Contributed By: DailyFx
Japanese Yen Losing its Safe Haven Status and Thereby its Buoyancy
Fundamental Forecast for Japanese Yen: Bearish
* The OECD projects Japanese GDP to slow from 3.7 percent this year to 1.7 percent in 2011 and 1.3 percent in 2012
* USDJPY has shown significant progress in three weeks; but is it a sign of a true trend change?
It is interesting to note that over the past three weeks, we have seen strong swings in risk appetite and risk aversion. And, through it all, USDJPY has maintained a steady advance. This bullish push (the most consistent since April) is made even more meaningful by the fact that this recent advance has turned a descending trend channel that had maintained the market’s bearings for six months. It is worth noting that similar selling patterns have emerged against the euro, pound and Canadian dollar among others; so this is not simply a one-off. However, there is something remarkable to take away specifically from USDJPY’s performance as both currencies stand as safe havens that have seen their fundamental foundations crumble from beneath them.
The reason that we should focus on the USDJPY cross specifically is that over the past few years, we have seen very clear trends emerge both for and against risk appetite. When panic hit its peak, capital was flowing into both the US dollar and Japanese yen; and when confidence was restored, the tide of funds once again receded. It is short-sighted to simply attribute cause and effect through risk appetite alone; because it contradicts a few fundamental truisms. To be a safe haven, a security generally needs deep liquidity, secure financial markets, stable pricing and some level of yield. Yet, with both the dollar and yen, financial uncertainties are prevalent (hence the need for stimulus), there is a real risk of deflation, and yields fall well short of risk. Often times, it is the case that the expectations for a currency to play the role of safe haven will produce a self-fulfilled prophecy; however, such a condition will reach its limit eventually. Even the scenario whereby the unwinding of previously established carry positions can keep the yen bid will run out steam. If, the Japanese yen were not so near record or multi-year highs across the board, it would be easier to ignore this fact. However, this is not the case here.
A wind down of risk funds from the Japanese yen is akin to nuclear disarmament – it will be very slow and highly reactive. Pushing the yen down means a combination of unwinding established long-positions and placing new shorts. The prevalence of long yen positions is already limited s we have not seen a meaningful risk aversion trend from the capital markets in some time. On the other hand, taking new yen short positions would be an indirect means of taking a long-carry view. That naturally raises an investor’s risk profile. However, the picture is very different between AUDJPY and say USDJPY. For the Aussie-based pair, the carry exposure is explicit; but for the dollar-backed major, we have two ‘safe haven’ currencies. That is why, to establish the true health of the Japanese yen, we need to keep a close eye on the performance of its very different pairings.
Contributed By: DailyFx
Euro: How Will Traders React to an Irish Bailout?
Fundamental Forecast for Euro: Bearish
- Ireland ignores calls to seek aid as the EU President warns euro in a ‘survival crisis’
- Greece’s 2009 deficit is revised sharply higher to 15.4 percent of GDP
- Euro marks a trend-defining breakout but comes up short on follow through momentum
Given the title of this section, it is clear what I expect to come of the persistent problems facing Ireland. Officials from the European Union, European Central Bank and IMF have traveled to Dublin to assess the ability of the country’s financial system to stand on its own two feet. Finance Minister Lenihan’s decision not to ask for aid at the last monthly EU meeting represents a sidestep in a complicated dance of politics and risk appetite trends. His suggestion that the government is fully funded through the middle of next year is technically true; and the refusal to seek aid is a sign of fiscal conservancy and confidence in his economy. However, the capital markets are not led by example; and the Ireland’s banking system is in dire need of affordable funding. With the nation’s banks borrowing 130 billion euros from the ECB (80 percent of GDP) and Allied Irish seeing liquidity drain with a 17 percent drop in deposits so far this year; something needs to be done to stem the bleeding.
Looking ahead to next week, there is no set time for when Ireland’s unofficial auditors will release their assessment on the country’s financial condition and deliver its recommendation; but the longer a decision is pushed back, the more speculative influence will take over and the greater the sense of anxiety will grow. In fact, there are two outcomes to this scenario. If the entourage of policy officials deems the stressed economy capable of fixing itself; it would be encouraging. That said, such an assessment would very likely be completely disregarded as record yield spreads would quite clearly weigh on the banking sector’s health. The speculative market is expecting aid; and there is a clear risk that confidence would crash and funding costs would soar should that conclusion not be met. If indeed Ireland’s immediate financial troubles are smothered, sovereign bond investors would be less reticent to hold the nation’s debt and the threat of an imminent crisis will be averted – for now. This could offer a temporary boost to the euro and market-wide sentiment.
Yet, in the wake of a financial rescue for Ireland, it will be hard to ignore the fact that this is the second EU member that would have to be saved from a crisis in six months. Had it been only one, it could be written off as anomaly. Yet, with two, there are the makings of a trend. And, if we wanted to identify those countries that are at-risk of a similar fate under adverse financial conditions, we can easily make the case for Portugal and then we step up to a far bigger player: Spain. The major variable here is how long confidence lasts in the EU’s effort to support its members. Much of the prevailing sentiment will have to do with the recognition that severe austerity measures amongst the high deficit economies will choke off growth and thereby increase the deficit through lost tax revenues. In the meantime, Germany’s push for sovereign bond investors to accept a portion of future potential losses will curb demand in an already restrictive time. Furthermore, risk aversion can be stoked by factors outside the European bubble (by say US housing market concerns or the application of emerging market capital curbs); but the effect would be the same on Europe’s pained financial system. As a global sore thumb, yields differentials would continued to balloon and force EU members deeper into trouble.
Contributed By: DailyFx
US Dollar Recovery on Track as Traders Cover Short Positions
Fundamental Outlook for US Dollar: Bullish
US Dollar drops on speculation that Ireland to accept Euro Zone fiscal aid
Greenback loses on soft US CPI inflation print, broader financial market consolidation
Yet the DailyFX team remains broadly positioned for continued US Dollar strength
A week of broader market consolidation left the US Dollar roughly unchanged from last week’s close, but the Greenback’s impressive turn from significant lows warns that the currency could recover further into the weeks ahead. Speculation that Ireland would accept a fiscal aid package from the Euro Zone and the UK calmed market tensions over the stability of the Euro, and the subsequent recovery in financial market risk sentiment sunk the safe-haven US currency. Yet exceedingly volatile day-to-day swings in the US S&P 500 and other financial market risk barometers warn that sentiment remains especially fragile, and flare-ups in tensions could easily force further US Dollar strength.
Lower-tier US economic data may make event-driven volatility unlikely in the days ahead, but traders should keep an eye out for especially surprising results from a densely packed string of economic releases through Tuesday and Wednesday. Such events include Existing Home Sales data, monthly changes in Durable Goods Orders, Personal Income and Spending releases, New and Existing Home Sales purchases, and the Minutes from the most recent US Federal Open Market Committee meeting.
FOMC Minutes arguably have the greatest potential to move markets, as they will clarify the Fed’s thinking in their decision to boost controversial Quantitative Easing measures by a further $600 billion through their most recent meeting. Though their decision was almost unanimous, markets may pay especially close attention to dissenting views from within the central bank as several officials have already spoken against such efforts.
The other events certainly have the potential to shift financial market sentiment, but it may take especially above or below-forecast results for these second-tier news releases to elicit reactions from the US Dollar. Given the recent fragility in financial market risk sentiment, we would argue that risks remain to the downside on any key disappointments in consumer and housing-centric economic data.
Recent weeks of US Dollar rallies leave momentum firmly in the currency’s favor, and the past week of sideways price action seems reasonable in light of previous gains. We maintain that the US Dollar established a fairly significant low against the Euro and other key currencies in the days following the Fed’s announcement of further QE. Recent CFTC Commitment of Traders data shows that many speculators have rushed to cover USD shorts amidst a general correction across financial markets. Yet Non-Commercial traders remain fairly net-short, and a further contraction in leveraged financial bets could fuel further US Dollar strength.
Contributed By: DailyFx
Near term in crude, 5 waves down are visible from the top which confirms that the larger trend has reversed. Crude reversed close to the former 4th wave extreme of 8300 therefore the next leg lower (either wave c or 3) is probably underway towards 71.50 (May low). Above 8332 would shift focus to resistance from Fibonacci at 8400 and 8500.
Contributed By: DailyFx
As mentioned in recent days, “price needs to stay below 13775 for the immediate extremely bearish count to remain valid. A move above there could also complete an expanded flat so it is best to NOT put a stop at that level. Bottom line, the larger EURUSD trend is down and I favor selling rallies.” Forget trying to count every single market squiggle and instead focus on the fact that the EURUSD has reversed in the face of extreme sentiment. The rally from the low may be wave a of an a-b-c correction. If it is, then wave b may test 13560 before a c wave ends upwards of 13860 early next week. A rally to there would present the ultimate shorting opportunity.
Contributed By: DailyFx
The CADJPY has worked its way into an ascending channel which has remained intact since the end of October. We entered into a long position at 80.86as the pair broke above its falling channel that lasted nearly seven months. I believe this pair has a great risk to reward level. A break and a close above 82.50 will validate my bullish bias. Looking ahead, we will shift our focus to the Canadian interest rate decision. As of late, economists are forecasting the annualized inflation rate to rise to 2.2 percent in October from 1.9 percent the month prior. In turn, this report may be the catalyst needed for the CAD to push higher. At the same time, holding onto out long British pound positions despite Irish woes proved well as the currency rallied yesterday amid speculation of an Irish bailout. Though I favor additional upside in the GBPJPY, I will take profits at this level and look to re-enter if the pair manages to break and close above the 200-day moving average. On the other hand, I will remain long GBPUSD as price action managed to break above the descending channel on the 4 hour chart. However, I will take off half of my positions as the slow stochastic indicator looks poised to cross back over to the downside, hinting at a slight pull back.
Nonetheless, entering into an AUDCAD short may be in the horizon as the pair has broken below the rising channel on the 4 hour chart. Taking a look at the daily chart, a close below 0.995 may validate additional downside risks towards the 0.97 area. Interest rate expectations in Canada are 16.0 percent versus 3.0 percent in Australia. Good luck trading!!!
Contributed By: DailyFx
I remain short EURUSD from last week at reduced size, having taken partial profits on the position at 1.36. I would ideally wait for the pair to test 1.3750-1.3800 before adding to my short position. Yet the pair has since reversed at just above the 1.3700 mark and I'm not sure it will get that far. The next step seems as if a test of 1.3600 is likely, and a break below targets a fresh run towards lows.
Contributed By: DailyFx
Europe Session Key Developments
* Stocks Edge lower as China Increases Reserve Requirements
* 14 of the 18 Western European Benchmark Indexes Close Lower
European Stocks Close Lower Amid Debt Concerns and Chinese Economic Policy
European markets closed lower as investors waited on whether Ireland would accept a bailout and China increased reserve requirements in order to cool inflation. When a central bank decides to increase the reserves a bank must hold, they are essentially tightening credit and slowing the money multiplier process, thereby pursuing contractionary monetary policy. The effect of this is a decreased rate of inflation at the cost of slower economic growth. Overall, many investors feel that the economic picture remains uncertain as European debt concerns are still weighing down markets. National benchmark gauges declined in 14 of the 18 western European markets, as the FTSE 100 experienced the largest decline among the major indexes.
FTSE 100 / 5,732.83 / -35.88 / -0.62%
The FTSE 100 experienced the largest decline among the major western European gauges. Lloyds Banking Group Plc and HSBC Holdings Plc fell over one and a half percent. European banking shares dropped 2.3 percent today, the worst performance among 19 industry groups in the Stoxx Europe 600 index. Rio Tinto, the world’s third-largest mining company, fell 2.3 percent, while BHP Billiton ltd dropped 2.6 percent. Basic resource shares were the second largest decliners in the Stoxx Europe 600. Hammerson fell 2 percent as Morgan Stanley downgraded the stock to “equal weight” from “overweight.”
CAC 40 / 3,860.16 / -7.81 / -0.20%
The CAC 40 closed lower at the end of the trading session on Friday. Essilor International SA fell 0.9 percent, ending a two-day advance. The company was cut to “underperform” from “neutral” at Exane BNP Paribas. Lagardere SCA advanced 0.6 percent as the company may surpass its upgraded guidance for the year thanks to a stronger advertising market. Technicolor gained 2.6 percent, the largest advance in more than a month. The production and distribution services company announced a court rejected an appeal to its restructuring plan.
DAX / 6,843.55 / +11.44 / +0.17%
The benchmark DAX managed to be one of the few major European indexes to close in the green on Friday. Bayer jumped 2.2 percent after Germany’s largest drug and chemical maker announced it aims to cut about 800 million Euro a year in expenses. Volkswagen preferred shares surged 3 percent. The 20-member supervisory board approved the outlays for plants, vehicles, and developing the carmaker’s nine brands at a meeting today in German. Henkel AG rose 2.4 percent as the company was upgraded to “overweight” from “equal weight” at Barclays Plc.
IBEX 35 / 10,271.70 / -53.60 / -0.52%
The IBEX 35 closed lower as 7 out of 10 sectors retreated at the end of the week. The benchmark index closed lower for the first time in three days. Banco Bilbao Vizcaya Argentaria SA fell 1 percent to 8.26 Euros, the second drop this week. Spain’s second-largest bank today ends a 5.06 billion-Euro rights offering. Ferrovial SA advanced 1.6 percent, the stock’s third gain this week. The UK competition regulator announced it may reconsider its ruling that the company must sell three airports after the UK government cancel plans to build a third runway at Heathrow.
S&P/MIB / 21,385.45 / -95.92 / -0.45%
Italian equities lost 0.8 percent for the day and 0.6 percent for the week. Banca Popolare di Milano Scrl declined 2.4 percent, retreating from a 3.2 percent gain yesterday. The Milan-based cooperative bank was cute to sell from hold at UnicreditSpA. Lottomatica SpA, Italy’s largest lottery company, advanced 2.5 percent to 10.5 Euros, leading gains in the FTSE MIB.
Contributed By: DailyFx
Given all that stress that the Federal Reserve's currency debasement program is laying on the global economy, last week's G-20 summit in South Korea should have been the monetary equivalent of a military degradation for the U.S. dollar. The greenback should have been slapped across the face, stripped of its medals, and cashiered from the ranks of respected currencies. Instead the dollar escaped unscathed, retaining its privileged status as the world's reserve.
However, the meeting did have its dark moments for America. The troubles starting even before the summit began with the failure of president Obama to conclude a long-planned trade deal with South Korea. Once the G-20 meetings began in earnest, the United States made scant headway with its main initiative to pressure the Chinese on Yuan revaluation. Just when it looked like the dollar would benefit from strife in Europe, a joint statement by key European leaders signaled that potential problems within the euro-zone may have been averted. In other words, nothing from this meeting should give any confidence that the dollar has a bright future.
Over the past three years, while the Chinese Yuan has appreciated ever so slightly against the U.S. dollar, it has depreciated against almost all other major currencies. As a result, one may have expected wider support for America's calls for appreciation of the Chinese Yuan. But in Seoul this issue was buried amidst rancor and fractious all-night meetings between splintered partners. Most participants were so focused on America's second campaign of quantitative easing, that the question of Yuan appreciation was moved to the back burner.
In an effort to avert competitive devaluations, the U.S. proposed that nations should restrict their current account surpluses and deficits within agreed percentages of economic output. Ironically, this idea had been proposed by the British at Breton Woods in July 1944. But this was at a time when war-ravaged Europe was in huge current account deficit. America was in massive surplus and vetoed the idea. Now that America is in chronic deficit, it is surplus countries such as China, India, Brazil, and Germany that oppose the idea.
While such restrictions would certainly be beneficial for all, given the lack of international enforcement mechanisms, it's hard to envision how, when push comes to shove, sovereign countries would respect the guidelines. Certainly America's power to persuade is greatly diminished.
America has lost much of the enormous political, economic, and financial prestige it enjoyed following World War II. In past G-7 and G-20 meetings, what America suggested usually was adopted. Now that other nations see the United States in trouble with no clear plan, rancor has replaced respect and argument has supplanted compliance.
In economic terms, the world appears leaderless, and China is anxious to fill the vacuum. Although its economy is still but one-third the size of that of the United States, China's power is growing daily. It is clear that it will not bow to American pressure. However, as an ancient and experienced nation, China knows a thing or two about diplomacy. Publicly, at least, China withheld its closely held push to challenge the U.S. dollar's privileged role as the international reserve currency. There can be little doubt that China is carefully choosing its best moment to strike.
In the meantime, the dollar is benefited from continuing trouble in Europe. Based on the growing crisis in Ireland, it now seems clear that sovereign debt problems of many 'euro zone' countries were only papered over temporarily by the ECB and IMF rescue plan of early 2010. Hard working German voters are now voicing revulsion at the prospect of more bailouts. To stem a voter revolt, German Chancellor Merkel has called for private holders of sovereign bonds to share the losses. But there are problems with this approach.
The EU treaty precludes individual states from bailing out others for reasons deemed "unexceptional" (defined as issues within a country's control). In order to bypass this rule, Euro zone governments had persuaded their banks to buy sovereign bonds to camouflage a direct bailout. The deception worked. Investors moved funds out of the U.S. dollar and into the euro, driving it higher. However, Chancellor Merkel's pronouncement reversed this trend, the euro faced a second great crisis and the U.S. dollar experienced temporary strengthening. However, a joint G-20 announcement from the finance ministers of Germany, France, Italy, Spain, and Great Britain effectively diluted Chancellor Merkel's position. This German retreat was enough to stem euro declines.
As far as investors are concerned, the G-20 provided little new information, but confirmed the continuing drift. The international monetary system is still based upon the gravely flawed U.S. dollar. The Yuan will not be allowed to rise in the near term, the euro faces great political challenges, and the U.S. dollar seems continually to be devalued. Meantime, precious metals, key commodities, and hard currencies should continue to benefit.
Contributed By: DailyFx
I need to reflect on a few of my rules. First, I don't like to take on new positions that are short to medium-term before the weekend. Second, I like to keep my exposure to a specific currency or theme measured. I am tempting both of this requirements with my holdings heading into the weekend. In addition to the long-term and reduced size USDJPY long that is being carried over, new setups taken yesterday (so not technically in breach of my weekend rule - though I fully expected Friday to be a write off session for trend development) include short EURUSD, GBPUSD and NZDUSD. These are all based on the same concept - we are seeing a correction on a burgeoning risk aversion move that is naturally occuring given a lull in the fundamental wave that instigated the initial break. Looking ahead to next week, we have a range of fundamental themes that can easily inspire fear and deleveraging. However, it is up to the market to decide whether they will let fear overtake them. That said, we need to also account for the drained speculative interest with the extended Thanksgiving holiday period in the US - a period that usually curbs volatility as well.
As for my setups, the USDJPY carries the same explanation as before. Rather than this being a vote of confidence for the US dollar, it is based on a lack of confidence in the yen and a general belief that the Japanese currency should be so high through any concept of yield potential, financial stability or capital stability. I have a loose first target at 85; so we will see what happens. More demanding of my attention are my three new setups. EURUSD was entered short at 1.3635 with an initial stop and first target of 150 points. GBPUSD was taken short at 1.6035 with a 150 point buffer as well. And, the NZDUSD short was put on at 0.7775 with a 125 extension in both direction. I recognize that these are riskier than I usually allow for. To partially mitigate this risk, the position size is a third of my full size. Nonetheless, all of these are exposed to risk appetite trends as we await guidance on Ireland's bailout, China's inflation fight and the United States' housing problems.
Looking for those pairs that are one or two steps away from a great trade, the list is filled with some really attractive setups. At the top of my list is still that AUDCAD reversal pattern following the aggressive bull trend channel. Like gold and the S&P 500, consistent trends don't survive long without a meaningful pullback; so I continue to watch 0.99. Next is GBPJPY. This is a short-term look at the rising trend channel seen on the 60 minute chart of the past four weeks. Both a range and breakout trade is possible here. USDCHF is nearing parity in a possible reversal. GBPCAD is pushing deeper into a terminal congestion pattern. EURNZD is at the bottom of a mult-month and wide range. CHFJPY is maintaining its chop but the 83.50 pivot is looking dangerous. Finally, even though EURJPY has jumped from its range low; I'm still concerned about the euro's future.