the dollar. The market has been harping on about the increased supply of treasuries but auctions (demand) have been good.
Yesterday the Treasury successfully sold USD 10 bn of treasuries including TIPS with good bid to cover ratio.
Central banks (through the way of indirect bids) have lent support to treasuries. It makes sense because where else can they park their dollars. The dollar and treasury market liquidity comes at a premium.
In contrast, the ECB has been very prudent with their monetary policy and I feel this is the main reason the EURUSD is supported. Members like Weber, Stark and Noyer have stated that 1)inflation is not a concern 2) no additional asset purchases are needed now - which will help the fiscal position of the EZ.
Today, the EUR tried to make progress against the dollar but to no avail given the poor risk appetite.
However, in the coming few days there could be good opportunities to long the EURUSD for a medium term bet because monetary policy is what will drive prices, rather than the risk aversion flows.
Even last night's positive close in the US stock markets were due to defensive stocks moving higher e.g. consumer staples. Breadth of the move was poor as well, meaning the upmove appears weak.
I heard that speculative accounts have been selling risk assets recently so as to lock in profits ahead of the US Q2 earnings season. There're risks of poorer performance as compared with Q1.
Alcoa, the belweather commodities firm will report after the bell on Wed 8 Jul.
As one analyst put it, the market is likely to react more strongly to bad news now than good news. I feel that in this non trending environment, this is likely to happen as well.
Some TA analysts say 890 is the neckline support for the head and shoulders pattern formation for S&P 500. If broken, prepare for another surge downwards.
In FX, the majors traded rangey against the dollar in spite of the decline in US stocks and the looming sense of risk aversion.
This is because tonight, the Treasury will sell about USD 30 bn worth of treasuries, worsening the fiscal position of the US and pressuring the dollar. The market has been harping on about the increased supply of treasuries but auctions (demand) have been good.
Yesterday the Treasury successfully sold USD 10 bn of treasuries including TIPS with good bid to cover ratio.
Central banks (through the way of indirect bids) have lent support to treasuries. It makes sense because where else can they park their dollars. The dollar and treasury market liquidity comes at a premium.
In contrast, the ECB has been very prudent with their monetary policy and I feel this is the main reason the EURUSD is supported. Members like Weber, Stark and Noyer have stated that 1)inflation is not a concern 2) no additional asset purchases are needed now - which will help the fiscal position of the EZ.
Today, the EUR tried to make progress against the dollar but to no avail given the poor risk appetite.
However, in the coming few days there could be good opportunities to long the EURUSD for a medium term bet because monetary policy is what will drive prices, rather than the risk aversion flows.
Sunday, June 28, 2009
Nothing on a weekend
I can't seem to find good trading opportunities in the FX market at this point. But I will post something as soon as news are out dictating the week's flavour.
It seems that the majors have been trading in a range against the dollar, capped by previous highs set in the past weeks as the market is bidding its time to assess latest econ data to see if the greenshoots are ever going to lead to more certain recovery in the global economy.
There are certainly headwinds against this, e.g. rising unemployment in most parts of the industrialized world, potential write downs for european banks, continuing de-leveraging within the US economy etc.
But econ data are showing slower contraction on all fronts - the question is, which investors will bite (and grab risk assets)?
Or are we in for a moderate correction in risk assets?
Next week we loads of econ data that can confuse the mind, but my tendency to lean towards better sentiments.
Because China's data, which tends to give the weary stock markets a good boost, may turn in a good result for the PMI reading (out on Wed 1 Jul), helping commodity prices, (and commodity) currencies, related stocks - spilling over into the europe/US markets, and so on.
Still, we are prone to plenty of event risks considering the various cenbank meetings/statements and econ data surprises.
e.g. hear what more China has to say about diversifying away from the dollar as a reserve currency, SNB's further involvement in the fx markets, a shocking NFP of course.
Nonetheless, I hope you will have a good week ahead!
It seems that the majors have been trading in a range against the dollar, capped by previous highs set in the past weeks as the market is bidding its time to assess latest econ data to see if the greenshoots are ever going to lead to more certain recovery in the global economy.
There are certainly headwinds against this, e.g. rising unemployment in most parts of the industrialized world, potential write downs for european banks, continuing de-leveraging within the US economy etc.
But econ data are showing slower contraction on all fronts - the question is, which investors will bite (and grab risk assets)?
Or are we in for a moderate correction in risk assets?
Next week we loads of econ data that can confuse the mind, but my tendency to lean towards better sentiments.
Because China's data, which tends to give the weary stock markets a good boost, may turn in a good result for the PMI reading (out on Wed 1 Jul), helping commodity prices, (and commodity) currencies, related stocks - spilling over into the europe/US markets, and so on.
Still, we are prone to plenty of event risks considering the various cenbank meetings/statements and econ data surprises.
e.g. hear what more China has to say about diversifying away from the dollar as a reserve currency, SNB's further involvement in the fx markets, a shocking NFP of course.
Nonetheless, I hope you will have a good week ahead!
Sunday, May 24, 2009
What a week it has been
What a week it has been in the FX markets. The greenback's massive selling off had been exacerbated by the possibility of further quantitative easing steps and asset purchases by the Fed, as revealed in their Apr meeting minutes.
Just this week, the dollar lost 4.97%, 3.72% and 4.49% against the Sterling Pound, Euro and Aussie.
And myself, I lost some money on the GBPUSD recommendation I posted last week as well (a loss of 120 pips). But, the murder had been a quick one as the price of the GBPUSD blitzed past my stop order so quick I couldn't react.
Yes the meeting minutes played a role in the dumping of the safe haven dollar, but I believe this is a part of a sea change towards valuation of currencies. This week's moves are a confirmation that the worst of the global recession is over as prices are trying to find their way back to normalcy.
Of course, we will not see EURUSD, GBPUSD and AUDUSD trading back at the heights of 1.62, 2.00 and 0.95 like in the heady days of '08 any time soon, but the markets are making adjustments already. Even ahead of the stock markets.
This week, the Dow traded almost unchanged, but currencies moved like crazy. Going into the next couple of weeks, I trust there would be potential for a correction back down but I am not making any confident calls right now as I have not found objective support/resistance targets after the strong bursts higher.
For the above major currency pairs, I suggest trading using the day's main theme and riding on the day's trend will help prevent excessive losses as compared to leaving positions open multi-day.
But if the corrections are strong, I'd favour buying these majors against the dollar for a longer term trade.
Just this week, the dollar lost 4.97%, 3.72% and 4.49% against the Sterling Pound, Euro and Aussie.
And myself, I lost some money on the GBPUSD recommendation I posted last week as well (a loss of 120 pips). But, the murder had been a quick one as the price of the GBPUSD blitzed past my stop order so quick I couldn't react.
Yes the meeting minutes played a role in the dumping of the safe haven dollar, but I believe this is a part of a sea change towards valuation of currencies. This week's moves are a confirmation that the worst of the global recession is over as prices are trying to find their way back to normalcy.
Of course, we will not see EURUSD, GBPUSD and AUDUSD trading back at the heights of 1.62, 2.00 and 0.95 like in the heady days of '08 any time soon, but the markets are making adjustments already. Even ahead of the stock markets.
This week, the Dow traded almost unchanged, but currencies moved like crazy. Going into the next couple of weeks, I trust there would be potential for a correction back down but I am not making any confident calls right now as I have not found objective support/resistance targets after the strong bursts higher.
For the above major currency pairs, I suggest trading using the day's main theme and riding on the day's trend will help prevent excessive losses as compared to leaving positions open multi-day.
But if the corrections are strong, I'd favour buying these majors against the dollar for a longer term trade.
Wednesday, May 6, 2009
The May ECB meeting
On Thur 7 May 09, the ECB will conclude their May meeting and many expect them to announce a rate cut of 25bps as well as some form of 'unconventional measures' to ease credit conditions in the Eurozone.
Pres Trichet and co are keeping their cards real close to their chests and not divulging what kind of 'unconventional measures' would be employed.
But I suspect there won't be so much of QE or Quant Easing, employed by both the Fed and BOE. Because three quarters of the supply of the EZ's credit comes through banks, lesser on securitization of debt, hence there is more of a need to target bank lending instead of the secondary securities market.
QE through the form of direct purchase of corporate debt by the governments is hence, unlikely.
Judging from price action of the EURUSD today, it seems there has been good and consistent buying, with the pair stabilizing around the 1.33 pivot after crashing to low 1.32 after the release of the WSJ report that BoA needed a massive USD 34 bn in additional capital.
Perhaps this is why..
1. Pre-empting the ECB outcome tomorrow, the market is buying on the rumour and will sell on the news. As traders expect the ECB to not implement QE, the Euro will be supported up until the announcement and get sold off after.
I have written before in previous posts on the lack of fundamental reasons to expect the EURUSD to go much higher. It will continue to trade in the downward channel - which I also illustrated on a previous post. Mid 1.31 is a likely target.
2. Less likely to occur: If the big surprise happens and the ECB does announce QE, the Euro will see a fire-sale. Selling EURGBP, EURCHF would be good ideas in this case.
Either way, I see the EURUSD to sell off at the end of the day.
3. But of course, if later in the NY session, the US bank stress test results are better than expected i.e. lesser than the reported 10 banks need more capital and the biggies like BoA and Citi require substantially less capital, then the mood will turn positive, leading to the buying of higher yielding currencies like the Euro, GBP and AUD.
Barring ECB QE, the EURUSD will go higher.
Pres Trichet and co are keeping their cards real close to their chests and not divulging what kind of 'unconventional measures' would be employed.
But I suspect there won't be so much of QE or Quant Easing, employed by both the Fed and BOE. Because three quarters of the supply of the EZ's credit comes through banks, lesser on securitization of debt, hence there is more of a need to target bank lending instead of the secondary securities market.
QE through the form of direct purchase of corporate debt by the governments is hence, unlikely.
Judging from price action of the EURUSD today, it seems there has been good and consistent buying, with the pair stabilizing around the 1.33 pivot after crashing to low 1.32 after the release of the WSJ report that BoA needed a massive USD 34 bn in additional capital.
Perhaps this is why..
1. Pre-empting the ECB outcome tomorrow, the market is buying on the rumour and will sell on the news. As traders expect the ECB to not implement QE, the Euro will be supported up until the announcement and get sold off after.
I have written before in previous posts on the lack of fundamental reasons to expect the EURUSD to go much higher. It will continue to trade in the downward channel - which I also illustrated on a previous post. Mid 1.31 is a likely target.
2. Less likely to occur: If the big surprise happens and the ECB does announce QE, the Euro will see a fire-sale. Selling EURGBP, EURCHF would be good ideas in this case.
Either way, I see the EURUSD to sell off at the end of the day.
3. But of course, if later in the NY session, the US bank stress test results are better than expected i.e. lesser than the reported 10 banks need more capital and the biggies like BoA and Citi require substantially less capital, then the mood will turn positive, leading to the buying of higher yielding currencies like the Euro, GBP and AUD.
Barring ECB QE, the EURUSD will go higher.
Friday, April 17, 2009
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.
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.
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.
Friday, April 3, 2009
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.
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.
Wednesday, April 1, 2009
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.
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.
Sunday, March 29, 2009
The case for USD support
In the days after the Fed announced QE more than a week ago, we saw obvious USD weakening.
Against the major currencies like the EUR, GBP and AUD the USD lost up 600 pts at its height, helped by rallying stocks. These sure make very good trading opportunities.
However, from here, I feel the trend for dollar weakening is perhaps less clear.
I'd not bet against the USD on a long term basis without looking out for clear signs what policymakers around the world will do next.
Recent strong selling of the GBP and EUR highlights the market's unwillingness to hold on to these currencies. The UK is in the midst of QE as well, and the EUR is still waiting for a breakthrough, or an implosion.
Note that Chancellor Merkel rejects the idea of a US-style stimulus package due to a huge national debt size, so I don't expect the EZ to go down this road to boost the economy. Their options are getting limited.
The idea of the Fed's QE is that as treasuries are bought from private hands namely agent banks, the economy enjoys more cash floating around, and thus forcing down the value of the USD.
However, what is observed from the TARP experience is that, money being pumped into banks stays just within the banks. Less than the desired amount is being pushed out into the rest of the economy on fear of corporate and consumer defaults.
QE this time around might suffer the same fate. As it is unclear how much money is being dumped into the system, so is USD weakness.
Furthermore, the case for USD support is that it is still, one of the safest if not the safest on a relative basis.
If true weakening of the USD were anything to go, my guess is it'll probably near the bottom of the recession when things are looking up again, and when banks will lend more freely, and when money velocity starts to head up.
Let's hope that comes sooner than later.
Against the major currencies like the EUR, GBP and AUD the USD lost up 600 pts at its height, helped by rallying stocks. These sure make very good trading opportunities.
However, from here, I feel the trend for dollar weakening is perhaps less clear.
I'd not bet against the USD on a long term basis without looking out for clear signs what policymakers around the world will do next.
Recent strong selling of the GBP and EUR highlights the market's unwillingness to hold on to these currencies. The UK is in the midst of QE as well, and the EUR is still waiting for a breakthrough, or an implosion.
Note that Chancellor Merkel rejects the idea of a US-style stimulus package due to a huge national debt size, so I don't expect the EZ to go down this road to boost the economy. Their options are getting limited.
The idea of the Fed's QE is that as treasuries are bought from private hands namely agent banks, the economy enjoys more cash floating around, and thus forcing down the value of the USD.
However, what is observed from the TARP experience is that, money being pumped into banks stays just within the banks. Less than the desired amount is being pushed out into the rest of the economy on fear of corporate and consumer defaults.
QE this time around might suffer the same fate. As it is unclear how much money is being dumped into the system, so is USD weakness.
Furthermore, the case for USD support is that it is still, one of the safest if not the safest on a relative basis.
If true weakening of the USD were anything to go, my guess is it'll probably near the bottom of the recession when things are looking up again, and when banks will lend more freely, and when money velocity starts to head up.
Let's hope that comes sooner than later.
Friday, March 20, 2009
ECB under pressure
With the Rambo move by the Fed to implement Quant Easing or QE, the ECB suddenly finds itself under pressure to do the same as well.
Major economies like the US and the UK are doing what they can to inject cash into money supply so as to reflate the economies and get money flowing around again.
If proven effective, the worry of deflation will be far from their minds as the excess money will find their way into the prices of goods and services.
However the ECB is standing still for the moment. The eurozone will be in danger of deflation if the they continue to take no steps to release more liquidity in a more direct way.
In a worse case scenario, prices of goods and services will come down, pulling salaries down as well. Asset prices will also fall, endangering overall economic growth in the Eurozone.
In this sense, the Eurozone appears to be behind the curve.
That saying, it is rather difficult for the EZ to do the above-mentioned for its economy. In my team meeting on Friday, my manager mentioned a couple of problems the ECB will have are pricing the many EZ nations' sovereign debt for purchase and that it does not have a central treasury like the US or UK.
On top of that, the ECB has some way to go in terms of cutting its key rate. It stands at 1.5% now. So QE, if it ever happens, will be further down the road.
Yesterday, some ECB members like Weber too, hinted at further easing. The market is pricing in a 50 bps cut at the Apr meeting.
So it'll be interesting to see if the market continues to buy more of EUR now because of the interest rate differential, or still keep to the safe haven allure of the USD albeit the fallout from QE.
USD Quantitative Easing
The market basically had a surprise when the Fed announced following its meeting that it will implement QE officially on Wednesday.
Besides using USD 300 bn to buy long term (LT) treasuries, the Fed will commit USD 700 bn more to purchase agency debt and other forms of Asset Backed Securities so as to bring down interest rates further and inject liquidity into the economy.
To do this, the Fed has to print more USD and bring it into the money supply, effectively depreciating the USD.
The results are telling, immediately the announcement, LT yields fell as investors bought treasuries in droves.
On Thursday, 30 yr mortgage rates dipped below 5%, a multi-year low.
And we in Singapore are complaining that home prices including (HDB 2.5%) interest are expensive? The median price of homes in the US is in dollar terms, the same as us ~ over 200 k.
The main impact on forex is that the USD was sold sharply as investors escaped the USD into other currencies.
EURUSD hit a high of 1.3738 for the week and the SGD followed EUR strength as usual, bringing the USDSGD pair to 1.5053 at the week's low.
GBPUSD topped close to 1.46.
On my last few postings, the EURUSD and GBPUSD had been flirting with only 1.30 and 1.40 respectively.
What a difference a week makes.
Besides using USD 300 bn to buy long term (LT) treasuries, the Fed will commit USD 700 bn more to purchase agency debt and other forms of Asset Backed Securities so as to bring down interest rates further and inject liquidity into the economy.
To do this, the Fed has to print more USD and bring it into the money supply, effectively depreciating the USD.
The results are telling, immediately the announcement, LT yields fell as investors bought treasuries in droves.
On Thursday, 30 yr mortgage rates dipped below 5%, a multi-year low.
And we in Singapore are complaining that home prices including (HDB 2.5%) interest are expensive? The median price of homes in the US is in dollar terms, the same as us ~ over 200 k.
The main impact on forex is that the USD was sold sharply as investors escaped the USD into other currencies.
EURUSD hit a high of 1.3738 for the week and the SGD followed EUR strength as usual, bringing the USDSGD pair to 1.5053 at the week's low.
GBPUSD topped close to 1.46.
On my last few postings, the EURUSD and GBPUSD had been flirting with only 1.30 and 1.40 respectively.
What a difference a week makes.
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