02/14/2010 – Risks to growth intensify; risk relapse likely

* Risks to growth intensify; risk relapse likely
* EUR remains under extreme pressure
* Greece in the headlines
* The pulse of US housing and the buck
* Sterling should be prepared for strong CPI
* Key data and events to watch next week

Key currencies largely consolidated this past week, with the commodity currencies (AUD & CAD) generally outperforming, the EUR trading heavy across the board, and the USD index mostly unchanged on the week. Stock markets similarly held to rather narrow ranges, while commodities saw some upside gains, but remained within the prior week’s range. Most JPY-crosses recouped some of the prior week’s sharp losses but generally remain lower.Full text »

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02/07/2010 – Credit concerns dominate headlines, but growth is the story

* Credit concerns dominate headlines, but growth is the story
* BoE due to release Inflation Report
* Cable suffering the impact of reduced liquidity
* Spain, Portugal, Greece to remain in the headlines
* Irish stocks less hard hit this year
* Key data and events to watch next week

As we suggested in last week’s report, risky assets swooned further this past week, with stocks, commodities, gold, oil and carry trades (JPY-crosses like AUD/JPY, EUR/JPY, and CAD/JPY) all seeing steep losses, while the USD surged higher as traders sought refuge. But a sharp rebound on Friday in those markets strongly suggests a medium-term bottom has been found. The price action on Friday generated ‘hammers’ on many of those markets daily candlestick charts (a bullish reversal signal after a decline), and price declines had clearly become excessive. We look to see risk trades recover next week on bargain hunting and optimists re-loading for the much awaited global recovery, but ultimately we favor using corrections in risk trades as a selling opportunity.Full text »

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01/31/2010 – Risk is off the cliff and the unwind has just begun

* Risk is off the cliff and the unwind has just begun
* 4Q earnings better, not good enough
* US GDP in perspective
* EUR weakness not over yet
* Fundamentals still bearish for oil
* Cable, the path of least resistance
* Key data and events to watch next week

Last week we expressed caution that the risk sell-off that has characterized the month of January was at a tipping point. That point has been broken to the downside and we are now expecting a further unwinding of long risk positions, which should see stocks, commodities and the JPY-crosses (EUR/JPY, AUD/JPY, etc) extend recent declines more aggressively. The USD is likely to be the primary beneficiary of a further risk sell-off, gaining ground on both better US data and on safe haven appeal as risk aversion increases.

The fundamental backdrop remains the same as over the past few weeks–China enacting measures to slow its economy, undermining global growth outlooks; reduced expectations over the strength of the global rebound; and heightened credit/fiscal concerns in Europe (Greece-more below), the UK, and elsewhere–but we think long-risk positioning is now likely to exert a stronger influence. Long positions in gold, oil and other commodities continue to dominate, and we have seen only small reductions in the face of recent weakness, suggesting the exodus is yet to come. Numerous stock market analysts are pointing to January as a bearish reversal month after a nine-month uptrend, and we would note that the S&P 500 closed just barely below its daily Ichimoku cloud at 1074.82. Gold prices managed to hang on above the weekly Kijun line at 1078.45, but the daily picture looks more ominous, with a downside crossover of the Tenkan below the Kijun with price below the cloud, constituting a strong sell signal. We prefer to sell bounces in the commodity space, rather than chasing this move lower. Full text »

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01/24/2010 – Risk is at a tipping point

* Risk is at a tipping point
* Fed meeting could prove market moving, for a change
* Greece bond sale could be a test for the EUR
* IFO may confirm or dispel fears that pace of German recovery has lessened
* GDP data set to confirm UK finally shook off recession in Q4
* Key data and events to watch next week

In last week’s update we cautioned that risk was in retreat, and that more downside was likely to develop. This past week saw risky assets (stocks, commodities, and JPY-crosses) slide further as new Chinese lending restrictions undermined the outlook for the global recovery generally, and for commodities especially. Softer ZEW surveys and European debt concerns centered on Greece continued to drag on the EUR, and there were some signs of deficit contagion spreading to other nations as well (see more below). Mixed 4Q corporate earnings reports were already weighing on stock market sentiment when late this past week US Pres. Obama announced plans to rein in banks’ trading operations and overall size. The plans sparked fears of capital flight from the US and led to steep losses on individual banks’ shares and pressured broader markets further. On Friday, concerns over the fate of ‘Helicopter Ben’ Bernanke’s re-confirmation to a second term as Fed Chair appeared to add to market fears. (Bernanke is viewed as a friend to markets.) The USD has broadly benefitted, but the real FX movers in the current risk sell-off have been the JPY crosses, which we expect to continue to be the primary reflectors of risk sentiment. We are skeptical about the fallout on the USD from the Obama bank plans, but we can’t completely ignore it either. Full text »

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01/17/2010 – Risk is in retreat, more likely to come

* Risk is in retreat, more likely to come
* Earnings season disappointments could bring JPY opportunities
* Greece outweighs economic news in the Eurozone
* Sterling bolstered by rate speculation, CPI and labor data may support
* Key data and events to watch next week

A confluence of factors has emerged that has negatively impacted the so-called ‘risk’ trade (long stocks, commodities, gold, and JPY-crosses), which ultimately is a bet on the speed and strength of the global recovery. The starting point would seem to be last Friday’s disappointing US employment report, which was the first reminder of the long and bumpy road ahead for the world’s largest economy. This past week began with a spurt of euphoria as China reported strong export and import growth. But the party was short-lived as the very next day saw China’s central bank (PBOC) take additional steps to rein in bank lending, tweaking rates higher and raising reserve requirements, triggering fears that Chinese growth may begin to slow. All along, deficit concerns weighed on most major developed economies, most acutely in the case of Greece and the Eurozone (see more below). Fears came to a head on Thursday as ECB president Trichet made it ‘crystal clear’ that Greece would get no special treatment and had to resolve its budget shortfalls on its own. German Chancellor Merkel gravely noted that “the Greek example can put us (i.e. the EUR) under great, great pressure.” Weaker than expected US Dec. retail sales and Univ. of Michigan consumer sentiment added to the growing sense of resignation. Interestingly enough, some better than expected 4Q corporate earnings reports failed to stem the tide of pessimism (more on earnings below). And the cold snap in the northern hemisphere finally broke (at least over North America), pulling the rug out from under oil and other commodities that had benefitted from the weather. Full text »

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01/10/2010 – One step forward, two steps back

* One step forward, two steps back
* Coming soon–JPY weakness
* US Employment Remains Moribund
* No surprises from the ECB
* EUR still jittery on Greek budget issue
* Key data and events to watch next week

Or maybe that’s two steps forward and one step back. Either way, Friday’s US NFP report (more below) should serve as a reminder to those who expect a normal recovery that this rebound is going to be extremely uneven, drawn out and likely to disappoint as frequently as satisfy. But it’s not just uneven US data, it’s happening all over. European unemployment just hit 10% and would likely be even higher if not for government programs to prevent layoffs (programs that may be winding down soon). Unemployment in Europe is the highest since 1998, while Swiss joblessness is the highest since 1997. European industrial new orders and retail sales both disappointed last week. Japanese data points to ongoing sluggishness. UK consumer confidence dropped anew in Dec. while unemployment has edged to nearly 8%. And fiscal and credit concerns remain lurking in the background globally and are liable to rear up unexpectedly. Against this backdrop, it comes down to which economy is doing the least badly, or perhaps showing the best signs of stabilizing. In this light, the US comes out looking a bit more stable recently than Europe, the UK and Japan. Australia, Canada, and New Zealand continue to stand out as the best performers in the G-10 space. Full text »

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12/27/2009 – USD recovery may reverse into year-end

* USD recovery may reverse into year-end
* CAD strength still in infancy stage
* Treasury supply could send USD/JPY higher still
* Key data and events to watch next week

Note: This week’s report has been finalized earlier than normal (late Wednesday afternoon) due to holiday scheduling. As such, readers should be aware that we do not have the benefit of knowing the weekly closing price levels, and any price points we cite should be interpreted in light of those closing levels.

The USD has seen its correction extend further this past week, but critical resistance levels (EUR/USD support levels) we highlighted in last week’s issue appear to be exerting some influence. The 1.4250 level has held as support on a daily closing basis thus far, and the more significant 1.4170/90 area remains untouched. In USD/JPY, the pair finally broke above the Ichimoku cloud, but has since stalled just below the key 92.00/50 area, with rumored large supply (selling interest) at 92.00. Should USD/JPY break above the 92.00/50 resistance zone, we would expect gains to continue toward the 94.50/95.00 area in coming weeks.Full text »

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12/20/2009 – Cautious on further USD upside, but JPY may play catch-up

* Cautious on further USD upside, but JPY may play catch-up
* Fed wearing rose-colored glasses again
* Cable likely to reflect the weight of poor sterling fundamentals
* Key data and events to watch next week

Note: This week’s report has been finalized earlier than normal, around noon EST. As such, readers should be aware that we do not have the benefit of knowing the daily/weekly closing price levels, and any price points we cite should be interpreted in light of those closing levels.

The greenback has extended its recovery, bringing the USD rebound against the EUR to nearly 6% since the 1.5150 high at the end of November, and erasing all the losses seen in the 4Q. The current environment continues to develop into a perfect storm against the EUR in particular, and indeed that is where the dollar has gained the most. Credit concerns continue to pressure the EUR, with Austria nationalizing a small regional bank at the start of the week (and placing the 4th largest bank under surveillance) and a ratings cut to Greek sovereign ratings coming mid-week. To finish out the week, Friday saw the ECB increase its forecast of Eurozone bank write downs by a further 13%. The sharp rebound in the USD has caught global reserve managers off guard, and anecdotal evidence (market chatter) suggests they are increasingly pulling back from plans to sell dollars and may be moving to the other side, looking to sell EUR/USD on any rebound. In Japan, the BOJ has declared war on deflation and that promises to keep pressure on Japanese rates in the near-term, increasing the JPY’s appeal as the primary funding currency for carry trades. US rates on the other hand, look to have peaked in the short-term, with 10-year yields cresting just above 3.60% and since dropping back to around 3.50%; two year note yields peaked just below 0.90% and have since dropped back to around 0.75%. Full text »

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12/13/2009 – The dollar rebound continues

* The dollar rebound continues
* European debt concerns will subside, eventually
* FOMC likely lackluster
* Key data and events to watch next week

The greenback extended its recovery this past week, as a confluence of fundamental factors undermined other currencies and supported the USD. However, we continue to believe the primary driver of USD strength at the moment is ongoing USD short-covering from excessive positioning levels. Sovereign credit concerns out of Europe struck raw nerves at several points this week (see below), hurting European currencies (EUR, CHF, and GBP). US data generally came in on the positive side, with Nov. retail sales and preliminary Dec. Michigan consumer sentiment in particular posting stronger than forecast gains. Together with some weaker demand at US Treasury auctions, the better data led to higher US yields, as traders advanced expectations on the timing of the Fed’s first rate hike. 10-year US Treasury yields are now up around 33 bps since the start of December, providing the buck with additional support. Commodity markets continued to implode, with crude oil prices suffering their longest losing streak (8 straight days) in the last six years. Even in last year’s collapse from north of 0 down to around /bbl, there were some bounces along the way down. The exodus from commodities is at odds with the ‘economy is improving/demand is strengthening’ story line contained in the positive data, and also not wholly attributable to the rebound in the USD. Again, we are left with the impression that long-commodity bets are being exited into the end of the year and that there is more to come. Full text »

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11/22/2009 – Currency markets to remain beholden to the risk trade

* Currency markets to remain beholden to the risk trade
* Bullion’s bull-run still intact
* Sterling takes a hammering, focus on 3Q GDP and public finances
* Key data and events to watch next week

The moves this week should convince anyone that had any doubt, that the correlation between equity markets and currencies remains alive and well. It was a rollercoaster, with EUR/USD oscillating between 1.4800 support and 1.5000 resistance for the better part of the week. The S&P 500 meanwhile continued to find interest on either side of the pivotal 1100 level. It seems that EUR/USD 1.50 and the S&P 1100 go hand in hand as both remain extremely challenging technical and psychological levels. Indeed, both have only closed above those crucial levels three times this year – euro in October and stocks just this week. It should not surprise anyone that the correlation between these two since the beginning of the second half of 2009 has been a stellar 92%. Don’t look for much to change on this front anytime soon. Full text »

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