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Weekly Fx Strategy

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Disinflation Threat to QE Currencies

Tue, Oct 13 2009, 18:52 GMT
by Ashraf Laidi

Even the tumbling USD has hit a 5-month high against the British pound. Such is the state of the deteriorating GBP as UK CPI hits a 7-year low at 1.1%.

Slowing UK CPI highlights the ensuing threat to QE currencies (USD, GBP) as diminishing inflation urgency enables central banks to further liquify bonds across the yield curve and cap rising yields resulting from higher govt borrowing. While US corporate earnings will comprise the focus of the trading week, slowing inflation will be the macrofocus from the UK , US, Canada and Eurozone.

Rising rates of savings and unemployment in a disinflationary environment will only lead into further cost-cutting at the expense of exacerbating falling payrolls and work hours. These dynamics are especially cogent in the case of sterling, whose central bank finds remains unfazed by currency weakness (unlike the Fed) and is mainly preoccupied by the risk of double dip and the yield impact of 12% of GDP deficit.

As GBP is damaged by an alternating onslaught of BoE pronouncements, sobering forecasts from think tanks and austere spending programs from politicians, the currency remains the choice of the bears during risk aversion as well as during improved risk appetite, selling it against CAD, AUD, NZD and EUR.

GBPUSD hits 5-month lows, testing the key $1.5730 support—38% retracement of the move from the 1.3660 low to the 1.7013 high. A close below $1.5730 is to clear the way for $1.5550. Any corrective rebound is seen limited at $1.5920.

EURGBP hits fresh 7-month highs at 0.94, a break of which clears way for 0.9455. This supports our year-end target of 0.97 and expectations for parity in mid Q1 2010.

Canadian dollar’s jobs-driven surge is extended by persistent gains in surge extends on the back of the 4 th consecutive daily gain in oil prices, as US crude breaks above $74.00, calling into focus the major resistance of $75.41—200 week moving average.

The unfolding strength of the Canadian dollar has yet to extend against the euro and the Aussie. FX price patterns have shown CAD strength to ensue across the board in weeks following upside surprises in Canada ’s job situation. Last week’s release of a stellar employment report showed a net rise of 30.6K jobs in September -- the first back-to-back monthly net job creation since Sep-Oct ’08. The decline in the unemployment rate to 8.4% from 8.7% was the first decrease since July 2008, an added boost to the currency.

USDCAD extends its losses to 21% year-to-date, hitting a 14-month low of 1.0270. Technically, there is little support before 1.0240 (the highs from Feb-Jul ’08). FX markets should expect to hear interventionist remarks from the Bank of Canada, which did include the currency factor as a source of difficulty in its last policy announcement.

EURCAD has fallen below our Friday target of $1.5320, reaching 2 ½ month lows, and is set up for prolonged medium term losses towards 1.5250, followed by 1.5130. Despite the speed of the selling over the last 3 sessions, relative momentum indicators (momentum vs. price) indicate prolonged losses on the weekly horizon. A rebound to no more than 1.5440, before the aforementioned targets are considered.

Published on Tue, Oct 13 2009, 18:52 GMT

Yield Curves, FX & LIBOR Trends

Thu, Sep 24 2009, 07:50 GMT
by Ashraf Laidi

CMC Markets

While FX trading seems to become increasingly bifurcated (broad USD weakness & broad JPY strength or vice versa), the unfolding trend remains a concerted move away from the QE currencies (USD, GBP) and into the commodity/high yielders as well as the EUR. Emerging talk on whether the US dollar has become the new low-yielding vehicle for carry trades financing equities, commodities and currencies vehicle highlights the difference between the USD and JPY carry trades. The latter was driven by structurally low Japanese rates (sub 1.0% since for past 10 years), which were a reflection of Japans anti-deflation policy, its current account surplus and the resulting proclivity to save.

But with the US budget deficit outpacing the level of that twice the total of the twin deficits (trade and budget) prevailing in 2004 (now at nearly 10% of GDP), there emerges the risk of renewed steeping in the US yield curve (widening spread between long and short term rates) as short term rates are dragged down by falling US LIBOR rates and long term yields chase escalating govt debt (which remains on the rise despite slowing private sector and household debt).

Yield Curve Steepening and Dollar Flattening

The chart below shows the US yield curve (as measured by the 10-2 spread) has peaked out at 2.60-2.70% in each of the last easing cycles (1991 & 2001 recessions). Thus, each time the 10-2 spread neared 2.70%, the FOMC was at the end of its easing cycle. This time, the two main forces that could help the current steeping exceed the highs of 1992 and 2003 are soaring US govt debt and secular decline in the US dollar. From a debt standpoint, despite evidence of household deleveraging in Q2, Federal debt issuance shows no sign of abating, especially when seen through the treasury auctions, which continue to reach new record issuance every month. From an FX standpoint, the dollar's heightened vulnerability emerges from its low yield and recurring role as a funding vehicle for the global recovery (or stability) play. Such vulnerability will remain despite the USD's preservation of its role as a reserve currency. Meanwhile, we see no change in the notion that rising risk aversion is the only viable source of any durable dollar rebound.

The Fed could hope to alleviate the steepening yield curve by renewing its program of asset purchases (not an option from an exit strategy-minded central bank). But any sign of extending the asset-purchase program would entail an extension of QE and a green light for traders to send the currency into danger territory. Opting between fast USD selling and excessive yield run-up is one of the Fed's many dilemmas. Such vicious circle remains the principal driver for hedge funds and other central banks to accelerate their build up of precious metals, which bolster the case for $1,200 per ounce in gold before year-end.

Oversold vs. Undervalued

The USD may be oversold in terms of excessive optimism in equities, USD shorts in futures markets and the excessive ascent in other currencies whose economies remain in or close to QE, but not necessarily undervalued as soaring debt deficit nears 10% of GDP as well as the fact that US growth remains negative (disproving the FIFO hypothesis that US would enter and exit recession before the rest of the world). With Germany, Norway, Australia, S.Korea, Hong Kong and New Zealand each back into positive GDPO growth), such broad evidence of economic stabilization outside the US offers tremendous justification for asset managers to take diversify their stock selection out of the US.

2005 and 2008

Some historical perspective also helps. Ever since the dollar bear market began in Q1 2002, the US currency has had 2 legitimate recoveries; the 2005 rebound, which largely resulted from the temporary tax holiday (Homeland Investment Act) designed to incentives US multinationals to repatriate earnings; and the 2008 rebound driven by the stampeding out of commodity and emerging market plays into safer USD-denominated cash. The 2005 rebound was also associated with the Federal Reserve being the first major central bank to raise rates following the 2001-02 recession. Not only the Fed is highly unlikely to precede any major central bank in raising rates, but any tax holiday from the Obama administration would surely be mimicked by other (as Japan is already proposing).

And so the only durable means for the USD to avoid such developments would be for the US recovery to be consumer-based . But as the transmission mechanism between the bank liquidity and consumer demand remains broken by weak bank lending, continued foreclosures and rising unemployment rates, the demand source for the necessary increase in the next earnings season will remain tepid at best.

No Wrap-up without Reiterating GBP Bearishness

Excluding USD, GBP emerges as the broad underperformer even during improved risk appetite such as today, followed closely by JPY. Plummeting sterling LIBOR rates in the aftermath of bank of England Governor King's "negative interest rate" reminders and Lloyds' failed bid to exit govt asset protection program are likely here to stay especially amid an expected continuation of the BoEs QE.

This suggests that GBPUSD and GBPJPY would re-emerge amid the most notable losers during the next wave of risk aversion (GBPUSD capped at $1.6720 and GBPJPY capped at 153, eyeing 145.05). This would be closely followed by CADJPY, NZDJPY and AUDJPY. The chart of LIBOR rates below cogently illustrate the extent of the speed of USD LIBOR falling below Japan's zero-range rates as well as GBP LIBOR's continued decline, which should soon reside in the territory of JPY and USD.

Published on Thu, Sep 24 2009, 07:50 GMT

VIX, Oil, BRICS & Sterling's Sell−Appeal

Mon, Aug 24 2009, 13:46 GMT
by Ashraf Laidi

CMC Markets

Just when we started highlighting the case for peaking risk appetite in last week's article, oil prices picked up the mantle for the bulls and triggered the sell USD, buy risk trade, partly caused by a plunge in weekly crude oil inventories. The previously unimaginable break above $74 per barrel has taken place this week, courtesy of growth optimism from better than expected Eurozone PMI figures and the 4th straight monthly increase in US existing home sales. But with currencies such as GBP and CAD solely rallying on the USD-side of the equation, their secular lack of fundamental strength has led to rapid reversals off their highs. FX markets are reluctant to retain any gains in risk currencies (currencies with high positive correlation with equities such as GBP, CAD, AUD and EUR).

Market participants are increasingly aware that intermittent bouts of risk appetite remain largely driven by inventory-related price jumps in oil rather than signs of improved demand or upside economic surprises. Consequentially, energy-related members of major equity indices have dominated the advancers.

Oil's Resistance & VIX Support

But with equities dealing a powerful Friday blow to the bears by hitting fresh highs for the year, we need to take a longer perspective for the general pulse of risk appetite, looking for any red flags lurking in the technical horizon. The charts below show $74.59 on oil and 23.00 on the VIX both mark their respective 200-week moving averages, thereby, serving as the underpinnings of any limitations in prolonged risk appetite. The almost perfectly horizontal shape of the oils 200-week MA manifests a relatively flat trend, which also suggests a mean-reverting trend for the fuel.

These long term measures of volatility and crude are especially vital for gauging the next destination in strengthening appetite, especially after the S&P500 closed the day at 1,026, well above the 1,014 resistance, which is the 38% retracement of the decline from the all time high of October 2007 to the 12-year low of March 2009. And so lets keep a close watch on these two levels in crude and the VIX.

BRICS Meet Mr. Fibonacci

While the Shanghai Composite Index has finally become a household item among individual investors and the media following its 17% slump off its record highs, we first warned of this unsustainable price action on July 29th, when the index fell 5% before peaking 4 days horizontal line38% retracement of the decline from the all time high of 2007 to the low of 2008. The other 3 charts show how the main equity indices of other 3 BRICs members; Brazils Bovespa, Russias Micex and Indias Sensex, each of which saw its 8-9 month rally stall at key Fibonacci retracement levels. Other than respecting major retracement resistance levels, these high profile emerging market members could be at risk of sustaining further blows later in the quarter owing to the declining weekly stochastics, spelling double bearish divergence. The currency impact of these indices is their allocation of risk cash, which is largely mobilized away from USD and JPY. Thus, rising BRICS is increasingly synonymous with strengthening EUR, GBP, AUD, CAD and NZD

Sterling's "Sell Appeal"

While our secular bearish view on the US dollar remains intact, we find more downside in the British pound against USD, and JPY over the medium term (into early Q4). Since pointing out last week the importance for GBPUSD to hold above its 50-day MA in the face of the headwinds from a dovish Bank of England, the pair has increasingly shown extreme signs of toppishness. The 3-hour chart below highlights how the bears are dominating the flow and any bounce towards $1.66 quickly becomes prey for the bears. Whether we get a fersh round of negative UK data, oil backs off its 200-week moving average or/and the VIX further pushes off its 200-week average, GBP will be due to retest $1.6280, before the targetting $1.57.

Published on Mon, Aug 24 2009, 13:46 GMT

Quantitative Easing & Currency Strengthening

Fri, Aug 7 2009, 09:26 GMT
by Ashraf Laidi

CMC Markets

Sterling Contracts as BoE Expands QE

Sterling dropped across the board today after the Bank of England expanded its quantitative easing program by adding an extra 50 billion of asset purchases into the next 3 months. Yields on 10 year guilts drop 35 bps to 3.57%, GBPUSD shed 200 pts, while EURGBP shot up 100 pts to 0.8555, further proving the 0.84 support to be a key foundation in the cross pairs cyclical ascent.

The above equation surely must have been examined by the Bank of England. With oil prices doubling year to date, sterling rising 25% vs USD and 11% vs EUR respectively and unemployment still on the rise, the Bank of England could run the risk of prolonging the tightening mechanism via excessive GBP gains in the event of closing the door on QE. For the ECB, euro is up 16% from the years lows, unemployment is back above 9% and oil prices are still more costly (despite strong EUR), all at a time when annual inflation has turned negative.

QE Easing vs. Currency Strengthening

Since the Bank of England has frequently addressed the positive impact of currency weakness in stimulating the economy, today's QE expansion was no major surprise, especially as it forecasts GDP growth contraction and sub-2% inflation well into Q1 2009. The BoE must also have been concerned with sterlings resurfacing positive response to improved risk appetite (mainly against USD). The other main risk to a definitive conclusion to QE is the potential negative impact on equity indices. Thus, tactically, the BoE could not afford to bear the currency repercussions from concluding QE, especially at a time when USD weakness has become synonymous with global recovery.

Building Blocks to Global Risk Aversion?

The charts below illustrate what could be the building blocks to a potentially concerted downturn in global risk appetite, ranging from peaking oil prices (failure to regain $73 triple top), struggling Chinese stocks (failed recovery from the years biggest daily decline) and prolonged signs of a well cemented bottom in the VIX (July chart showed classic sign of indecision at the bottom of the downcycle). With the US equities-oil correlation as high as 0.85 this past 8 weeks, the unsustainable run-up in the fuel seems to justify the bearish divergence in the oscillators throughout US, UK and Eurozone equity indices, as well as the Shanghai Composite Index below.

Loonie's Tipping Point

CAD's weakness is highlighted by its muted response to the latest spike in oil prices as the impact of Wednesdays interventionist remarks from Canadian Finance Minister Flaherty warning against excessive currency strength. But with US crude increasingly struggling to overcome the $73 resistance, Canadas jobless still on the rise and verbal intervention at its most vocal since last year, the downside risks for the loonie are growing appreciably. This renders equities as the potential tipping point for concerted CAD selling, especially as major US equity indices (S&P500 and Dow) have shown a 0.75 correlation with the Canadian currency (as expressed in USDCAD and CADJPY).

Readers have already been warned of the incipient recovery in USDCAD on Monday after bottoming out at the trend support of 1.0690. Our interim target of 1.0780, is expected to be followed by 1.09. Friday's release of Canada's July employment report (11:00 EST 1.5 hrs before US payrolls) could be the catalyst for prolonged weakness as Canada's unemployment rate may hit as high as 8.9% from June's 8.6%, with payrolls expected -20K after -7K.

Published on Fri, Aug 7 2009, 09:26 GMT

Dollar Stabilization & Stock/Gold Ratio

Tue, Jul 28 2009, 15:57 GMT
by Ashraf Laidi

CMC Markets

Dollar weakness has been excessive...at least for now..

The overnight wave of dollar selling was mostly led by a fresh wave of buying in commodity currencies (rather than only rising equities) courtesy of +$70 in crude prices and hawkish comments from the Reserve Bank of Australia raising the possibility of rate hikes before a peak in the unemployment rate. Markets were already expecting the RBA to raise rates by 25 bps by year-end. Todays comments further boost the long term viability of the currency. But current US dollar weakness shows to have grown unsustainable considering the related expansion in risk appetite and the lack of unjustifiable data developments in the Eurozone, UK, Canada and New Zealand--and not to mention recent rhetoric from central bankers and finance Ministry officials to jawbone the latest strength in their currencies. Accordingly, we cannot ignore the flattening momentum in G-5 equities over the last 3 sessions, which is beginning to appear similar to the period prevailing in the first week of June.

The Dollar Index (basket against 6 currencies with EUR accounting for 57% of the basket) has tested the June lows at 78.31, a break of which would be the lowest since December. We should once again expect to hold at 78.25 -- the 61.8% retracement of the rise from the 71.29 low to the 89.50 high. The fact that dollar weakness occurred despite a flat Tuesday close in the Nikkei underlines the prevalence of the sell-USD status quo, which was magnified earlier by hawkish comments from the RBA. But its time for a corrective bounce again.

Current price action suggesting unsustainability of further USD weakness reflected in the lack of follow-through in EURUSD, and GBPUSD, as market remains unwilling to close at its intraday highs (trend of past 7 sessions). Throughout last week, we addressed the failure by these currencies to close at or near their intraday highs, a recurring trend that began to suggest unsustainability in these rallies.

Thus, the equivalent of the 77.90 support in the dollar index translates roughly to $1.4320 in EURUSD resistance, $1.6570 in GBPUSD resistance, 0.8360-70 in AUDUSD and 0.6650 in NZDUSD, all of which are expected to hold into first week of August. Prior to this morning's US data release we asked in our Intraday Market Thoughts (08:30 ET) "If equities hardly managed a rebound despite a sharp increase in US new home sales, then what would they do in case of renewed decline in S&P/Case Shiller home price index and US July consumer confidence". Indeed, consumer confidence slumped to 46.6 in July, even at a time of rallying equities. We remind that the June 30th release of the June consumer confidence coincided with the intermediate peak in equity indices before a 6% decline occurred in the ensuing 2 weeks.

How Much Beyond Parity in S&P500/Gold Ratio?

One week after the S&P500/Gold ratio rose to parity, the equity index has garnered further ground to hit 1.03, its highest level since January. The daily chart below shows the rising S&P/Gold ratio to be a result of the superiority of equities vs metals in March. But as the Fed began purchasing US treasuries in April, inflationary concerns stemming from a potential debasement of the US currency prompted capital into metals. The broadening advances in global risk appetite of the past 4 months have prompted gains in both gold and equities, leading to a consolidation in the equity/gold ratio.

The only viable means for the equity/gold ratio to regain its 2008 highs (S&P/Gold regains 1.10), would be for the Fef to begin withdrawing liquidity (exit strategy via selling back treasuries) without upsetting equity markets. At the present macro juncture, this is highly unlikely for at least the next 2 months. Only when unemployment has shown clear signs of peak and GDP growth emerges from slowing decline to positive growth, would a rally in equities be sufficiently strong to overcome a tighter monetary policy.

For now, with equities being overstretched in terms of valuations and nonsupportive macro climate (excessive emphasis on cost-cutting rather than revenue growth), a gradual retreat in stocks and metals is the more likely course into end of Q3. But the ensuing retreat in gold may not breach below the 880 level considering the escalating fiscal imbalances in the US Federal Govt as well as the individual States. Thus, we expect the recent ascent in equities relative to gold to be nearing its peak, without exceeding 1.05 in S&P500 / Gold, 9.5 in Dow30 / Gold, 1.7 in NASDAQ100 / Gold and 4.8 in FTSE 100 / Gold.

Published on Tue, Jul 28 2009, 15:57 GMT

What comes around...

Wed, Jun 24 2009, 15:18 GMT
by Ashraf Laidi

CMC Markets

GBP is knocked off its highs hours after the SNB intervened by selling francs, propelling it vs. GBP, EUR and USD. Bank of England's King and Barker say pound "appreciation has been unhelpful" and that previous sterling weakness would help UK recover faster than other nations. Such talk does not go unnoticed by FX traders as the emerging rhetoric continues to aim at keeping fx strength in check.

In such an environment, gold prices do tend to appreciate (as central banks are deemed to engage in currency-debasing tendencies). WSJ had a piece about Fed not caring much about current dollar weakness, which is a fair remark to make considering the Fed's current priority is to slow down the pace of rising yields.

Published on Wed, Jun 24 2009, 15:18 GMT

Yield Shoots, Dollar Leaves

Thu, May 28 2009, 15:08 GMT
by Ashraf Laidi

CMC Markets

Talk of Fed Exit Strategy is Premature. Yesterdays 23-basis point jump in 10-year yields to 3.74% may have been helped by mortgage backed securities traders hedging, but the upward trend remains clearly intact. With Fed increasingly behind the curve in catching up with US Treasurys relentless bond issues, 10 year yields have now retraced over 50% of their decline from their 5.32% high of June 2007 to their record low of 2.03% in December. The path is now paved towards the 4.1% market, last attained in October 2008. We cannot imagine the Fed sticking with its current plan to purchase $300 bln in treasuries when their yields are exasperating the fragile jobless recovery and further endangering the value of their foreign holders. The only solution so far is for the FOMC to step up purchases towards the $500-700 billion target, the implications of which will flash the green-light for dollar selling.

"Green Shoots" optimists, credit rating pessimists and bonds-to-stocks rotation realists have all provided arguments for the jump in bond yields. The acceleration could be extended by reduced portfolio weightings in government bonds and onto metals and agriculture. Portfolio re-allocations from fixed income to commodities may be uncommon, but central banks reflationary policies leave little choice for investors to pursue seek capital preservation strategies.

The chart above illustrates the USD index/10 yr yield index ratio, highlighting the ensuing retracement in the value of the greenback relative to bond yields after the ratio shot up to a record high of 37 in November. A rising ratio reflects an appreciating greenback relative to bond prices, while a declining ratio highlights the bonds underperformance relative to the US currency. The overshoot in the USD/Yield ratio of Q4 reflected the combination of violent repatriation flows into US treasuries, which boosted the USD and dragged down yields. The ratio, currently at 22 (80.9/3.7) is above its 39-year average of 15 and is bound for further declinesin line with broader retreat in the greenback.

The EURUSD chart below supports the view for continued gains towards the $1.41, followed by $1.47 by end of quarter. Meanwhile we could see an interim retreat limited to $1.3720-30s. The same applies for AUDUSD, whose support holds at 0.7650, while paving the way for 0.820

More Speculative Dollar Shorts Ahead. Last week's data from currency futures showed euro longs vs. USD exceeded the shorts by 12,250 contractsthe highest level since the week of July 15 (the week when EURUSD hit its record high). Meanwhile, yen longs vs. USD exceeded the shorts by 6,000 contracts, the highest since March. Aussie net longs vs. USD also hit their highest since July, reflecting the extent of deepening anti-USD sentiment among the speculative (non-commercial) community. Considering that EUR and JPY net longs vs. USD are about 11 times lower than their record highs, speculators have plenty of upside against the USD in terms of quantity as well as price.

Published on Thu, May 28 2009, 15:08 GMT

Oil to Underperform Metals

Thu, May 14 2009, 16:47 GMT
by Ashraf Laidi

CMC Markets

While both oil and equity indices reveal preliminary signs of a consolidation, downward momentum is particularly expected to weigh on oil. This is especially supported by my expectation for oil prices to underperform metals, which is signalled by a looming rebound in the Gold/Oil ratio. The chart below cogently illustrates how the turning points in the Gold/Oil ratio are driven by commodity markets' optimism with the economy. Thus, a rising G/O ratio occurs during deteriorating sentiment (expressed primarily by oil weakness) while a falling G/O ratio emerges in tandem with improved market sentiment. And despite the decline in the G/O ratio from its 14-year highs attained in February, it continued to hold above its 200-day MA, which hasn't been broken since last fall.

Notably, the "green shoots" theme of the past 8 weeks unleashed substantial gains in oil prices (+60% from Feb lows), which outweighed the recovery in gold (+12% from Jan lows), silver (+24% from Jan lows) and copper (+47% from Jan lows). Accordingly, the Gold/Oil ratio fell 37% its February highs of 26.0. And with equity indices due for prolonged pullback (macropicture does not justify stocks further nearing to fair value) and the prospects for another govt-driven boost for banks in Q2 diminishing, risk aversion trades are set to re-emerge in favour of metals (led by silver), the yen, the dollar (to lesser extent than yen)all at the expense of equities and energy prices.

Readers of our March 13 piece Here Comes the 2-Month Cycle recall how we predicted the bear market rally would last for 2 months. If equities stick to this 2-month pattern (as they have since March 2008), then we could be on the cusp of a fresh downleg into late Q2.

Oil technicals suggest an initial target of $54 by early next week, followed by $51.80, with any attempts for a rebound seen limited at $57.80. We reiterate our positive outlook for gold and silver from last week's piece, backed by the notion of a potential win-win situation for gold, silver and copper whereby: (i) any further gains in equities would fuel metals on improved global risk appetite (what's good for China & the green shoots theory is good for metals) and; (ii) any pullback in equities (and banks) could fuel the rotation from financials into metals and ETFs. Technically, each of the last 3 attempts by gold to break below its 200-day MA has failed over the past 4 weeks. $935 appeared as the initial target for gold, followed by $975. A clear break of $1,100 isn't seen until end of Q2.

Despite falling risk appetite over the past days, the dollars stabilization has paled compared to the rebound in the yen as the US currency has yet to shake off the concerns of soaring bond yields, contracting economy and recent remarks by Japanese politicians calling for the halt of treasury purchases (although those sounded like only political posturing by the leader of the opposition party). Canadian dollar seems well past its moment in the sun and is set for further retreat, with USDCAD targeting at 1.1850, followed by 1.1910-- the 200-day MA. The sell-oil story remains a fundamental driver as technicals show gradual signs of a breakdown, eyeing $54.60 as the next key target.

Published on Thu, May 14 2009, 16:47 GMT

Golden Chance from FX−Equity Play

Fri, May 8 2009, 08:30 GMT
by Ashraf Laidi

CMC Markets

You must have read by now that about 70% of activity in currency markets over the last 2 years has been largely driven by risk appetite, with equity indices being the primary independent variable steering FX flows. But there are times when currencies peak or bottom 2-3 days before equities begin to turnaround. The more resounding and recent example was the March 4th bottom in the EURUSD (peak in the US dollar), which occurred 2 days before the low in the major stocks indices. That low in the EURUSD coincided with the peak in the US dollar index at 89.62, which happened to fall right below the 38% retracement of the major decline from the 2002 high (top of dollar bull market) to the all time low of March 2008. On March 10th, we warned the dollar index would reach today's level of 84, 10 year yields would exceed 3% and S&P500 would regain the 800 level, with each level prominently displayed.

So does today's euro test of its 200-day MA for the first time in 9 months forewarn a looming top in equities? Various measures of sentiment suggest the current 35% rally in the S&P500 from its March lows has the configurations of a typical bear market rally, where sentiment is 3x as much as as that of bull market rallies. What may have been an attractive proposition to buy stocks 8 weeks ago when indices were at 17-year lows has turned into a momentum trade fuelled by the helium of second derivative, postulating that slowing pace of contraction warrants the fastest (magnitude over time) bear market rally in history. Will stocks be right to rally another 3% on Friday in the event that US jobs turned out to lose only half a million instead of the forecast 600K?

Today's ECB announcement to buy covered bonds triggered a knee-jerk drop but the decline in US jobless claims towards the 600K level (lowest since Jan) further boosted risk appetite at the expense of the dollar, yen and bond prices and to the benefit of EUR and commodity currencies. Considering the risks that the current market recovery (rising equities/falling dollar) may be overdone, Forex markets are increasingly cautious whether to the push the envelope beyond the 200-day moving average (best measure of long term trend). EURSD's rally stopped right at its own 200-day MA ($1.3470), while S&P500 remains 40 pts below its 200-day MA (960).

GOLDEN IMPLICATION: As metals (and rest of commodities) embraced the green shoots story and managed to rally along with stocks over the past 2 weeks, a possible win-win scenario emerges for metals (gold and silver), whereby (i) further gains in equities would fuel metals on improved global risk appetite (what's good for China is good for metals) and (ii) any retreat in equities (and banks) could fuel the rotation from financials into metals and ETFs; and (iii) each of the 3 attempts to break below gold's 200-day MA have failed over the past 4 weeks. $935 appears as the initial target for gold, followed by $975. A clear break of $1,100 isn't seen until end of Q2.

With the EURUSD testing its 200-day MA, the FTSE-100 doing the same and the S&P500 and Dow not far behind, measures of risk appetite in FX and equities are pushing the envelopes. The trade in gold and silver is already taking place. In FX, scaling up short positions n CAD, NZD and GBP vs USD and JPY could well be the emerging FX trade as each bank sets to make the case with its own version of stress tests.

Published on Fri, May 8 2009, 08:30 GMT

Rising Yields Fight the Fed

Mon, Apr 27 2009, 16:27 GMT
by Ashraf Laidi

CMC Markets

Cant' fight the Fed? Bond vigilantes are fighting the Fed and winning at bidding up bond yields. Short of another shock-&-awe policy announcement this Wednesday, the FOMC decision is likely to generate fresh dollar strength against risk currencies (non-JPY).The FOMC announcement is not expected to generate the fireworks from the March 18 meeting of buying long term Treasuries. Yet, considering the combination of rising US bond yields testing 5-month highs with $101 billion in new issuance this week, the need for the Fed to rein in long yields could re-emerge. In the event that the FOMC statement makes a discreet reference to improved market economic/dynamics (such as slowing pace of decline, tentative signs of stability), bond yields could easily snap back up. To prevent that, the Fed will have to clearly reiterate that the "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period".

With the US Treasury estimated to borrow about $3 for each $1 purchased by the Federal Reserve this year in long term paper and agency mortgage securities, supply will continue overwhelming demand, and so will the upward impact on bond yields. And as the US Treasury/Fed grows more sensitive to China's concerns with the repercussions of soaring US debt, stabilizing long term yields becomes more paramount than ever. The FOMC decision to buy up to $300 billion in LT treasuries at the March 18 meeting was a surprise due to the Fed's prevailing rhetoric at the time signalling no immediate need for such purchases. But when we consider the fact that Chinese Premier Wen Jiabao had stated earlier that week the need for the "...United States to honour its words, stay a credible nation and ensure the safety of Chinese assets..." the Fed decision becomes less of a surprise. Those comments had lifted 10 year yields for three consecutive days leading to the FOMC decision.

With the dollar sustaining strength against most major currencies, the Feds priority will remain geared at stabilizing bond yields without worrying about prompting a durable sell-off in the currency. The Fed hopes for well received auctions this week ($40 bln in 2-year notes Monday, $35 bln in 5-year notes, $26 bln in 7-year notes on Wednesday. Then right after the Wednesday decision, the Treasury will announce how much in 10 and 20-year treasuries it intends to raise.

Only to the extent to the that FOMC announcement succeeds in dragging down bond yields will the decision weigh on the US dollar to the benefit of gold. The chart below illustrates that the inverse correlation between the gold and yields had intensified earlier this year as markets began to anticipate the Feds purchases of LT treasuries, which helps gold via a deepening of credit easing and dollar declines. The daily correlation since April 1st was a significant -0.62, compared to a merely -0.27 since January and -0.09 since September.

Considering the upward movement in global bond yields, this weeks US auctions and growing signs of stabilization in some economic data sets, the FOMC will have to pull another shock-&-awe announcement on Wednesday to bring down yields. Anything short of that, the dollar could resume its upward momentum against risk currencies (non-JPY), while gold is likely to be caught up between the negative effects from a rising dollar and the positive impact from a falling stock market. Hence, absence of aggressive Fed action could once again dissipate the inverse gold-treasury relationship (both move higher), especially if stocks are pressured anew.

Published on Mon, Apr 27 2009, 16:27 GMT

Canada Goes Japanese

Tue, Apr 21 2009, 13:45 GMT
by Ashraf Laidi

CMC Markets

Canada’s decision to target monetary reserves of C$ billion is textbook “quantitative easing” (not only credit easing), which is the way the Bank of Japan announced policy easing in 2002-04. Canadian dollar damaged across the board as the Bank of Canada is the latest central bank to dive into quantitative easing by unexpectedly cutting rates by 25-bps to a historical low of 0.25%, revising down its 2009 GDP growth forecast to -3% from previous -1.2% and revises 2010 GDOP growth forecast to +2.5% in 2010 from earlier +3.8%. Market was expecting rates unchanged, followed by an explanation of its intentions on Thursdays’ policy update. But decision to balance a target balance is weighing on the loonie across the board. Considering the escalating positive correlation between CAD and equities (+0.74 since April and +0.73 since Jan) any further deterioration in risk appetite is to magnify losses in CAD. USDCAD seen extending gains towards 1.2650, CADJPY eyes 75.70 and EURCAD at 1.6360.

Published on Tue, Apr 21 2009, 13:45 GMT

Selective Carry Trades in FX/Equities

Wed, Apr 15 2009, 16:21 GMT
by Ashraf Laidi

CMC Markets

Global risk aversion gradually returns as equity indices struggle in passing the earnings test. Our oft-mentioned 860-865 target in the S&P500 denoting the +30% rally mark from the March low was tested without success, further highlighting the significance of the implications for the latest equity rally. Although the S&P500 breached above the 50 and 100-day moving averages, these moving averages stand halfway between the 200-day MA (989) and the March low (666). The wide disparity between the 100 and 200 day MAs in US indices highlights the speed of the recent advances as they managed to breach above medium term trend measures (50 and 100-day MAs) but still remain far below the longer trend measure (200-day MA) which remains dwarfed by the longer-term trend.

While the relationship between equities and currencies evolved since the ongoing retreat in volatility 4 weeks ago, the principal rule of behind risk and lower yielding currencies continues to hold. The upper chart shows the relationship between the S&P500 and selected currency pairs with notably positive correlation. AUDUSD and USDCAD (expressed in inverted terms on chart as CADUSD) have shown the highest correlation with the S&P500 since March (recovery in stocks) at 0.78 and -0.77 respectively--but for different reasons. Aussies correlation with equities had been more robust during a rising market, while the loonies correlation with equities had been slightly higher during a falling market. NZD continues to attract strong selling interest against USD and JPY during falling equities due to lingering negativism and expectations of at least 50-bps in RBNZ rate cuts. The Canadian dollar has largely benefited from a rebound in oil prices and steady oil prices, but the looming threat of quantitative easing from the Bank of Canada as well as the lagging effect of US macro-deterioration on Canada raises doubts about the credibility of the loonie's advances.

The lower chart graphs the relationship between GBPUSD, EURUSD, FTSE-100 and S&P500.

Since Jan 1st, GBPUSD showed overall weak daily positive correlation with the S&P500 and FTSE-100 at 0.33 and 0.28 respectively. The correlation remained weak even during the years worst 4-week period (Feb 9th- Mar 9th). In contrast, EURUSD, proved more positively correlated with S&P500 and FTSE-100 at 0.67 and 0.35 during a falling market (Feb-Mar) and a rising market (Mar 9th Apr 9th) at 0.38 and 0.20. The analysis highlights sterlings recent advances relative to EUR especially amid the lack of negative UK news and Barclays successful sale of I-Shares, which implies no needed government protection for the bank. In general, EUR and GBP remain best correlated with stocks when traded against JPY (despite similarly low rates with USD) than against USD.

Despite sterling's stellar performance (highest overall return month-to-date in a universe of 11 major currencies), the rally shows increased signs of tapering off. The absence of real economic data from the UK has often proved a temporary booster for the currency over the past 2 years. Despite its newly acquired low yielding status, sterling continues to behave as a risk currency, rallying during improved market sentiment. The vacuum of news on the UK banking front has also been a factor. But as the IMF sets to officially release its latest estimates for global banking losses next week--reportedly standing as much as $4 trillion from the already reported $1.3 trillion since the start of the crisisa renewed pullback in financials will likely drag sterling anew. Recall that the IMF was widely ridiculed a year ago when it announced its initial estimates for banking losses to reach $1.0 trillion.

JPY crosses may have staged a gradual recovery after touching our projected targets on Tuesday courtesy of US retail sales and negative earnings from Intel. But just as S&P500 struggled in crossing above the 29% threshold from the 666 lows beyond 860-870, USDJPY remains unable to breach above 101.60 resistance, an increasingly prominent signal of traders reluctance to sell the Japanese currency beyond a point thats deemed excessive as far as FX risk appetite. The level marks the 61.8% retracement of the decline from the August high of 110.7 to the to the January low of 87.13. Interim resistance stands at 100.60. The duration of carry trades remain selective, with the more prolonged gains (and short-lived losses) seen in Aussie due to a limited scope for RBA rate cuts relative to G10 central banks (quantitative easing included). Not only Aussie rates are expected to near their bottom, but they could do so at a relatively hefty 3.25%, which is higher than all G10 currencies. Aussies recent 6-month high of 0.7320 drew near the 200-day MA of 0.7350, a long term benchmark not breached since August. The Aussie story is now well cemented into the psyche of institutional and retail investors, especially given its limited pullbacks during risk aversion (reduced appetite).

Published on Wed, Apr 15 2009, 16:21 GMT

Aussie's Latest Boost

Fri, Apr 3 2009, 07:05 GMT
by Ashraf Laidi

CMC Markets

Before exploring the latest boost to the Aussie, let's first go over today's surprisingly smaller than expected 25-bp rate cut from the European Central Bank. The ECB is likely to use the next 4 weeks in elucidating its intention to keep the door open for further conventional easing (rate cuts) and starting non conventional easing (asset purchases and extending term lending) as early as the next meeting. Currency markets are no longer subscribing to the much punditized notion that slower/ further ECB rate cuts keep it behind the curve at the expense of the euro. The realities of the market remain shaped by the positive impact of rising risk appetite on EUR, GBP, CAD, AUD, NZD at the expense of JPY and USD.

The latest burst in risk appetite boosted the Norwegian krone and the Aussie at the top of the list of major currencies. Ive long discussed in previous notes highlighting the long term fundamentals of these two currencies on the basis of positive fiscal balances, favourable external imbalances and relatively generous yield foundation. The Norwegian currency has practically become a household name as of late after outperforming all major currencies since the beginning of the year. It is also the only currency to have appreciated against the price of gold. Chapter 8 of my book Currency Trading & Intermarket Analysis made the case for the Norwegian Krone for being more than just an energy-dependent currency. (The book was completed in last summer).

Aussie traders will find long term positives in the latest USDA report showing US farmers to reduce total acres with corn, soybeans and wheat this year. The USDA announced that planned wheat plantings were to drop 7.1% from last year when seedings were the highest in 10 years. Australias position as a leading top producer and exporter of wheat, allows it to gain from the rise in crop, as was the case in 2007 to H1 2008.

With US jobless claims at fresh 27-year high of 669K and continuing claims at a record 5.73 million, it is a reminder that macroeconomic deterioration in the US is far from having reached its trough. Even if Friday's March jobs report from the US shows further stabilization on the payrolls front (as did the last 3 reports), the US unemployment rate is likely to exceed 8.1%, thereby, surpassing that of the Eurozone and Germany, a development that could not be imagined just a few months ago by the classic critics of the Eurozone model. And with US consumer credit delinquencies in Q4 surging to an all time high, the deleveraging process within US households relative to that of the Eurozone is another dynamic supporting medium term stabilization in the single currency.

Funding the Fund with Gold. The G20 announcement of tripling IMF resources to $750 billion offered an extra boost for equity markets and higher yielding currencies at the expense of further damage in the dollar and the yen. The G20 confirmed our predictions that central banks will incorporate gold sales to finance assistance for lower income nations. Central banks gold selling would also help stabilize any renewed selling in the greenback and prevent any unwanted appreciation in other currencies.

China's aspiring role for becoming the IMF of the Eastern Hemisphere fits with increased assistance for the multilateral institution ahead of the WB/IMF meeting later this month in Washington. Chinas various currency swap arrangements totaling CNY650 billion with its trading partners (South Korea, Hong Kong, Malaysia, Indonesia, Belarus and Argentina) comprise a major step towards turning the yuan into an invoicing currencya natural course for bolstering its role as a reserve currency. Chinas membership in the Inter-American Development Bank and its US$350 million contribution to the agency's lending, should also enhance its role in assisting Latin American and the Caribbean nations.

Published on Fri, Apr 3 2009, 07:05 GMT

Gauging the Turn in Dollar, Gold & Oil

Fri, Mar 20 2009, 16:03 GMT
by Ashraf Laidi

CMC Markets

The FOMC announcement of March 18, December 16 and September 16 each produced an interventionist surprise at the expense of the dollar. But unlike in the announcements of Sep 16 (AIG bailout) and Dec 16 (Fed's surprising zero interest rate announcement), Wednesday's announcement to buy long term treasuries and expand the purchase of MBS and Agency securities may continue to extend the dollar's retreat, beyond just a few days. My warning for a turn in the dollar emerged shortly after the dollar index failed to break above 89.62 (euro equivalent low at $1.2455), which was a trend line resistance prevailing since the February 2002 high (peak of USD bull market).

So why is it different this time?

1. The Eastern/Central European story haunting the euro was clearly a negative theme for the currency, but such a story would only prove detrimental for the euro in the event of a bankruptcy/implosion of these banks. Absent those events, those fears were confined to grading watch from credit rating agencies, thereby, not justifying prolonged selling in the euro towards the October lows.

2. It is not enough to make the case for the dollar simply based on the premise that the Feds aggressiveness renders the US economy most likely to recover the soonest. The fact that US credit market strains and ongoing macroeconomic spill-over show no signs of abating, justifies that intensity of the US central bank measures as they reflect the critical situation of US markets/economy. Also, recall that part of the Feds liquidity measures have been aimed at shoring up liquidity for foreign central banks.

3. Technically, the ensuing positive correlation between the USD and global equities suggests an acceleration of the dollar sell-off as equities extend their recovery (albeit still deemed a bear market bounce). Indices would have to rally by more than 27%-28% from this months lows to 845-855 in the S&P500, 4,460-4,500 in the FTSE-100, 4,680-4,700 in the Dax-30 and 9,000-9,100 in the Nikkei-225.

These are some of the factors most likely to make yesterdays major Fed action different from the previous two by extending USD weakness (commodity strength) beyond just 2-3 days, and into mid end of April-Mid May. These conditions are especially facilitated by oils' break to 2-mth highs above the 100-day MA for the first time since August and a rally in resource metals (copper at 4-month highs).

What About Gold?

Golds uptrend was bolstered by its ability to hold above the bottom of the 4-month channel pf $880, its ability to limit periodic declines to no more than 10-11%, as well as holding above its 50-day MA. These technical criteria were first brought up on March 6th. Having passed all these tests, I re-iterate the near term target of $1,050.

Published on Fri, Mar 20 2009, 16:03 GMT

Here Comes the 2−Month Cycle

Fri, Mar 13 2009, 15:36 GMT
by Ashraf Laidi

CMC Markets

Friday 13 may imply plenty of luck for global equity markets as it could confirm the beginning of a 2-month rally in the major indices based on cyclical analysis of the past 12 months. Since mid March 2008 (1-year anniversary of the Bear Stearns bailout), the S&P500 has persistently shown rallies and declines lasting 7-8 weeks. The same rule has applied for the FTSE, DAX and the NIKKEI.

2-Month Long Bear Market Rallies

March-May 2008: S&P500 along with major global equity indices began a 2-month climb after the March 17 bailout of Bear Stearns. The bailout was accompanied by a series of liquidity-enhancing measures from the Fed and other central banks, such as extending the duration of credit lines given to banks, and broadening the types of securities purchased by these central banks. The intervention of authorities provided a temporary sense of relief that could not last beyond end of May.

July-September 2008: Global equity indices were stimulated by various factors such as the US-led consumer stimulus package, broadening central bank currency swaps and credit-expanding loans as well as a global inflation boom, which proved helpful for profit margins.

November-January 2008-09: Coordinated global interest rate cuts, concerted stimulus packages from the US, UK, Germany and China, credit-market specific announcements such as TARP and TALF, and promises of bailouts to ailing auto sectors were among the factors driving short-sellers to book profits ahead of the end-of-year closing. Seasonal analysis has also shown that the last 4-5 weeks of the calendar year usually involve a paring down of the trends prevailing in the third quarter of the year.

Where to From Here? I've shown in previous notes that since the equities peak of autumn 2007, global indices have shown rallies that were no more than 25%. (The Nov-Jan rally of 28% proved the exception as it involved three interim declines of 7%). With the likely duration of the current rally expected to last for about 8 weeks and extending for about 25%, the S&P500 may reach the 840-850 level as the next target for possible re-emergence of selling into end of June. Technically, 850 coincides with the 100-day moving average, which has not been broken since June 2008. Accordingly, major equity indices such as FTSE-100, DAX and NIKKEI-225 may also accumulate gains of similar magnitude and duration as was proven over the past 12 months.

The currency implications suggest further erosion in the US dollar against its higher yielding counterparts, specifically, EUR, AUD, NZD and NOK, while GBP and CAD are to show the most resistance in gaining vs the greenback. Yesterdays note illustrated how the dollar index (against basket of 6 currencies) failed to breach above its 7-year trend line resistance of 89.60, which also mark the 38% retracement of the decline from the 2002 high to the 2008 low. Today, the index is at 87.27, reflecting the prolonged decline in USD vs most major currencies. The $1.2930 target in EURUSD has now been breached, making way for $1.3070 and $1.3350, while GBPUSD carries momentum to test $1.4160, followed by $1.4410. USDJPY to remain capped at 100.80. Oil prices could be emboldened by a combination of additional OPEC cuts, USD losses and improved risk appetite and garner a climb a towards $50.20.

Published on Fri, Mar 13 2009, 15:36 GMT

FX, Bond Yields & Oil Prices

Wed, Mar 11 2009, 08:44 GMT
by Ashraf Laidi

CMC Markets

Oil gains 40% from its February lows, trading at $47.47, and $1.00 below its 100-day moving average, a trend that hasnt been broken since August 2008. The simultaneous advance in US bond yields along with oil prices may appear unusual given the erosion in global economic growth. But it is all about supply as increasing supply of US borrowing (another weekly batch of +$60 billion in US Treasury auctions) and mobilized stocks of US crude oil constitute the main forces behind the ensuing price dynamics in Treasuries and WTI. WTI eyes $51.00 as the next key target, while 10-year yields have yet to breach the 3.05% level.

While the notion of rising US bond yields and a falling dollar may sound counter intuitive to those who firmly believe in the direct yield-FX relation, such is not the case when bond yields are driven up by increased borrowing rather than increased growth/inflation expectations. In the case of crude oil, the WTI benchmark has now resumed its more normal pricing of reclaiming its premium above London Brent, after being priced at a discount since November. Sundays upcoming OPEC meeting may be a decent excuse for rising oil prices, but the escalating supply builds at the Cushing hub have finally triggered orders from refineries at prices not seen since 2003.

The implications of rising oil prices and US bond yields are USD-negative, especially if the ensuing bear market bounce in global equities extends ahead. As this takes place, markets start using the growth argument to rationalize the rise in oil prices and bond yields, which would only accelerate USDs sell-off against non-JPY currencies. A temporary return to risk appetite defined as no more than 25% rally in equities (see charts below) could subject the USD to particularly hefty losses against AUD (0.68), EUR (1.31) and NOK (6.60).

Finally, jump in risk appetite comes as no surprise to a market standing at 16-17 yr lows in the major US indices, lacking major US economic data and providing bottom pickers to mount what may be the first real signs of a bear-market raly since January. While pundits are discussing the importance of closing above 700 in the S&P, the next major resistance stands at 775, followed by 805 until we're likely to see renewed downside. As signalled in today's morning IMT, Aussie and Nokkie respond best to today's rally (see AUDCHF in today's HotChart), while GBPUSD sends a negative signal by failing to close above $1.3850 in London trade. Such a failure in NY close would cast prolonged negative dynamics on GBP.

While last week's feature article highlighted the deteriorating fundamentals in the Canadian dollar, todays piece reiterates the case for the Australian dollar, which appears set to exploit any advances in risk appetite as the currency is characterised with superior structural foundation (lowest external deficit in 7 years, lowest budget deficit in G10. Readers of my HotChart section have seen an array of calls favouring AUDCHF, AUDJPY and AUDCAD. The Aussies strength was also manifested in the currencys out-performance of the CAD, NZD and GBP during bouts of risk aversion (falling stocks).

Published on Wed, Mar 11 2009, 08:44 GMT

Loonie's Falling Downside

Mon, Mar 2 2009, 17:28 GMT
by Ashraf Laidi

CMC Markets

While the dollar and the yen continue to prove being the strongest currencies during falling equities, let's focus on the currency with the combination of past sell-off as well as prolonged downside ahead. The latest Canadian GDP report accentuates our recent notes highlighting the case against the Canadian dollar as the country produces deteriorating figures on growth, jobs and industrial production. Q4 GDP fell 3.4% annualized (first decline since 91) from +0.9% on Q3, while 2008 GDP rose 0.5% from 2.7% in 2007.

The report leaves little doubt as to the outcome of tomorrows Bank of Canada rate announcement (50-bp rate cut to record low of 0.50%). Markets are currently in debate as to whether central banks readiness (BoE and BoC) to launch credit easing will avoid taking rates down to zero. In mid-February, Bank of Canada Governor Carney hinted at quantitative easing, indicating that the Bank retains considerable policy flexibility, which [it] will use if required." With Canadian interest rates at 1.0% and inflation dipping to 1.1% y/y, well below the banks preferred target of 2.0%, the outlook for further rate cuts looms large, especially considering plummeting oil prices and the drag from the US contraction. The onslaught of record job losses (-129K decline in Jan) and the 6.4% unemployment rate at 5-year highs paves the way for prolonged dislocation, allowing for a 7.0% print to emerge before year-end.

Canada's eroding budget and trade imbalances are highlighted by the fact that the nation is slipping into its first budget deficit in 12 years and its first trade deficit in 33 years 1976 as falling oil prices and plummeting exports from the US eroded its external account. Since currency markets focus on relative values, the deepening deterioration in Canadas finances as well as the prolonged onslaught from the US recession is the key to the increased positive correlation between the Canadian dollar and the US equity indices. Those who argue that Canada's budget and trade imbalances remain far superior to those in the G-3 economies, a reminder suggests that FX markets focus on the relative changes rather than absolute levels in these macroeconomic variables.

The Canadian dollar is increasingly correlated with shifts in risk appetite as the currencys heightened vulnerability to the US contraction and plummeting oil prices rendered it a high profile victim of rising risk aversion and a beneficiary of market bounces. Correlations in USDCAD (Canadian dollars per 1 US dollar) against the S&P500 and the DJIA edged up to -0.69 since the start of February, compared to -0.66 since year-to-date. The increase in correlation was similar for CADJPY, which is a stark manifestation of risk appetite as the loonie is gauged against the low yielding Japanese currency. Additional downside in equities (-15% from current levels) is likely to see USDCAD head beyond $1.30 and onto $1.3490s, while CADJPY is likely to breach below 72 and onto the 69.70s.

The Australian dollar fared as the best performing currency in February, followed by the pound and the US dollar, while the yen and Canadian dollar were the worst performers amid a group of 10 currencies. Year-to-date, the dollar retains the lead in FX returns, followed by the pound and the Norwegian krone, while the New Zealand dollar and the euro trail at the bottom.

Fundamentally speaking, the Australian dollar represents an economy that has fared better than most of its G10 counterparts, with a growth outlook far exceeding that of the G10 nations. Australias 2009 GDP growth is expected to reach +1.0% y/y, compared to -2.0%, -2.20%, -5.0%, -2.7% and -2.2% in the US, Eurozone, Japan, UK and Canada respectively. From a structural perspective, Australias current account deficit is seen at 4.4% of GDP in 2009, its lowest level since 2002. Its budget surplus is expected to hover at 1.0% of GDP--a far superior display than the deepening deficits of the US, Eurozone, Japan and the UK.

Norway, the other commodity currency, whose structural situation is boosted by a hefty current account surplus standing at 5% of GDP (biggest in industrialized world) and a budget deficit of less than 2.0% of GDP. Chapter 8 of my book highlights the Norwegian Krone's outperformance relative to other energy currencies (Canadian dollar, Russian ruble & Mexican peso) during the following periods Jan 2000-May 2008, Jan 2002-May 2008 and Jan 2007-May 2008.

I have argued the case for for 5,500 in the Dow and 550-60 in the S&P500 before end of Q3 based on the interaction with interest rates, gold and oil. The economic and banking case is also supportive. The FX implications for such an outlook are likely to carry prolonged gains in the yen and the dollar (despite weak Japanese fundamentals) but CAD weakness will be here to stay.

Published on Mon, Mar 2 2009, 17:28 GMT

Equity/Gold Ratio's 40 yr Cycle

Wed, Feb 18 2009, 14:33 GMT
by Ashraf Laidi

CMC Markets

With gold prices only 7% away from their record highs and the main equity indices 45-50% below their highs, an analysis of the equity/gold ratio is amid the many rationalizations for prolonged gains in the precious metal. The equity/gold ratio highlights a commonly used measure of corporate market value versus a decades-long measure of real asset value. Gold is known as a measure of real assets value because of its ability to preserve value during inflationary times. But during these disinflationary times, the current global growth/demand landscape also supports the notion of too many dollars chasing too few gold ounces.

The equity/gold ratio (using the Dow or S&P500) has fallen about 85% from its 1999 peak, which occurred when gold stood at 20-year lows and equities reached their highs at the top of the dot-com bubble. Since the 1920s, the equity/gold ratio has peaked twice at nearly 35-year intervals: 1929 to 1965, and 1965 to 1999. After each of those three peaks, stocks descended in multiyear sell-offs, accompanied by a rally in gold. But the converse was not true when stocks recovered in 2003-2007. As the chart shows, the 2002-3 start of the commodity-wide bull market failed to prevent equity/gold rally from extending its decline.

The 100 years of equity/gold analysis indicate each peak in the ratio was followed by a full retracement back to the preceding lows. The emerging fundamentals indicate a recurrence of this trend and the equity/gold ratio has further declines ahead until a possible recapture of the 1980 lows. In 2002-2007, the falling ratio emerged on a rally in both equities and gold, albeit a faster appreciation in the latter. From 2008 to present, the persistent decline in the ratio emerged on a combination of a divergence in the pace of declines (slower fall in gold than in equity indices) or divergence in the direction (rising gold and falling/neutral equities).

In assessing the interaction between gold and monetary assets, it is worth weighing in on the current gold rally by comparing the amount of gold available versus the creation of monetary assets. Just as equity/gold ratio stands at 18-year lows, the ratio of total financial assets to physical gold is near the low end of its historical range. Additionally, The worlds available gold stock stands at a mere 5-6% of total global stock and bond market valuation, which is about 4 times lower than in 1980s. It is no coincidence that the difference between todays gold/equity ratio and that of the 1980 low was also 6 times greater.

The Road Ahead

A return in the equity/gold ratio towards the cyclical lows of 1980 is highly plausible. Rather than simply arguing this point on the basis of further declines in equities (see yesterdays note in my website on long term equity cycles), the prospects for prolonged gold rallies are emboldened by the refuge towards the metal as a yield substitute resulting from emerging depreciation in the secular value of currencies. And as we have seen in 2005-7, returning rate hikes pose no challenge to gold. Instead, higher rates are accompanied by improved global growth, resurging demand for industrial commodities and a broader backdrop for the precious metal. The all time lows of 1980 in the Dow/gold and S&P500/gold ratios stood at 1.33 and 0.18 respectively, compared to the current levels of 7.8 and 0.81. Assuming a return in the ratios to their 1980 lows, these would have to fall by another 75%-80%. Taking a more conservative scenario of a 50% decline in the equity/gold ratio and a target gold price of $1,250-1,300/ounce, the implied value of the Dow and the S&P500 would stand at 4,500-5000 and 500-520 respectively.

Published on Wed, Feb 18 2009, 14:33 GMT

Loonie Pressured Further

Mon, Feb 16 2009, 15:30 GMT
by Ashraf Laidi

CMC Markets

More dismal economic figures from Canada, this time the biggest drop in new manufacturing orders on record (-12.9% in Dec) and prolonged net foreign selling of Canadian securities (fourth monthly net sales of stocks and bonds). Favored positions in USDCAD and AUDCAD are seen extending into the week. AUDCAD at 0.8150 is seen as the next upside target, followed by 0.8200. Weekly stochastics in AUDCAD also suggest bullish crossover heading towards 0.8180, followed by 0.8250. Aussie optimtism likely to re-emerge on the passing of the second stimulus package since the beginning of the crisis. Prolonged bids in gold is also providing AUD with the necessary momentum. USDCAD is likely to regain the 1.25 figure from current 1.2466, but failure to close above the figure remains a reflection of USD doubts.

Published on Mon, Feb 16 2009, 15:30 GMT

Yen Withstands Global Sneeze

Mon, Feb 16 2009, 13:24 GMT
by Ashraf Laidi

CMC Markets

The Japanese Finance Minister may have caught a cold as the US economic sneeze persists but the Japanese yen preserves strength across the board in Monday Asian/European trade. The 3.3% contraction in Q4 GDP and reports of a possible resignation of Japan’s finance minister Nakagawa have put up little resistance to safe haven bids in the low yielding currency after the G7 statement on foreign exchange markets omitted the issue of yen strength. As the G7 shifted its focus from individual currencies to combating the global economic crisis, foreign exchange traders maintained their focus on bidding up the yen ahead of further clarity on the passing of the $787 billion stimulus package.

The chart below shows the number of contracts of yen longs relative to USD shorts at the Chicago Mercantile Exchange slipped last week to a net 43,597 contracts, down from 50,518 contracts the prior week. Considering that the figures stand below the all time high of 65,920 reached in April 2008, the yen’s current strength is partly underlined by lack of Japanese appetite into foreign stocks and bonds following the destruction of capital wealth of the past 2 years. The other key component supporting the Japanese currency is the anticipated rate cuts in the UK and Eurozone, as well as prolonged zero rates in the US. This well be highlighted in Wednesday’s release of the minutes from the latest interest rate decisions of the Fed and the Bank of England.

USDJPY enters its first 3-day winning streak since the first week of January and is slated to close above the important 91.90 resistance in the event that markets show confidence in the just passed US stimulus package. Prolonged gains are seen encountering the next obstacle at 92.35, followed by 92.95—76.4% retracement of the decline from 94.7 to 87.19. Preliminary foundation stands at the TL support of 91.30, followed by 90.80.

Fresh Sterling Weakness?

Sterling weakness could return as soon as tomorrow on the release of the UK Jan CPI (Tues), minutes of this month’s BoE rate decision (Wed), CBI survey (Wed) and Jan retail sales (Fri). Jan CPI could fall to as low as 2.7% y/y from 1.1%, while the core rate is seen as low as 1.0% from 1.1%, which would be in line with the latest inflation report’s outlook for rising disinflationary risks. Friday’s release of the Jan retail sales are expected to show a smaller rise of 2.1% after the holiday sales fuelled-increase of 4.0% in December. But the possibility of a greater than expected increase figure is also plausible on prolonged holiday discounting --as was the case in last week’s release of the 1.0% jump in US January retail sales.

The aforementioned dynamics coupled with negative moving average crossovers are likely to push GBPUSD below the $1.4240s and onto $1.41. The fact that there were no remarks about the GBP at the G7 meeting may remove any intermediate support for the currency until as the emergence of the $1.40 figure. The likelihood of another run-up in the pound will require a fresh boost of risk appetite once US markets return from the long weekend. $1.4640 stands as major resistance.

Published on Mon, Feb 16 2009, 13:24 GMT

Gold's Net Longs & the Gold/Oil Ratio

Thu, Feb 12 2009, 10:45 GMT
by Ashraf Laidi

CMC Markets

The latest run-up in gold's secular bull market has reaches 7-month highs of $947/oz, triggered by an initial decline in the US dollar following a disappointing Tuesday market reception of the US Financial Stability Plan. Remarkably, however, gold shifted to the next gear despite a rebound in the US currency or the decline in oil prices, underscoring the metals improving allure as a yield replacement during interest rate-eroding policies in the industrialized world.

The high profile divergence between gold and oil is a stark reminder that inflation is not the only pre-condition for a surge in the metal. The gold-oil ratio reached a 10-year high of 25 as the global recession erodes demand for energy commodities and investors abandon monetary assets in favour of the safe haven metal. Before assessing the market implications of the surge in the gold-oil ratio, lets recall the September 18 piece warning that the recovery in the ratio from its July record low augured negatively for U.S growth in particular and the world economy in general. The rationale was based on the notion that multi-year lows in the G.O. ratio reflected soaring energy prices, which were instrumental in bringing the world economy to a standstill. The rebound in the G.O. ratio ensued as financial markets unwound gold longs and central banks reverted to interest rate cuts.

Now that global central banks are flirting with zero interest rates and the world economy in contraction mode, the ratio faces no prospects of a pullback any time soon. Only a decline of at least 20-25% in the G.O. ratio would signal the markets pricing of a recovery (pace of oil rebound outpaces that of gold). The above chart serves as a helpful historical guide indicating pullbacks in the G.O. ratio (white graph) generally coincided with stabilization in the US economy, while rebounds in the ratio preceded a broadening slowdown. Particularly positive for gold is that a pullback in the G.O. ratio may not necessarily occur at the expense of the metal, but rather, a recovery in oil relative to gold. This was seen in 2002 and 2004, when the decline in the ratio emerged mainly on a faster increase in oil than in gold, and not on a decline in oil. Thus, any economic recovery strong enough to support energy demand is likely to boost gold on industrial demand for metals and investor interest in gold funds.

The speculative element to golds surge is reflected in the 138% increase attained by speculative net longs in gold futures to a 9-month high of 155,306 contracts (see above chart). Speculative longs as a percentage of total open interest reached 52%, the highest since July, suggesting further upside remains ahead. Interestingly, the record high in golds net speculative longs was reached in December 2007, three months before the metal hit its all time highs. The 3-month lag between golds net longs and multi-year highs also took place in 2006. Thus, even if speculative net longs regain record territory above 200K contracts, prices may have at least 2-3 months of upward momentum. The prospects for $1,200-1,300 gold by end of Q3 remain underpinned by a set of cogent fundamental variables involving currencies, interest rates and the global economy. Meanwhile, even as the divergence between gold and oil begins to fade, any oil-friendly dynamics are seen positive for gold's luster.

Published on Thu, Feb 12 2009, 10:45 GMT

Aussie's Risk−Based Bounce

Tue, Feb 3 2009, 17:39 GMT
by Ashraf Laidi

CMC Markets

Aussie is the days best performing currency out of a group of 9 currencies due to market optimism resulting from the latest government stimulus package of A$42 billion and ahead of tonights (3:30 am GMT) widely expected 100-bp rate from the RBA. With a 100-bps cut fully priced in, the risks are in favour of further Aussie upside in the event of only a 75-bp cut.

AUDJPY is seen particularly bullish in the event of a positive close in US equities and Asia, which would trigger fresh risk buying and an additional boost for the pair. Last week's 150-bp rate cut from the RBNZ to 3.50% took rates below those of Australia for the first time in 10 years. The RBA will have to cut by 100-bps to keep its rates below the RBNZ's. Considering emerging Aussie optimism from monetary and fiscal stimuli, a 100-bp cut would be deemed neutral too positive, while anything less is expected to boost the currency towards the 65-cent figure. AUDNZD is likely to extend gains towards 1.28 in the event of a 75-bp rate cut to 3.50%.

The VIX chart is set for further declines in the short-term, heading towards the 40 level (from todays 43.90), with market bulls likely to eye the 200-day moving average (currently at 36.75). Rather than the end of the bear market, the incoming retreat in volatility is seen as another temporary opportunity for the next relief rally in the VIX (and renewed pullback in stocks).

Risk appetite is also boosted by the Bank of Japans decision to buy risk assets via its purchase of shares in major Japanese banks. Seven years after the BoJ purchased shares in ailing banks to stabilize the tumbling equity market, the central bank returns overnight with a purchase of 1 trillion yen worth of shares aimed at boosting top banks capital. The purchases, which will go into effect until April 2010, is a reflection of the escalating risks emerging from falling bank lending, a soaring yen, and deteriorating capital partly dragged by struggling equities.

Cognizant of the incoming event risks from data releases that are likely to trigger fresh yen strength, the BoJs purchases may also be aimed at staving off the exceedingly positive bias in the currency. Recall that the BoJ purchases of Japanese shares in 2002 coincided with yen-selling intervention--which at the time had more fundamental validity as Japan was isolated in a deflationary spiral. Today, however, any overt intervention to sell the yen has little fundamental support due to the persistently downward path in G10 interest rates and negative risk environment.

Published on Tue, Feb 3 2009, 17:39 GMT

How Gold Links USD & Treasuries

Tue, Jan 27 2009, 08:47 GMT
by Ashraf Laidi

CMC Markets

US Dollar & Treasuries. The emergence of last week's unsual direct relation between the dollar and gold provided a valuable signal to the validity of the rally in the precious metal. It could also be explained by the rise in bond yields (fall in prices). Last week witnessed a rise in bond yields that was accompanied by a not-so smooth strengthening in the value of the dollar. Despite the dollar's leap to 23-year highs vs GBP, the currency made more modest gains vs the euro while nearing 14-year lows against the yen. The dollar's gains proved sketchy at best as the rise in bond yields emerged from supply concerns (excessive borrowing) rather than improved economic data. Yields on 10-year treasuries hit 6-week highs as the Obama Administration is expected to step up the nations borrowing to a new record high, taking the fiscal deficit to as high as $1.4 trillion or (9.5%-9.8% of GDP). This week, auctions of 2-year notes, 10-year notes and 20-year TIPS will raise $78 billion. As the dollar is unable to fully respond to rising bond yields resulting from supply worries, gold prices take over the mantle of safety.

Gold has comfortably held above the $900 level as the unusual decoupling with the euro (and unusual coupling with USD) continues due to the metals improved luster resulting from widespread global economic gloom and ultra low global interest rates. As the price of money (interest rates) is held down by central banks, the price of its competitor (gold) pushes higher on the lack of yield reward in monetary alternatives, excess printing by Fed, BoE & ECB as well as the absence financial market shocks (which have proven negative for risk appetite as well as gold).

My Friday outlook for $900 gold was especially highlighted by the notion that gold remained lower in yen terms than in terms of USD, GBP or EUR, thus, more likely to lure Japanese investors into lifting the metal towards the YEN 82,000, which is technical resistance. As this ensues, retail investors worldwide begin to chase the headline-grabbing trend (+$900) and drive the metal further up. While having breached well above its 200-day moving average against both the euro and the dollar, gold remains 11% lower than its 200-day MA in yen terms. Reports of gold shortages in popular gold shopping places such as Dubai have are also starting to provide the real demand element to the rise in spot price of gold. Despite golld's breach above the psychological level of $900, The $920 trend line resistance remains the more essential target to break. Tuesday's release of the Germany's January IFO survey on business sentiment may well be teh catalyst for further gains in GLD and EUR in the event that both the expectations and current assessment indicators meet or beat forecasts.

For more on the Gold/USD relationship, visit Chapter 1 of my book "Currency Trading & Intermarket Analysis".

Wednesday's FOMC decision will no longer carry the usual suspense associated with the size of the rate cut after the FOMC clarified it will keep rates near zero for some time. Instead, the quantity of bonds purchased will be the new focus as the Fed implements the Term Asset-Backed Securities Loan facility, which case Treasuries may stabilize, yields weaken and the dollar ease lower.

Euro has a firm grip above the $1.29 figure after last week's successful stabilization at the $1.2760 low kept bears at bay despite the latest S&P downgrade of a Eurozone member. Tuesdays IFO survey will be mulled for its components as both the current conditions and expectations index will have to show declines in order for EURUSD to fall markedly. EURUSD is unlikely to repeat last weeks wobbly tone especially ahead of the zero-bound FOMC. Trend line resistance remains firm at $1.3250, followed by the 50-day MA of $1.3320. EURGBPs 6-day rally is being reversed amid a partial pick-up in risk appetite. 0.9275 is seen as a temporary support that could be broken only in the event of accumulated buying in global equities.

GBPUSD made its obligatory bounce from the latest 23-year low of $1.35, but gains are increasingly capped at $1.3980. The main drivers of any sterling rebound are seen as technical buying, overall USD selling on Fed credit easing and the resulting bounce in risk appetite. Subsequent gains could emerge towards $1.4070.

Published on Tue, Jan 27 2009, 08:47 GMT

Gold, Treasuries & USD

Mon, Jan 26 2009, 13:08 GMT
by Ashraf Laidi

CMC Markets

Gold is comfortably holding above the $900 level as the unusual decoupling with the euro (and unusual coupling with USD) continues due to the metal’s improved luster resulting from widespread global economic gloom and ultra low global interest rates. As the price of money (interest rates) is held down by central banks, the price of its competitor (gold) pushes higher on the lack of yield reward in monetary alternatives, excess printing by Fed, BoE & ECB as well as the absence financial market shocks (which have proven negative for risk appetite as well as gold). Our Friday outlook for $900 gold was especially highlighted by the notion that gold remained lower in yen terms than in terms of USD, GBP or EUR, thus, more likely to lure Japanese investors into lifting the metal towards the YEN 82,000, which is technical resistance. As this ensues, retail investors worldwide begin to chase the headline-grabbing trend (+$900) and drive the metal further up. While having breached well above its 200-day moving average against both the euro and the dollar, gold remains 11% lower than its 200-day MA in yen terms. Reports of gold shortages in popular gold shopping places such as Dubai have are also starting to provide the “real demand” element to the rise in spot price of gold.

US Dollar & Treasuries. The emergence in the direct correlation between the dollar and gold can be better explained by the rise in bond yields (fall in prices). The past week has witnessed a rise in bond yields that was accompanied by a not-so smooth strengthening in the value of the dollar. Despite the dollar’s leap to 23-year highs vs GBP, the currency made more modest gains vs the euro while nearing 14-year lows against the yen. The US currency’s gains were sketchy at best as the rise in bond yields emerged from supply concerns (excessive borrowing) rather than improved economic data. Yields on 10-year treasuries hit 6-week highs as the Obama Administration is expected to step up the nation’s borrowing to a new record high, taking the fiscal deficit to as high as $1.4 trillion or (9.5%-9.8% of GDP). This week, auctions of 2-year notes, 10-year notes and 20-year TIPS will raise $78 billion. As the dollar is unable to fully respond to rising bond yield’s resulting from supply worries, gold prices take over the mantle of safety.

Wednesday’s FOMC decision will no longer carry the usual suspense associated with the size of the rate cut after the FOMC clarified it will keep rates near zero for “some time”. Instead, the quantity of bonds purchased will be the new focus as the Fed implements the Term Asset-Backed Securities Loan facility, which case Treasuries may stabilize, yields weaken and the dollar ease lower.

Today’s 15:00 GMT release of US Dec existing home sales is expected to show 2.0% decline to 4.4 mln. Also at 15:00 is the Dec leading indicators index expected to show a 0.2% decrease after two straight declines.

Euro has a firm grip above the $1.29 figure after last week’s successful stabilization at the $1.2760 low kept bears at bay despite the latest S&P downgrade of a Eurozone member. Tuesday’s IFO survey will be mulled for its components as both the current conditions and expectations index will have to show declines in order for EURUSD to fall markedly. EURUSD is unlikely to repeat last week’s wobbly tone especially ahead of the zero-bound FOMC. Trend line resistance remains firm at $1.3030, followed by the 50-day MA of $1.3320. EURGBP’s 6-day rally is being reversed amid a partial pick-up in risk appetite. 0.9275 is seen as a temporary support that could be broken only in the event of accumulated buying in global equities. GBPUSD made its obligatory bounce from the latest 23-year low of $1.35, but gains are increasingly capped at $1.3980. The main drivers of any sterling rebound are seen as technical buying, overall USD selling on Fed credit easing and the resulting bounce in risk appetite. Subsequent gains could emerge towards $1.4070.

USDJPY rallies along with the rest of yen pairs as Europeab bourse and US equity futures broaden in the green territory. The break above 89 is seen extending towards 89.50, but trend line resistance (from Jan 19 high) seen imposing at 90.10. Support climbs to 88.40, backed by 87.80.

Published on Mon, Jan 26 2009, 13:08 GMT

Sterling's Damage & Geithner's Dollar Policy

Fri, Jan 23 2009, 08:09 GMT
by Ashraf Laidi

CMC Markets

Currency market participants are faced with increasingly diverse options amid the deepening erosion of risk appetite, persistent banking losses and deteriorating measures of corporate and household wealth. While yen-supportive strategies remain most prevalent amid the worsening risk-landscape, broad selling of the British pound and bearish stances in the commodity currencies (CAD, AUD and NZD) has also proven rewarding. The US dollar continues to emerge as a reliable companion to the yen in strengthening by default against the European and commodity currencies. USD-strength by default simply means the increase in value resulting from a slew of negative European issues (UK banking troubles and S&P sovereign downgrades of Eurozone nations). But as I have argued last week, golds upward trajectory manifests the ongoing fundamental woes in the US economy and currency (last weeks retail sales, falling CPI and todays soaring jobless claims). As retail investors realize gold's ability to hold above its 2-month trend line, their new zeal for the metal via ETFs may help propel the metal back to December's $890s.

Sterling Focus: From Davos to Rome

As French and German officials begin to express concern with the impact of the pound's rapid fall on their already sluggish economies, more swings are expected in the British currency, particularly, the parity-bound EURGBP exchange rate. Chatter is already circulating about a possible mention of the weak GBP in next month's G7 meeting in Rome. Over the last 6 years, G7 summits were a popular venue for policy makers to voice their concerns over a plummeting dollar, an artificially low Chinese yuan or Japanese yen. But with the current GBP plunge already dubbed as a currency crisis (23-year lows vs the USD and record lows vs EUR and JPY), the focus has clearly shifted and the stakes are higher. Consequently, we should expect more GBP volatility ahead of the G7 meeting, especially as the chorus of remarks from German and French officials about GBP intensifies. Currency swings will be especially pronounced as German and French tensions may be further countered by the approving from UK Treasury officials. After all, the weak pound is the only silver lining of the UK recession.

Next week's Global Economic Forum in the ski slopes of Davos should prove as a warm-up exercise for GBP-related chatter, speculation and verbal and intervention, leading to the Feb 14 G7 meeting in Rome. Having reached $1.3618, GBPUSD is increasingly expected to extend $1.30 in the medium term, a figure last seen in September 1985. Parity in EURGBP remains a more plausible target than $1.25 in GBPUSD.

Geithner's FX Message to Asia

Yesterday's remarks from US Treasury Secretary designate Tim Geithner expressing his views in favour of flexible exchange rate systems were largely targeted at China, but more of such remarks could be interpreted as his green light to allow the further declines in the USDJPY exchange rate, currently at 14-year lows. Geithner is familiar with FX matters at the NY Fed, including the notion of double standard policy espoused by the Bush administration in past years whereby US officials pressured Beijing against yuan-selling intervention while allowing Tokyo to engage in yen-buying interventions in 2002-2003 as both measures served the interests of the U.S. economy.

Geithner's allusion yesterday that China is engaging in currency manipulation would be a departure from the US Administrations repeated shrugging of the matter. In the event the Obama Treasury pressures China into further currency revaluation, the dollar/yen exchange rate would make the transition from falling to collapsing, especially if Beijing stonewalls Washington as it is likely to do considering its slowing economy.

Forex traders may reason that Geithners experience with international monetary affairs grants him the ability to attain successful coordination with European and Asian policy makers in stabilizing currency swings. But there is validity to the opposite argument stating that Geithners experience implies his awareness of the non-viability of currency intervention due to prevailing fundamentals. With US interest rates expected to remain at zero and UK interest rates have yet to reach that level, the downside for both USD and GBP is here to stayparticularly against JPY.

Published on Fri, Jan 23 2009, 08:09 GMT

The 3 Limits of Risk Appetite

Mon, Jan 12 2009, 13:16 GMT
by Ashraf Laidi

CMC Markets

Global risk aversion takes over as US equities once again fail to exceed the 25-30% rebound mark. This is the third time since the intensification of the crisis last autumn that the S&P500 and DIA fail to extend their bear market rallies above and beyond 25% that all temporary bounces remain short-lived money-making making opportunities for traders than long-term openings for investors. The 7.2% unemployment rate and half a million job losses underline the deepening dislocation for consumer demand and corporate margins, while a budget deficit above 8% of GDP illustrate the long-term threats for the US currency.

We reiterate that 950 in the S&P500, 92.20 in USDJPY and 35 in the VIX each continue to pose major obstacles for any marked improvement in risk appetite. The upper chart of the two below highlight the ensuing consolidation in the S&P500 between the 950 and 830 levels and the failed attempts to garner more than 25% gains from the lows. The bottom chart shows the Volatility Index (a measure of risk aversion -- inversely related to equities) remains well supported at the 35, which is both the 200-day MA and 50-week MA, each key technical trend measures. The 35 level is also a former resistance level, now acting as a key support.

The trifecta of intermarket obstacles to risk appetite is completed by USDJPY. As we mentioned in our post-payrolls strategy, USDJPY predictably failed to regain 92.20-25 , which is the right shoulder of the ensuing Head & Shoulder pattern on the 4-hr chart. The level also presents the 38% retracement of the drop from the 94.58 high.

Euro faces the question of whether the ECB will cut by 50 or 75 bps in Thursday’s council meeting. Recall Eurozone flash CPI plunged to a 22-month low of 1.6% y/y in December from 2.1% in November, falling well below consensus of 1.8%. Combining the continuously weak inflation figures with the records low in services and manufacturing sector surveys, the ECB is likely to mull the possibility of another 75-bp rate cut to 1.75%. This would lower the EU-UK rate differential down to 0.25% from the prior 0.50%, during which EURGBP charted the course towards parity. Considering that excessive euro strength is the last thing the ECB needs in a recession, it would wish to temper renewed bouts of EUR strength (GBP and USD weakness) via interest rates. This makes the probability of a 75-bp cut as much as 55%, with 45% chance for a 50% rate cut.

Euro’s breach below $1.33 is seen adequately underpinned by $1.3250, which is the 50-day MA and the 61.8% retracement of the rise from Oct low to the Dec high.

Published on Mon, Jan 12 2009, 13:16 GMT

Euro Gains on Geopolitics & USD Strains

Mon, Dec 29 2008, 14:26 GMT
by Ashraf Laidi

CMC Markets

Euro strength and dollar weakness further emerge in thin trading activity as geopolitical uncertainty creeps higher (Israel-Hamas & India-Pakistan), giving gold a $13 boost to a 10-week high of $890/oz and more than a $5 rise to crude oil at $42.17 /barrel. The escalating violence between Israel and Hamas served as the main catalyst to oils $5 rise as Israels rocket attacks of Gaza reached their third day, raising speculation of a ground offensive of the Palestinian city. Mixed reports of troop redeployment by Pakistani military towards the Indian border were dampened by news that the two nations military officials have exchanged talks. This weekend marked the 1-year anniversary of the assassination of former Pakistani PM Bhutto, an event, which resulted into a $30 climb in the price of gold in less than a week.

Aside from geopolitics, gold and oil are also boosted by a return to broadening USD weakness, especially in the aftermath of last weeks jobless claims and personal consumption reports, which illustrated the accelerating path of unemployment and appreciating rate of decline in inflation, both of which highlight the need for the Federal Reserves latest push on the reflationary pedal.

Euro Extends Anti-Dollar Gains. Euros anti-dollar attribute is being underscored by: (i) the ECBs reluctance to telegraph further easing as in the case of the BoE (ii) the aforementioned negative releases from the US and (iii) the ensuing geopolitical uncertainties from the Middle East and South Asia. Euro strength is creeping across the board, hitting fresh all time high vs GBP at 0.9795, paving the path for parity as early as this week. One of the several factors making parity possible is remaining technical strength in EURUSD, which is likely to retest its 200-day moving average (tested 2 weeks ago) currently at $1.4650. The level also marks the 61.8% retracement of the decline from the $1.6037 high to the $1.2328 low. And finally, despite USDJPYs breach under 90 yen, EURJPY easily penetrated through the 129 yen figure, eyeing 130.50 and 131.

Gold Eyes $926. Gold breaks a key resistance of $880, which marked the trend line extending from the July 15 high and the 61.8% retracement of the decline from the said high to the $698 low of Oct 23. A simple look at the weekly chart below demonstrates how the trend line resistance was tested at 2-month intervals, suggesting that the last 2 weeks of December may mark the break of the 8-week cycle pattern, and a breach of the trend line, paving the way for a possible reading of $920 by weeks end. While a daily chart of gold clearly shows a break of the 5-month trend line resistance, the weekly chart below does not yet this breach.

Published on Mon, Dec 29 2008, 14:26 GMT

Fed's Quantitative Easing Extends Seasonal Reversals

Tue, Nov 25 2008, 16:22 GMT
by Ashraf Laidi

CMC Markets

Today's latest liquidity drive from the Federal Reserve gives a fresh jolt to risk-seeking trades, extending my scenario of seasonal reversals in currency and commodity markets put forth last week, typical of the last 5-6 weeks of the calendar year, whereby markets reverse the flows prevailing in Sept and Oct. In this case, the lower yielding dollar and yen sustain fresh damage, reversing the gains posted in Oct and Sept. Such reversal is seen prolonged into mid December.

The Feds quantitative easing policy reaches a new landmark as the central bank announces the purchase of up to $500 billion in Government Sponsored Enterprise Mortgage Backed Securities (MBS belonging to Fannie and Freddie Mac) and an additional liquidity facility of up to $200 billion in new lending to consumer Asset Backed Securities in an effort to stabilize the securitized housing and consumer loan market. The Feds balance sheet has grown by over $1.3 trillion so far this year and is well on its way of following the Bank of Japans policy of quantitative easing-- targeting the quantity of money rather than its price.

The Feds latest announcement overshadowed the revised Q3 GDP report and a bigger than expected 17% decline in the September S&P/Case Shiller Home Price Index

US preliminary Q3 GDP was unrevised at -0.5%, while personal consumption revised to -3.7% from -3.2%.

Sterling surges to a 3-week highs of $1.5393 from a session low of $1.4980 largely on the Feds latest jolt of liquidity. Sterling was initially dragged by renewed remarks from BoE officials highlighting the need for further interest rate cuts as commercial banks were slow to pass though rate cuts. Cable breached the 38% retracement of the decline from the 1.6672 high (Oct 30) to the 1.4558 low, eyeing preliminary resistance at 1.5440. Support starts at $1.5240, backed by $1.5180.

EURUSD regains the $1.30 level for the first time in 3 weeks, boosted by fresh bids as orders reverse euro shorts partly on the Feds liquidity announcement and partly on what we have warned to be year-end seasonal reversal in currencies and commodities. We expect EURUSD to extend gains towards $1.3080, followed $1.3130. Key resistance stands at $1.33. German Q3 Final GDP fell 0.5% q/q and rose 0.8% y/y

Yen's declines are faring relatively modest in light of the accelerating declines in housing prices, offsetting the effect of the Feds announcement. Resistance seen standing at 96.60, followed by 97.00. Support crops up at 94.80.

The Canadian dollar accelerates its gains, dragging USDCAD from 1.2479 to 1.2124 mainly on the better than expected 1.1% increase in retail sales, and the 0.8% jump in core sales (ex autos), which was four times greater than expectations. CAD is also gaining on the jump in risk appetite, which is positive for commodities. I warned in yesterday's Intraday Market Thoughts of USDCAD reaching 1.24 on risk-driven reversal in currency and commodity markets. Accordingly, resistance seen imposing at 1.27, while downside target seen extending towards 1.20.

Published on Tue, Nov 25 2008, 16:22 GMT

Beware of Seasonal Forex Reversals

Thu, Nov 20 2008, 09:04 GMT
by Ashraf Laidi

CMC Markets

Although currencies ended up adopting their usual path of following the swings in risk appetite, it's worth explaining Wednesday's earlier spikes in EURUSD and GBPUSD. The moves were a result of broad dollar selling (also seen in a $25 rally jump in gold) on reports that Iran was pushing ahead with its nuclear program. The International Atomic Energy Agency found stated an increasing build up of enriched uranium stockpiles, which could be converted into weapons-grade material. Despite the Iran element of the dollar decline, caution is urged of renewed selling waves in the greenback vs. all majors except the yen as seasonal reversals in FX markets usually emerge in the last 5-6 weeks of the year, paring the flows prevailing in Sep-Oct. These reversals emerge from end-of-year position squaring, with dealing desks functioning on skeleton staffs. The chart below illustrates this phenomenon for EURUSD over the last 3 years. A repeat of these trends could see reversals in EURUSD, GBPUSD and USDJPY towards $1.33, $1.62 and 100.00.

Nonetheless, One reason, however, that 2008 might prove an exception to these reversals would be for bank dealing desks to add in more hours than is usually the case in year-end in order to maximize trading revenues and ease the operating losses posted throughout the year. And as long as the laws of risk appetite continue to dictate Forex flows, proprietary desks will have no choice but to pursue lower yielding currencies, especially as stocks are resolved to retest the lows of October 2002.

FX Flows Remain Enslaved to Risk Swings

Despite GBPUSDs surge past the $1.5090 resistance onto a 1-week high of $1.52, I warned (CMC clients) that "caution is urged due to GBPUSD's knack for notorious pullbacks at the end of the London session". Ultimately, cable peaked out at $1.5245 before tumbling 300 points as risk aversion soared amid the 6% tumble in US stocks. Remarks from Bank of England's John Gieve indicating prolonged rate cuts due to the possibility of inflation falling below the 2.0% target in 2009 (from current 4.5%). Recipients of the IntradayThoughts were informed that $1.5275 would remain intact as it presented the trend line extending from the Nov 3 high. Similarly, EURUSD gave in at the trend line resistance of $1.2780 (4-hour chart) extending from the Nov 10-13 highs.

Falling inflation and contracting home building remains the hallmark of the current economic landscape as US CPI tumbled 1.0% in October (biggest on record) exceeding expectations of a 0.8% decline, while core CPI fell 0.1% vs. forecasts of a 0.1% increase. Year-on-year figures show a 3.7% increase in the headline and 2.2% in the core. October housing starts up 791K, building permits at 708K. Although the deepening price erosion in all inflation indicators could be perceived as a positive for US stocks on the basis of prolonged Fed easing, the negative impact on profit margins remain considerable, as pricing power disappears in an already poor demand environment. Adding the element of weak foreign demand and the negative impact of currency translation from lower non-USD currencies, US multinationals are set for a multi-dimensional earnings slump, thereby, adding to the fundamental argument of the equity selling.

Feds Forecasts Chase Reality

In stark illustration of another central bank outlook falling behind the real economy, the FOMC downgraded its economic projections for 2009 and 2010 from those made in June. The range of forecasts for 2009 GDP growth was lowered to -0.2% -1.1% from Junes 2.0-2.8%, core PCE was lowered to 1.5-2.0% from 2.0-2.3%, while the unemployment rate was revised to 7.1-7.6% from 5.3%-5.8%. The Fed's continued downgrades of the economy not only show the central banks miscalculation of the real economic risks to the economy, but once again underestimate their assessment ahead. The unemployment rate for instance is widely expected by private economists to reach 8% in 2009, a figure that isnt even included in the higher end of its forecasts. The forecasts highlight the increasing probability the Fed funds rate could reach 0% before end of Q1, a possibility already echoed by San Francisco Feds Yellen. But at least the Feds excessive preoccupation on inflation is diminishing markedly. The latest projections noted "The majority of participants judged the risks to the inflation outlook as roughly balanced, and a number of others viewed these risks as skewed to the downside--a marked shift from June, when the risks to inflation were generally seen as tilted to the upside".

The latest study from the World Gold Council showed an 18% increase in Q3 demand due to safe haven flows resulting mostly from financial market turbulence. Investment demand showed solid support from ETFs, jewelers demand advanced on falling prices, while industrial demand fell on broadening economic slowdown. Golds decline relative to most currencies has been primarily a function of the rising dollar emerging from the globalized nature of the economic slowdown and the massive liquidation in dollar shorts of the first half of the year. This point was especially highlighted by the $100 spike on September 17th when Lehman Bros failure and AIGs woes were considered a largely US-centric risk. Nonetheless, during the past month, gold continues to outperform oil prices, consolidating around the $740s is seen as a prime candidate for rallying on the earliest signs of stabilizing risk appetite and nascent signs of a recovery in Europe and the US.

Published on Thu, Nov 20 2008, 09:04 GMT

Consumers Further Erode Retail Payrolls

Fri, Nov 14 2008, 16:27 GMT
by Ashraf Laidi

CMC Markets

The attached chart shows the deepening implications of falling retail sales on retail sector payrolls, highlighting the deteriorating role of the US consumer, especially as Democrats dampen hopes of any additional stimulus package before year-end.

US Retail sales fell 2.8% in October vs expectations of a 2.1% decline, following a revised drop of 1.3%. Sales excluding autos fell 2.2% against expectations of a 1.9% decline. The sales' decline marked the fourth straight monthly decrease, a pattern not seen in at least over the last 16 years. On a year-to-year basis, the decline is second straight annual decline, and only the fourth of such decline since 1992. Todays figures would highlight the dislocation of the US consumer, which was also borne in the 11th straight monthly decline in retail payrolls, surpassing the 8-month string of consecutive losses in 2001.

The higher than expected release of the preliminary November Univ of Michigan sentiment survey at 57.9 from Octobers 57.6 had a short-lived impact on appetite, even with the rise in the current conditions index to 61 from 58.4 and the marked decline in the 1-year inflation expectations index to a 2-year low of 2.9% from 3.9% . With stocks hovering between -2% and -1.2%, currencies are closely following the swing in risk pendulum.

EURUSD fails to break out of its $1.2730 trend line resistance charted from the Oct 29 high through the Nov 5 high. As long as stocks deepen their reversal from Thursdays gains, EURUSD is seen extending losses towards $1.2620s. One day after German growth was revealed to have slipped into recession by showing back to back quarterly declines, France escaped the recession by growing 0.1% in Q3, following a 0.3% contraction in Q2. But French payrolls did fall by 0.1% in Q3. Spain's Q3 GDP fell 0.2% after a 0.1% rise in Q2. Italy's Q3 GDP fell 0.5% following -0.4% in Q2, pushing the nation into its third recession in a decade.

GBPUSD retains composure after recovering from yesterdays latest 6-year lows of $1.4558, as sterling flexes its higher yielding muscle against USD, eyeing $1.4830. But the high expectations of further BoE rate cuts continue to limit sterlings gains, marking a clear resistance at $1.4920. USDJPY closely tracks equities, hovering within the 96-98 yen range, but overall resistance seen producing lower highs, limited at 98.20. Defensive flows are seen finding support at 96.60, with 96.20 providing a more solid foundation.

In the battle of high yielders, AUDNZD maintains its bullish tone after the Aussie hit a 5-week high of 1.1796, partly due to golds recovery and the worse than expected declines in NZ retail sales earlier this week. These dynamics are prevailing despite Australian rates standing at 5.25% versus 6.50% in New Zealand. Prolonged gains in risk appetite are seen favoring the Aussie towards 1.1900. Prolonged selling in equities is seen dragging AUDNZD towards 1.1680.

Published on Fri, Nov 14 2008, 16:27 GMT

Risk Aversion Fills Data Vacuum

Tue, Nov 11 2008, 15:58 GMT
by Ashraf Laidi

CMC Markets

Although signs of easing credit strains are manifested in multi-year lows in interbank rates, the market turmoil has exasperated the already shaky cash situation of US auto manufacturers, retailers and shippers, forcing fresh waves of nation-wide layoffs, which would only feed off the negative loop from rising employment, falling consumption, lower earnings and eroding bank credit. Consequently, JPY retains the last word over the USD, while both low yielding currencies dominate dealing flows against European and antipodean FX as Asian and European markets are mired in prolonged downside, failing to break Mondays sell-off in the US.

The aforementioned negative channels of transmission will provide little positive backdrop to equities and overall risk appetite, and any gains such as last Fridays session remain an example of bear-market buying. Talk of the US unemployment rate reaching 10% by end of 2009 from its current 14-year high of 6.5% is to become a more common topic of discussion as companies struggle to survive in the midst of dried up credit and eroding domestic and global demand.

The US data calendar remains light as bond markets close in observance of Veterans Day, but the calendar will gradually resurrected, culminating with another major Friday release, namely the October retail sales report expected to show the fourth consecutive monthly decline (a pattern not seen over the last 15 years) and the second year-on-year decline in 6 years.

Euro Tests Triangle's Lows

German ZEW index on investors economic sentiment unexpectedly improved to -53.5 in November from -63 in October, after reaching an all time low of 63.9 in July. The historical average stands at +27.5.The improvement was attributed to the German governments approval in favor of rescuing select banks and insurance companies. Nonetheless, the current situation index fell to nearly a 3-year low at -50.4 from -35.9 in October. The improvement in the economic sentiment index does not necessarily suggest that next weeks release of the IFO survey on business sentiment will improve as the index targets businesses and executives.

EURUSD joined non USD-currencies on the downside, breaching below $1.28 and onto $1.27 as the failure for global risk appetite to recover erodes the hopes of euro bulls. The 4-hour EURUSD chart shows a clear formation of lower peaks and lower highs, forming a symmetrical triangle whose lows are being tested at $1.2700. Key foundation stands at $1.2650. Upside capped at $1.2830, followed by $1.2940 high, which is the 61.8% retracement of the decline from the $1.3116 high to last weeks $1.2650 low.

Dim GBP Prospects Ahead of Inflation Report

Sterlings prolonged selling across the board is especially heightened by i) renewed damage in global risk appetite and ii) expectations that tomorrows release of the Bank of England quarterly inflation report will further downgrade its inflation outlook, thereby, paving the way for further interest rate ahead. Yesterdays bigger than expected decline in October PPI supported the possibility for interest rates to reach 2.00% by end of H2 2009.

Having failed to regain the $1.5640 trend line resistance, cable was crushed towards the $1.5500s, making the way ahead for $1.5370. The lower highs from Oct 14, Oct 20, Oct 30 and Nov 05 underscore the sterlings failed recoveries, suggesting prolonged technical weakness prevailing ahead.

Yen Retains Risk-Driven Strength

Yen comes off the highs seen in the Asian session, but maintains the pattern of posting modest gains. With no data in the US economic calendar seen reversing sentiment to recall the 98.40-50s, yen bulls remain confident in finding bids below the 98.50s. Yen continues to shrug Japanese data, swinging to the pendulum of deteriorating risk appetite. Nonetheless, 97.00 yen remains firm support, which is above the 38% retracement of the 90.89 low to the 100.54 high.

Published on Tue, Nov 11 2008, 15:58 GMT

BoE Scrambles With Shocker Cut

Thu, Nov 6 2008, 14:23 GMT
by Ashraf Laidi

CMC Markets

Bank of England shocks with with a 150-bp rate cut to 3.00% (lowest level since 1954), against expectations of 50-bp cut, making the biggest rate cut since the central bank acquired operation independence 11 years ago. The Swiss National Bank also surprised in an unscheduled meeting with a 50-bp rate cut to 1.75%. Sterling collapsed by a full 2 cents in less than 3 minutes to $1.5710 before jumping back by more than 3 cents towards $1.6020 and later dropping back towards $1.5850s, as surging volatility widens price spreads and impacts liquidity.

The European Central Bank did not surprise as it reduced its refinancing rate by 50-bps to 3.25%. ECB’s president JC Trichet will deliver the post-announcement press conference at 8.30 am EST.

US Weekly Jobless Claims rose to 481K vs expectations of 477K.

The UK ’s National Institute of Economic and Social Research estimated Q3 GDP to have contracted by 0.5% from an initial estimate of a 0.2% contraction, expecting the downturn will last into 2010.

The magnitude of today’s interest rate moves not only reflect the gravity of the financial and economic dangers in Europe and their impact on the rest of the world, but also manifest the lateness of UK central bank policy makers, whose inflation-focus had clouded their ability to weigh the depth of the recession. Despite having acquired operational in May 1997, the Bank of England was bound to a government-imposed inflation target (not ceiling as in case of ECB), now at 2.0%.

Pre-US Jobs Central Bank Action? The global fallout from yesterday’s 5% slump in Wall Street ought to have played a role in forcing the hand of the BoE into making today’s historic move. Tomorrow’s US non-farm payrolls for October are expected to show a loss of more than 220K (biggest since November 2001), while the unemployment rate hitting a fresh 5-year high of 6.3%. Considering the momentum of sectoral employment deterioration , we expect a payrolls decline of as much as 310K. An unemployment rate above 6.3% would be the highest since 1994. Yesterday’s ADP report on private payrolls showed a decline of 157K in October (highest since Nov 2002). The impact on US and global markets of such a report could be of escalating volatility, favoring the lower yielding currencies. We continue to expect USDJPUY will not reach its cyclical low until end of 2009, early 2010 at 77 yen.

Published on Thu, Nov 6 2008, 14:23 GMT

Elections, the Dollar, Stocks & the Economy

Tue, Nov 4 2008, 10:23 GMT
by Ashraf Laidi

CMC Markets

Much has been written about the relationship between the partisan power in the White House and the performance of the stock market. Considerable amount of statistical exercise was undertaken in dissecting any the correlations and causalities involving partisan control of Congress, mid-term elections, balance of power between White House and Congress, and the impact of double term presidencies. The table below shows the performance of the dollar index, S&P500 and the general state of the US economy since the dollar became freely floated in 1971.

Here are some of the conclusions drawn from the patterns observed over the past 38 years.

Dollar Performance

Out of the 38 years analyzed, there were 20 years of negative dollar performance versus 18 years of positive performance. 7 of the 20 negative years occurred when the White House and Congress were of the same party. And in all but 2 of the 20 negative dollar years, the dollar declines occurred in series of at least 2 consecutive years. 1990 and 1998 were the only negative dollar years were the decline was preceded and followed by an increase in the currency. The 1990 dollar decline occurred due to the recession caused by the Savings & Loans Crisis and soaring oil prices resulting from Iraqs invasion of Kuwait. The subsequent Fed rate cuts dragged the dollar across the board as did flight to safety. The 1998 dollar decline emerged from sharp unwinding of yen carry trades away from the dollar in the midst of a liquidity crisis in capital markets in the aftermath of collapse of Long Term Capital Management. Similarly, all but 1 of the 18 years of dollar gains occurred in at string of at least 2 consecutive years.

2005 was the only year during 1971-2008 delivering stand-alone rising performance, as a result of Feds interest rate hikes as well as the temporary reduction of taxes on U.S. multinationals repatriated profits. Such a pattern reflects the notion that foreign exchange rates move in trends, particularly a widely traded currency such as the dollar. As fundamental dynamics are built up and are accentuated by portfolio shifts, traders flows and speculative sentiment, the trend grows increasingly established.

The impact of U.S. presidential and mid-term elections on currency markets was especially prominent during the controversial 2000 presidential elections and the 2006 mid term elections. In November 2000, the already tumbling euro sustained a severe blow against the dollar at the announcement of a victory for President George W. Bush. The dollar rally emerged on the tax-cutting agenda by Republicans, which was a boon for the markets, especially after a series of tax hikes from former president Bill Clinton. Inaccurate media reporting of the 2000 election announcements erroneously declaring candidate Al Gore the winner prompted sharp but short-lived declines in the U.S. dollar. Republicans' full loss of power of the Senate and the House of Representatives in the 2006 mid-term elections sped up an already deepening sell-off in the US currency.

Stock Market

Out of the 10 years of negative stocks performance, 7 occurred during a Republican-controlled White House versus 3 under Democrat control. Of the 28 years of positive stock performance, 19 occurred during partisan control between the White House and Congress. Regarding the relationship between the dollar and stocks, 7 out of the 10 negative years for stocks coincided with negative years for the dollar when 2008 is included. At time of writing the dollar is down 6% and stocks are down 15% year-to-date. Fundamentally, the relationship between stocks and the dollar had been prominently positive during the early 1980s and the second half of the 1990s. In the early 1980s, the Feds staunch anti-inflation war under the command of Paul Volcker boosted interest rates towards 20%, rendering the dollar an attractive return on foreign investors funds, while stocks recovered as inflation was dampened and oil prices retreated. In the second part of the 1990s, U.S. equities attracted persistent growth in foreign capital flows while European economies were floundered in stuttering recoveries and Japan remained in a deflationary spiral.

Economy

The criteria used to determine whether the economy fell in a recession in a given year is the number of quarters showing negative GDP growth. 1973, 1974, 1980, 1981, 1982 and 2001 each showed two quarters of negative growth, regardless of whether these were consecutive quarters. Although the economic reports are increasingly pointing to a recession in 2008, at the time of writing the official body in charge of declaring U.S. recessions has not yet done so. The National Bureau of Economic Research usually announces recessions about 2 our 3 quarters after they start. Due to this formality, 2008 is excluded from the recession count, leaving us with 8 recessions between 1971 and 2007. 1990 and 2000 were also recession years even though they had only one negative quarter. 6 of the 8 recessions occurred under a Republican Administration versus 2 occurring under the Democrats in 1980 and 2000. Regarding the sharing of power between Congress and the White House, 7 of the 8 recessions took place during a bipartisan split (1973, 1974, 1980, 1981, 1982, 1990) while 1 occurred in 1980 during dual control of the Democrats.

Dollar To Refocus on Economics

It has been widely stated that the financial markets main concern related to the election was the potential for adverse tax consequences from a Democrat-controlled White House, whereby the prevailing tax cuts will not be renewed after their 2010 expiration. Nonetheless, the risk of a Democrat victory for the market is diminished by heightened certainty that the Democrats will take control of the White House, thereby, ridding markets of the risk of the unknown. And with the US economy already mired in a recession and markets posting their biggest year-to-date decline in history, the role of politics in shoring up the economy is becoming less relevant, especially with the fiscal deficit expected to surpass the $800 billion market in 2009 regardless of politics. The fiscal imbalance is expected to breach the 7% of GDP figure regardless of whether the Bush tax cuts are phased out, or a new stimulus packaged is announced. By mid end of Q2 2009, the dollar's main preoccuaption will revert towards the structural imbalances of the currency.

|For more on the political and economic factors shaping the dollar over the last 38 years, see Chapter 9 "Selected Topics in Foreign Exchange" of my upcoming book "Currency Trading & Intermarket Analysis" - Wiley Trading.

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Published on Tue, Nov 4 2008, 10:23 GMT

Reflationary Trade Here to Stay

Thu, Oct 30 2008, 10:09 GMT
by Ashraf Laidi

CMC Markets

The Fed's 50 bp-cut to 1.00%, adds to the 50-bps made less than a month ago, making the central bank in full pursuit of its full employment objective, while extending its policy U-turn away from its inflation bias. The combination of market and macroeconomic elements will maintain global monetary policy in a rare unison of easing mode (again typical of global recession), hence, paving the way for the reflationary trade (explained below).

On a side note, this is the first time in the current easing cycle that there is no mention of labor markets in the 6-paragraph policy statement, thereby, reflects the evident fact that the economy is in recession. The emphasis on slowing consumer expenditure in the same paragraph underscores the fluidity of the transmission mechanism from falling asset markets and dried up credit to households.

Reflationary Trade Here to Stay

In further highlighting the deterioration in the domestic economy, the Fed has introduced the element of slowing foreign economies as a new dynamic in its policy statement, a practice last adopted during the global economic slowdown of 2001-2. The foreign element of the US economic slowdown will be further compounded by the strengthening dollar acting on nearly a third of S&P 500 earnings, ranging from makers of consumer goods, technology and building materials.

Unlike the aggregate 125-bps easing delivered in a space of 7 days in January , which was primarily targeted at systemic threats provoked partly by Bear Stearns and Societe Generale, the 100-bps easing of the last 3 weeks have been targeted at dissipating credit, eroding interbank confidence and broadening contraction in macroeconomic activity.

Such combination of market and macroeconomic elements will maintain global monetary policy in a rare unison of easing mode (again typical of global recession), hence, pave the way for the reflation trade, namely quantitative policy easing eroding real interest rates to the benefit of commodities. The Fed's downgrade of inflationary concerns further plays in favor of the reflation trade. Policy easing aside, commodities will welcome any stabilization in global demand creation to get them to recall the interest seen over the past 3 years.

The above chart summarizes the positioning among forex speculators in the various currencies against the US dollar. While the individual charts clearly show accumulated bias in favor of the dollar, the chart above highlights the Japanese yen as the only currency (among EUR, GBP and CHF) standing in net long territory i.e. the only currency which traders are net long against the USD in light of rising risk aversion. The individual charts show futures positions in the Aussie and the Canadian dollar remaining in net positive territory, showing the long AUD positions vs the USD continue to exceed the shorts, despite the 40% plunge in AUDUSD of the past 3 months and the 60% decline in Aussie net longs. This suggests that the speculative element to this years Aussie ascent was not as considerable as that behind EUR and GBP. In contrast, CAD futures positions have turned net short against the USD since July, despite lofty oil prices prevailing at the time. The swift drop in CAD longs reflected the sharp sentiment downturn in USDCAD exchange rate and surging equity market volatility. More analysis to follow on FX spec futures

Loonie Flies On Reflationary Trade

After an earlier negative knee jerk reaction in equities, which pared gains in high yielding currencies and yen crosses, risk appetite is on the rise again, delivering sharp gains in the commodity-dependent AUD, NZD and CAD. In our earlier note today, I singled out the Canadian dollar as most likely to come out among the big winners in the event of protracted market gains. Indeed, USDCAD deepens its declines by more than 7 cents (5.8%) from 1.2870 to 1.2170 as gold and oil push higher on further expansion in the reflationary trade. USDJPYs chances of regaining yesterdays 98.50 yen remain slim as the pair is likely to drift back towards the 97.50-96.50 range, awaiting any signs of a potential BoJ cut later this week. EURUSD continues to face difficulty regaining the Oct $1.30 figure from Oct 30 amid markets anticipation of further ECB easing. Negative bias crops back up towards 1.2760. GBPUSD exceeded our resistance targets to call up the Oct 22 high of $1.6470 which is the 61.8% retracement of the decline from the $1.72 high to the $1.56 low.

Published on Thu, Oct 30 2008, 10:09 GMT

Dissecting FX Returns Since the Storm

Fri, Oct 10 2008, 15:55 GMT
by Ashraf Laidi

CMC Markets

The relationship between slumping world equities, record high TED spreads (LIBOR minus T-bill) and multi-year highs in low-yielding currencies is bolstered by a break in confidence across the equity, credit and foreign exchange markets. Our Thursday morning piece sent to clients titled "Sterling Still the Major Loser" preceded further losses in the currency as GBPUSD broke to 5-year lows at $1.6784. Sterling also slumped against the Swiss franc, hitting 12-year lows at 1.900 as the Swiss franc also flexed its low yielding safe haven muscle alongside the Japanese yen. But the yen fared exceedingly better than the Franc, hitting 3-year highs against the franc at 86.53 yen, a 7% rise for the yen this week and an 18% increase from its June record low. Aside from favoring JPY and CHF against GBP, AUD and NZD, using USD as a low yielding play against GBP and AUD remains the preferred short-term play especially as a hedging short USDJPY positions.

Dissecting Currency Performance Since September 2nd

The above charts show the Japanese yen as the best performing currency since September 2, which is about 2 weeks before the surge in volatility. The left chart shows currencies’ performance as measured against gold, with the yen showing the least decline at -4% and the Aussie the greatest decline at an astounding 44% loss against the metal. The yen is followed by the dollar and Swiss franc, while the worst performing Aussie is followed by the New Zealand dollar and the Canadian dollar, all of which are typical “commodity currencies”. The chart on the right shows the returns of each currency against an aggregate of 7 other currencies, also showing similar performance.

The reason the dollar has outpaced the lower yielding Swiss franc in overall performance partly reflects the unwinding of dollar-selling positions accumulated over since mid September, as well as funds’ disposal of positions in emerging market assets.

The complete break in the once positive correlation between gold and the Aussie owes to the escalation in the unwinding of carry trades at the expense of high yielding currencies, which coincided with a refuge to the safe haven metal. Thus, unlike in past conditions of strengthening economic fundamentals when rising gold moved in tandem with the metal-dependent Aussie, today’s conditions are characterized by reduced risk appetite, money flowing out of high yielding currencies to the benefit of safe haven yen, Swiss franc and gold.

Equity markets are increasingly being dominated by liquidators as fund managers accelerate selling to meet or avoid margin calls and hedge funds clients pile on their redemption requests. In an environment where 5%-8% daily losses in major indices are a back-to-back occurrence, the modus operandi mainly is characterized by players seeking an exit, or speculators buying volatility, rather than traders seeking value.

Published on Fri, Oct 10 2008, 15:55 GMT

Margin Debt Shows More Selling Ahead

Tue, Oct 7 2008, 14:11 GMT
by Ashraf Laidi

CMC Markets

There is one concrete reason why US indices could lose at least another 20-25% from current levels.

The powerful correlation between margin debt usage by member firms of the NY Stock Exchange and the trend of major indices such as the S&P500 and the Dow Jones Industrials Average suggests further selling ahead in the main indices. The considerable leverage accumulated during the last bull market is now forcefully being undone by a powerful combination of margin calls and accelerating market losses, triggering broad ripples of sell orders among large and small investors. On Jan 25th, 2 days after global markets plunged on the revelation of mounting losses at Societe Generale, we predicted a decline of 15%-25% in US equity indices for H1 2008 and further losses in H2. Amid the many signals in the market and the real economy, we focused on the aggregate margin debt used by member firms of the NY Stock Exchange.

The chart (attached herewith) shows that the rapid declines in margin debt from their record highs correctly predicted prolonged losses in the major equity indices in fall 1987, fall 1998 and spring 2000. After attaining a record high of $381 billion in July, NYSE member firms' margin use continued to tumble into the subsequent 4 months, reaching a low of $322 billion. The declines in margin debt resulted from the execution of margin calls as client losses escalate to unsustainable levels--a typical characteristic during surging volatility. The top chart also shows that after recovering in May-July near 300 billion, margin debt fell anew in August, reaching 292 billion--the lowest since March 2007. The bottom chart shows the monthly S&P500, and how it closely reflects the shifts in margin accumulation and disposal.

The relationship has already enabled us to predict 12-15% declines in equities in Q1 2008 (announced to clients in the 2008 preview in December 2007) and in H1 2008. Back then, the rationale was: " We expect another 15-25% of declines to come by end of H1 as the macroeconomic deterioration coupled with prolonged losses in US banks and profit warnings (no currency translation effect this time as the dollar stabilized in Q4-Q1) will overwhelm the easing measures of the Fed. "

Today, all major US equity indices are down by more than 30% year-to-date, leading their international counterparts well into bearish territory and ensuring that recession will not only meet its common definition of 2 consecutive quarterly declines, but also that the slowing economy will feed into weaker valuations and earnings compression. And as :place :country-region US stocks lose in 1 year what they gained in nearly 4 years, the corrosion to the wealth effect adds to an already fragile consumer foundation, burdened by negative home equities.

Margin debt accumulation and disposal bolstered our bearish take on the markets in January, allowing us to forecast renewed unwinding in yen carry trades. Looking ahead, we expect USDJPY to fall under the 100 yen level this month for the first time sine March. As long as the Federal Reserve holds out from cutting rates before October 29, markets are likely to maintain their relentless pressure, especially considering the vacuum of good news on the economic and earnings fronts. Additional deleveraging is also expected to weigh on EURUSD towards the $1.3350 territory, while dragging GBPUSD towards $1.7050.

Today's Markets

The bigger than expected 100-bps rate cut from the Reserve Bank of Australia had a temporary effect in stemming risk aversion and shoring up carry trades in favor of high yielding currencies at the expense of the USD and JPY. But reports on RBS, Barclays and Lloyds each had sought about £15 in capital, brought back sterling from a session high of $1.7650 to a fresh 2 1/2 year low of $1.7418. As stocks in these banks plummeted by over 30%, risk aversion bounced back, dragging USDJPY, AUDJPY, AUDUSD and EURUSD.

The fundamental data also weighted on sterling after UK industrial production fell 2.3% y/y in August from a 1.9% decline the prior month, bolstering chances of a negative Q3 GDP reading and confirming chances of at least a 25-bp rate cut from the Bank of England this week. Despite the existing dissent from the hawks at the BoE's Monetary Policy Committee, we expect a 50-bp rate cut to 4.50% mainly due to the expected contraction in Q3 GDP following a flat reading in Q2. Also, if the Fed cuts rates by 50 bps later this month, the US-UK rate differential would plunge to a considerable 325bps.

Fed Chairman Bernanke's crucial speech at 1pm EST on the "Economic Outlook and Financial Markets" at 1pm EST is likely to confirm a contraction in economic growth in Q3, and signal a rate cut for the October meeting.

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Published on Tue, Oct 7 2008, 14:11 GMT

More EUR, GBP Loses Ahead

Wed, Oct 1 2008, 13:31 GMT
by Ashraf Laidi

CMC Markets

Smaller than expected 8K decline in ADP report on private payroll jobs accelerates dollar buying already emerging on increased reports of short-term USD funding among European banks. The 10 am release of the ISM report may destabilize the dollar as long as the headline index remains above $48 (exp at 49.5v from 49.9). Traders are also willing to further punish the EUR and GBP as the ECB and BoE affirm their monetary policy intransigence.

Sterling Faces Further Losses Near $1.7600

A few hours after we warned of sterling’s technically bearish pattern yesterday, the currency lost more than 3 cents from $1.8100 to $1.7750. We expect the pair to sustain further damage in the next 24 hours, extending declines below $1.77 and onto $1.76. Although the Bank of England is expected to hold rates unchanged at 5.00%, the reaction is seen widely negative as markets are increasingly focused on the growth priority of central banks than inflation. GBP losses are even more justified by an eventual resolution at the Senate on the rescue package. Also helping the dollar is the smaller than expected 8K in September ADP report on private Payrolls vs expectations of a 50K, decline.

USDJPY Gains Capped at 106.50s

Propped by increased optimism that the Senate will pass the rescue package, and by the overnight gains in Wall Street and Europe, USDJPY managed to hold above the 106 figure, with occasional testing of the 106.30s. This morning’s ISM report is apt to generate the needed push past 106.30s in the event of a figure above 48. But lack of clarity as to whether the Republicans in the House of Representatives will agree on a resolution as well as labor-market-related gloom ahead of Thursday’s weekly jobless claims and Friday’s payrolls may stem the pair below 106.60 and trigger fresh damage towards 105.30s.

EURUSD Dragged by Broader Dollar Buying

The final September manufacturing readings on Eurozone PMIs showed declines across the board. Those worked to further destabilize the euro following interventionist remarks from French politicians about the importance of the State’s hand in supporting local banks. Talk of a weekend meeting between leaders of France , Germany , UK and Italy and JC Trichet underlines the gravity of the problems on hand. Reports of increased short term USD funding at European banks is further driving the greenback against EUR, CHF and GBP. EURUSD faces initial support at $1.3980, followed by 1.3940.

Best

Published on Wed, Oct 1 2008, 13:31 GMT

Quadruple Testimony to Prop Dollar, Equities...Temporarily

Tue, Sep 23 2008, 12:50 GMT
by Ashraf Laidi

CMC Markets

We expect Today’s quadruple testimonies (Fed’s Bernanke, Treasury’s Paulson, SEC’s Cox and OFHF’s Lockhart 9.30 am EST) at the Senate Banking Committee addressing the “Turmoil in US Credit Markets” to serve their primary purpose of averting prolonged damage to the financial system and fare as an effective booster of confidence to US equities and the dollar for the day. With no major US economic data due for release, the four officials will seek to do what their respective institutions did exactly seven days ago; convey a sense of optimism to the financial markets by assuring that the central bank (via liquidity injections), the Treasury (via purchasing bad debt), the SEC (via limiting short sales) and the Office of Federal Housing Finance (via added homeowner relief) will work collectively to shore up confidence in the financial system and the economy.

To the extent that the current market turmoil is caused by lack of confidence, official demonstrations of unified assurance have worked in temporarily stemming market erosion. But the culprits go far beyond sentiment and confidence, extending towards dislocated credit market dynamics and weakening macroeconomic fundamentals. Accordingly, we anticipate prolonged strength in stocks and the greenback throughout the Tuesday session, until sentiment fades at the beginning of the European Wednesday session when dollar longs are seen curtailed ahead of the highly awaited release of Germany ’s September IFO survey of business sentiment. More on IFO in EUR section below.

Temporarily Euro Retreat Limited at $1.4680

In line with our expectations of a positive market reaction to today’s quadruple Senate testimony, Euro is to join European and antipodean currencies in amassing some of Monday’s gains, especially as the excessive moves in oil prices are expected to stabilize. The morning’s release of Eurozone September PMI data were spectacularly dismal, highlighted by the worst reading in the manufacturing index since December 2001 and the lowest reading in the services index since June 2003.

Euro losses are seen extending down to $1.4710 and $1.4680 before some stability is likely to ensue ahead of Wednesday’s 4 am EST release of the September IFO survey. Although the Business Climate and Current Assessment indices are both expected to show the fourth consecutive monthly declines, we anticipate a surprise increase in September to result from positive responses on the basis of lower oil prices and a weaker euro. This was the reason to the unexpected rise in last week’s release of the ZEW survey and we expect it to do the trick for the September IFO. Since the IFO survey has acted as the most consistent trigger of major euro moves (upside and downside), we expect Wednesday’s release to prop the euro back above the $1.4750s and onto $1.4865-70. But prior to this, we’re to see temporary lows near $1.4680s.

Dollar to Target 107 yen

Our expectations for a sharp upswing in risk appetite are seen dragging the Japanese currency across the board, producing the greatest leverage in the USDJPY pair. Dollar bulls will have to negotiate extensive selling interest at 106, a breach of which is seen propelling the pair past 106.40-45 and onto 106.75. These historically volatile times are capable to produce another 2.-50%-3.00% daily upswing in major equity indices, which are to be joined by further USDJPY gains towards the high 106.80s near the Asian session.

Cable seen Breaching Below $1.8450

We expect GBPUSD to continue its downward retracement from Monday’s 4-week high of $1.8633 down to $1.8500 and onto $1.8370. The rhetorical support of the aforementioned four testimonies and the supplications from members of the Senate Banking Committee will likely produce a USD-centric rally, which will not highlight sterling’s eroding fundamentals and likely trigger the next low near the end of the Wednesday Asian session at $1.8280.

Best

Published on Tue, Sep 23 2008, 12:50 GMT

Fed Options & FX Implications

Tue, Sep 16 2008, 13:17 GMT
by Ashraf Laidi

CMC Markets

Dollar extends losses and risk aversion accelerates despite the Fed’s latest $50 bln liquidity boost in repos. The 0.1% decline in CPI confirms last week’s release of the unexpected 0.9% decline in August PPI. Combining last week’s release of the shock decline in August retail sales and yesterday’s unexpected 1.1% drop in August industrial production (vs expectations of +0.2%), the notion of peaking inflation and faster break in macroeconomic fundamentals is further strengthened, thereby supporting our calls for the to focus on shoring up growth vs tackling inflation. The downside risks are not just about credit and liquidity,

We expect a 50-bp rate cut in the Fed funds rate to 1.50% along with a similar 50-bp easing in the discount rate to 1.75%. Despite the $70 billion in overnight repurchase agreements pumped up by the Fed on Sunday night and the just announced $50 billion announced minutes ago, the U.S. central bank is facing a state of crisis in the financial markets from a perspective of solvency, liquidity and confidence. This morning’s $50 bln liquidity boost drove down the effective Fed funds rate down to the 2.00% target from 3.75%. For these reasons, the Fed has no choice but to resort to interest rates in order to better undertake its functions of maintaining stability in the financial system.

Skeptics who indicate that US interest rates are already too low for the current high inflationary environment, they must remember that in 2002, US interest rates fell to 1.00% at a time when the housing market was firm, credit markets were liquid and bank solvency was intact.

The depth of uncertainty and market fear is highlighted by the fact that neither an announcement by the NY Federal Reserve injecting an additional $50 bln in overnight repos, nor reports of Goldman Sachs’ buying Wells Fargo have proved sufficient in allaying market fear and the sell-off in equity futures. The VIX broke closed above the 30 level for the first time since the week of the Bear Stearns rescue in mid March.

FOMC Options & FX Implications

A 50-bp rate cut in the Fed funds rate would be the most generous result for risk appetite as far as realistic outcomes are concerned, in which case we could see a rapid and short-lived decline in the yen across the board, a broad dollar decline with the exception of against the yen. The resulting yen decline will only go as far as the duration of the rally in stocks, which will also be partly dependent on whether the Fed would cut the discount rate.

Alternatively, the Fed could hold the Fed funds rate steady and cut the discount rate by 50 bps from 2.25% to below the Fed Funds rate at 1.75%. Such an outcome could also be effective in stemming risk aversion, but it is vital to stress that a great deal of this depends on finding capital for AIG.

Such measures will ultimately be seen more of an assault in the dollar’s interest rate foundation than shoring up sentiment in the US currency.

USDJPY is expected to find the 103 target and accompanied by broad declines in the yen crosses. EURUSD is apt to regain $1.4350-55. GBPUSD remains widely boosted by weak USD, thereby making all upward moves temporary. Resistance stands at $1.7960 and $1.8000. Aside from USDJPY, USDCHF is the other main pair dragging on the USD, eyeing interim support at 1.1020 followed by 1.0960. USDCAD is the main USD pair working in favor of the US currency amid the substantial decline in oil below $99. Upside seen capped at 1.0770.

Published on Tue, Sep 16 2008, 13:17 GMT

Planets Alignement for a Dollar Peak?

Mon, Sep 15 2008, 15:33 GMT
by Ashraf Laidi

CMC Markets

Dollar nears best levels of the past 12 hours on partial profit-taking during the overlap of the European lunch break and the beginning of US trade. The greenback was battered to 1 1/2 week lows against the euro and 2-month lows against the strengthening Japanese currency, which continues to take its queues from escalating risk aversion.

Risk aversion is increasing looking like a pendulum swinging violently, with both extremes signifying heightened fear, with the lowest point of the pendulum reflecting short-lived reductions in aversion. Barclays’ announcement to reject the purchase of Lehman, the confirmed bankruptcy of Lehman and Merrill Lynch’s announcement to sell itself to Bank of America each signified a rapid reduction in risk, which was principally guided by broad dollar declines and yen rallies. Temporary relief in volatility and risk aversion were triggered by announcements from a group of international banks forming a $50 bln fund to save help troubled banks.

Careful with FIFO Analysis on Currencies

A major fundamental argument sustaining the prior dollar rally was that of First-In-First Out (FIFO), supporting the hypothesis of the US recovering earlier than Europe because it had preceded it in entering the global slowdown and has delivered more aggressive fiscal and monetary measures than the old continent. While this notion is partially true, it overlooks the fact the impaired US banking capital and broadening credit woes (in interbank market and hedge funds) are the main factors distinguishing the US challenges from those in continental Europe . Stated differently, the Eurozone patients may have joined the global intensive care unit well after the U.S. , but it in no way suggests that their condition is more critical than that of the U.S. Consequently, the collapse of Fannie/Freddie and Lehman, and near collapse of Merrill Lynch exemplify the repercussion on the increasingly fragile consumer fabric and employment foundation. The argument for Fed rate cuts is not only aimed at shoring up liquidity or inter-bank confidence, but adding from what remains of the Fed’s firepower to the ailing economy.

A Cut in the Discount Rate?

As in August 2007, the Fed may be expected to try market’s reactions with a rate cut in the discount rate rather than in the Fed funds rate to further increase banks’ access to the fed’s lending window. The discount rate currently stands 25-bps above the 2.00% Fed funds rate, half than where it was before the beginning of the easing campaign last August. At a time when the Fed has tripled the period of term loans to banks and expanded the range of loans it could buy from banks, it only makes sense to lower the discount rate down to the Fed funds’ level.

Planet Alignment for a Dollar Top?

The charts below show confluence of macro forces acting to halt the dollar rally. US dollar index gives way at the 3-year trend line resistance of 80.70, while EURUSD stabilized last week at the major support of $1.3877, which is near the 3-year trend line (blue line) and 50% retracement of the rise from the $1.1638 low (Nov 2005) to the record high of $1.6036. Similarly, oil’s decline has yet to breach the 98.66 support, which is the trend line support from the January 2006 low. Gold shows to have bottomed at $745, which is just above the key support of $730 support (previous resistance in May 2006) and the 50% retracement of the rise from the March 2005 low to this year’s fecord high.

The fundamental underpinning of these chart formations is emerging from the latest woes in Wall Street and from a possible reduction in the dollar’s yield foundation in the discount rate. We continue to expect 50 bps in the fed funds rate, with the most plausible scenario occurring between Tuesday’s FOMC meeting and the October meeting. But we are not yet ready to pronounce the end of the dollar’s upward correction due to what may occur in European banks’ ties to Lehman as well as the macroeconomic weakness in the continent.

CHF and JPY continue to outperform across the board, especially against the wobbly USD and GBP. USDJPY seen capped at 106.20, with pressure pulling back towards 105.20 and 104.80. USDCHF eyes 1.1160, EURCHF eyes 1.5850, AUDJPY capped at 86.20, eyes 84.60 and 84.20.

Published on Mon, Sep 15 2008, 15:33 GMT

Dismal US Jobs Not Bad Enough for USD Due to Relative FX Strengths

Fri, Sep 5 2008, 13:53 GMT
by Ashraf Laidi

CMC Markets

The jump in the August unemployment rate to a new 5-year high of 6.1% from 5.7% leaves little doubt to currency traders that the USD rally remains largely a manifestation of broadening economic weakness outside of the US, rather than any signs of strength at home.

August nonfarm payrolls fell by 84K vs expectations of -75K, in track to match the length of consecutive monthly job losses in the recessions of 1990-91 (11 months) and 2001-2 (15 months).

We reiterate that we do not expect prolonged dollar damage from the gloomy report mainly because the recent dollar strength is NOT a result of improved US fundamentals but of worsening conditions abroad. Poor US jobs data neither alters the reality of economic conditions overseas nor the performance of EUR, GBP, AUD and NZD. Since currency dynamics thrive on relative economic valuation, the rapid deterioration in European and antipodean fundamentals offer plenty for such relative assessment.

Nonetheless, it is worth highlighting that the report is firmly in line with the weak employment figures from jobless claims, ISM services/manufacturing and Conference Board, highlighting the increasing downside risks to the US consumer and bolstering our projections for renewed Fed easing this year.

FX Implications

The currency consequences mean continued USD strength against GBP, EUR, NZD and AUD, but NOT against the JPY. The 3% decline in US equities and resulting sell-off in global markets reflected the reality that no economy is immune from the global economic slump, prompting further unwinding from dollar shorts and yen longs.

EURUSD managed to regain the $1.43 figure but we expect little follow through above $1.4350. We warn of rapid pullbacks towards the $1.4250s. Also, o ffsetting the official ECB party line on inflation, new Austrian central bank president and ECB council member Ewald Nowotny said today there is a strong chance that inflation has peaked and that wage demands should consider the CPI peak. In the event that the more established members of the ECB begin to tout similar rhetoric, the single currency could sustain faster declines ahead.

Similarly, GBPUSD broke above $1.77 from as low as $1.7590, but the stark UK realities are likely to prevent GBP from breaching above $1.7750. Market is apt to begin gradual retreat towards $1.76.

We continue to favor JPY as the next best alternative to USD due to the rapidly deterioration in global risk appetite . As our analysis has shown earlier , JPY is the second best performing currency since the beginning of Q3 and beginning of the year. The chart below shows the yen is gradually gaining ground on the best performing currency since beginning of Q3 (USD), with the evidence showing in the spread of 10-year yields between US and Japan as well as the falling US indices. The divergence between the 2 charts agrees with the daily USDJPY chart, suggesting that 105 and 103 are around the corner.

Published on Fri, Sep 5 2008, 13:53 GMT

Pre− EU CPI, US GDP FX Strategy

Thu, Jul 31 2008, 07:35 GMT
by Ashraf Laidi

CMC Markets

Dollar and stocks gains further ground on the unexpected 9K increase in the July ADP survey for private sector jobs. Despite the weak correlation between the ADP survey and BLS' payrolls, the stronger than expected figure manages extend dollar strength on the already positive momentum.

While all eyes shift to Thursday's advanced release of Q2 US GDP report, FX markets will also scrutinize the flash estimate for Eurozone July CPI (5 am EST), expected to reach a new high of 4.1% y/y following 4.0% in June. Given the current selling pressure in the euro, any reading below 4.0% is likely to deal further damage to the single currency, triggering a low of $1.5480, which is the 11-month trend line support.

The 8.30 am release of US Q2 GDP is based on incomplete Q2 data, expected to show a 2.0% increase following 1.0% in Q1. The main question will be mulling the extent of the stimulus package on consumer spending and capex in boosting the final figure. The fact that Q3 GDP is expected to retreat below 1.5% may temper any upside reaction to tomorrow's report.

Weekly jobless and the employment component of the July Chicago PMI will serve to complement or offset the reaction to the Friday payrolls report.

Gold Seen Supported at $880

Our prolonged concern with medium term structural and cyclical weakness in the US and Europe remains a principal basis for optimism in gold prices, especially as central banks face increased challenges in combating inflation. From an intra-commodity perspective, we expect gold to continue gaining relative to oil as the latter is dragged by demand destruction weakness and the former is boosted on the combination of prolonged inflation and central bank inaction. The $880-885 level represents the 200-day moving average, which is a technical benchmark last broken in August. The trend lines from the November and May lows are also acting as key support levels near $875 and $880. US payrolls could act as source of event risk, dragging gold below $870, at which point the last source of support emerges at $856.

Has Aussie Luster Faded?

The deepening decline in commodities, coupled with gold's break below the $900 figure have accelerated losses in the Aussie, the most resilient commodity currency to date. Despite the weakening fundamentals in Australian figures, the Reserve Bank of Australia has not given the "all clear" sign on inflation. Given our positive outlook for gold and renewed policy challenges facing the Federal Reserve, we expect a bottom to emerge near the 0.9170 territory, which is the trend line support holding since August. The level also coincides with the 38% retracement of the rise from the 0.8059 low to the 09862 high. The oscillator indices in the chart below suggest further downside from the current 0.9430s until stability emerges at 0.9170 for a gradual bounce back towards 0.97 by Q3.

More Kiwi Gloom Ahead

The increasing deterioration in New Zealand fundamentals render the Kiwi as a popular bearish choice against most currencies mainly due to the Reserve Bank of New Zealand's clear signaling for further easing ahead. The 5-year tightening cycle has prompted a squeeze among households and businesses to the extent that markets are pricing a 75-bps decline in the overnight interest rate by year-end from the current 8.00%. Accordingly, the Kiwi is to be the new whipping boy throughout the rest of the year. NZDUSD and NZDJPY are seen as favorite candidates for prolonged downside. Having broken below 80 yen, NZDJPY faces intermediate support at 78.00 and 77.70. 76.90 remains viable at the next bout of yen buying.

Published on Thu, Jul 31 2008, 07:35 GMT

GSEs' Impact on Foreign Inflows & Risk Appetite

Mon, Jul 14 2008, 13:35 GMT
by Ashraf Laidi

CMC Markets

Almost 4 months to the day after the Fed backed the JP Morgan rescue of Bear Stearns, the Fed and the US Treasury intervene to provide a 3-part rescue plan for US Government Sponsored Enterprises Fannie Mae and Freddie Mac. The US Treasury will increase its existing $2.25 bln lines of credit to the two entities, and will assume temporary authority to purchase shares in their equity if the need arose. The Federal Reserve will extend emergency borrowing via the “discount window” to the two entities in return for collateral.

Freddie/Fannie are Key in Drawing Foreign Inflows The chart below shows that even though net foreign inflows into US Agency securities fell to 35% in of total inflows in 2007 from 44%, they made up a significant share of total foreign purchases of US assets. The importance of GSEs is highlighted by the fact that in 2006 and 2007, they drew the second biggest share of total foreign inflows (behind corporate bonds in 2006 and 2007). The 2007 decline as well as the current slump in Fannie Mae and Freddie Mac means faster declines of foreign flows in Agencies and the erosion of a vital share of the foreign financing of the U.S. current account deficit. The chart also shows that US stocks and treasuries were the only asset class that saw an increase in net foreign purchases as a percentage of total foreign purchases in 2007, in contrast to purchases of US corporate bonds and GSEs. The 20% decline in US equities from their October highs implies falling foreign demand for US equities and equities, which leaves Treasuries as the only asset class with fundamentally viable outlook. Nonetheless, if US inflation remains on the rise, the prospects for US treasuries could be questionable.

Will Another Rescue Plan Help Equities? On the positive side, the government’s weekend announcement to back Freddie and Fannie has so far helped to stabilize the declining dollar and support US equity futures. Would another historic rescue plan from do the trick in stabilizing the recent rapid sell-off in US equities and run-up in the VIX? The chart below shows that each of the last major four peaks in the VIX resulted by unexpected or historic interventions by the Fed of the Fed government. The August 2007 and January 2008 peaks in the VIX occurred after intermeeting rate Fed cuts of 50-bps and 75-bps respectively. The March peak emerged after the Fed backed JP Morgan in buying out Bear Stearns.

This Time Is Different

The latest government intervention may not succeed in providing the required confidence in US equities as it is not accompanied by a reduction in interest rates. Providing backstops to the biggest buyers of US mortgages neither helps reduce unemployment, nor props consumer demand or boosts industrial production. As in the case of the Bear Stearns rescue, the Feddie/Fannie package coincides with the beginning of US corporate earnings. But the previous earnings season was largely boosted by a falling dollar and more robust foreign demand. This is not the case for the unfolding earnings season. The dollar was up against GBP and JPY in Q2 and all overseas economies came grew weaker than in Q1.

FX Outlook

Due to these distinctions,we do not expect any marked recovery in the dollar. But Fed Chairman Bernanke’s testimony to Congress tomorrow may alleviate dollar losses on the argument of renewed assurance from the central bank. The currency’s best chances of recovery remain against JPY and CAD, but these are likely to remain temporary. USDJPY capped at the trend line resistance of 107.10, before renewed weakness emerges back to 106.20. EURUSD is supported at 1.5820 and 1.5780, which remains well above the increasingly important support of 1.5620. Upside capped at 1.5970. Tuesday’s German ZEW survey (5 am EST) may well further drag the pair towards 1.5700. AUD remains our preferred currency against USD (0.9740), NZD (1.2830) and GBP (0.4950).

Best

Ashraf

Published on Mon, Jul 14 2008, 13:35 GMT

Dollar Gets Bernanke Lifeline

Tue, Jul 8 2008, 13:25 GMT
by Ashraf Laidi

CMC Markets

Dollar lifts off its lows as Fed Chairman Bernanke throws a quick a lifeline to the when he said earlier this morning the Fed is considering the extension of lending facility to Primary into next year. This may be what the markets wanted to hear after credit woes pertaining to U.S. financials resurfaced sharply yesterday. Although yesterday’s trading volumes in Wall Street were typically lethargic of post July 4 weekend activity, the 1.2% turnaround in stocks from their session highs was behind the 1.1 cent and 1.5 yen decline in the dollar against the euro and the yen.

Are Fed Funds Futures Traders Wrong?

Whether we’re referring to bond vigilantes trading treasuries or fed funds futures, these traders were prominently correct a year ago when the bottoming in the 10-2 year yield spread helped signal increased pressure by the Fed to act. But could they be wrong this time? Indeed, they were wrong in their longer term expectations such as in spring 2007 in pricing expectations for rates to remain steady 6 months out. Although futures have scaled down odds of a rate cut, they continue pricing nearly 50% odds of 25-bp hike by the September 16 meeting and as much as 75% odds of similar tightening by year-end. Such pricing is in our opinion flawed considering the history that the Fed had never raised rates before a considerable decline in the unemployment rate. And unemployment is far from being the only obstacle to a rate hike. Recall that the Fed continues to pump extra liquidity in the system through its Primary Dealer Credit Facility just to keep some form of normalcy in the financial system.

San Francisco Fed president Janet Yellen said yesterday she is forecasting the unemployment rate to peak below 6.0% in the present cycle from the current 5.5%, while describing credit conditions as tighter than the in last August. Her optimism for lower inflation expectations ahead may dampen expectations of a rate hike this fall. Although her remarks aren’t widely shared by the rest of the FOMC, the more likely course of preference by the Fed is that of holding rates steady into the rest of the year. The relentlessly hawkish speeches emerging from the Fed over the past 3 months (since oil surged past $120) were largely meant to dampen inflation expectations as opposed to signal an actually rate hike. Central bank officials around the world are aware that inflation expectations are vital to controlling actual inflation. And that is exactly what Fed funds futures are reacting to as the Fed manages its rhetorical targeting of inflationary expectations. By shaping these expectations ahead, the Fed hopes to support bond yields and stabilize the dollar, which will cap oil prices. The main risk to this strategy is that oil prices are influenced by their own set of supply and demand forces, while the capital situation for US financials and the macroeconomic figures will play against the Fed’s plan. Thus, while price stability is part of the Fed’s objectives, so is “maximum employment”. Ensuring stability in the financial system may not be an objective but is a major responsibility of the Fed. And although the Fed is continues to provide liquidity through its term loan facilities, these efforts are now regarded as a bear minimum in light of the latest developments with UBS, FNMAE and Wachovia. Expectations of a losing quarter in Merrill Lynch will surely not help. We continue to expect the next move interest rates will be a reduction of 25 bps to in October, followed by an additional cut in December to bring down rates to 1.50%.

At 10 am EST, pending home sales seen falling 3.0% in May after a 6.3% jump in April.

At 12.30 pm, Richmond Fed Pres Lacker to speak on the economy.

Euro Remains Consolidated

Consolidation to continue being part of the game plan in EURUSD as both currencies are increasingly torn by the opposing forces of inflation and central bank hawkishness on one end, and increased downside risks on the other. Setting oil dynamics aside, the euro remains bolstered at the expense of the dollar’s woes vis-à-vis the deteriorating capital structures of U.S. banks and onset of further write downs. But it is not all about financials and markets. Last Thursday’s jump in weekly jobless claims above the 400K figure was widely overshadowed by the June payrolls number, which was in line with official expectations but half than what was feared. The run up in claims means that the jump in the unemployment rate to 5.5% was no aberration. Thus, the euro has more than US financials to feed off from.

Interim support holds at $1.5640, backed by the 200-day MA of 1.5610. From a longer-term perspective, EURUSD is seen extending its consolidation into the $1.5350-$1.5900 range. Thus, 1.5620 and 1.550 remain viable short term targets. Upside capped at 1.5750.Key resistance stands at 1.5780.

Another Failed USDJPY Recovery

Failed rallies in USDJPY are becoming increasingly interrupted by sharp 100-point declines occurring in 2-hour intervals. This highlights the ease at which the reduction in risk appetite is disrupting financial markets. Bernanke’s speech did lift the dollar from 106.80 to 107.20 after the Chairman said the central bank will extend the liquidity lifeline to banks. USDJPY faces resistance at 107.30, followed by the 200-day MA of 107.55. Subsequent run-up remains capped at the trend line resistance of 107.90. Support stands at 106.55.

Sterling Extends Declines After Bernanke

The impact positive dollar impact from Bernanke’s speech is expected to be especially punishing for GBP as the deteriorating UK fundamentals remove resistance facing the offers. Much speculation will emerge on whether the Bank of England will cut rates this Thursday, which will dictate fresh volatility in the currency. We expect the decision to be a close call in favor of no rate cut at which point the reaction is likely to be of further GBP losses. Support stands at $1.9705, followed by 1.9660.

Published on Tue, Jul 8 2008, 13:25 GMT

Dollar Faces Dual Threat from Trichet, Payrolls

Mon, Jun 30 2008, 13:11 GMT
by Ashraf Laidi

CMC Markets

The latest record in Eurozone inflation at 4.0% annually in June is the latest catalyst to the broadening euro strength and continued dollar weakness. In a week when the European Central Bank is expected to raise rates at the same day that US jobs figures are set to show prolonged weakness, dollar weakness remains the order of the day. This is cogently highlighted in the new record high of $143.54 per barrel in crude oil and the latest 4-week high of $935.40 per ounce gold.

Considering the ECB decision, US non-farm payrolls, US services and manufacturing ISM surveys, we expect EURUSD to regain $1.5955, but the $1.60 figure may serve as the line in the sand for USD weakness, at which point we anticipate renewed jawboning from US and European officials. But jawboning does not mean actual USD-supporting intervention as the fundamentals are exceedingly stacked against the currency, which makes the fruits of an intervention short-lived.

At 9.45 am, Chicago June PMI seen at 48.4 from 49.1, with the subcomponents in new orders and jobs.

EUR Rises on ECB, Oil, US Reports

Euro surged to afresh 3-week high of 1.5836 before retreating on overall consolidation prior to the US open. Aside from the potential of disappointing US data, the ECB press conference may sound off a more hawkish tone than anticipated. It may be argued that in order to avoid an excessive euro run-up in the aftermath of Thursday's rate hike, the ECB would stress on the downside risks to the economy. But the deterioration in European inflation bears reason for persistent hawkishness. Inflation in Germany jumped to 3.3% from 3.0% while that in Spain it surged to as high as 5.1%.

Having breached above $1.58, EURUSD is expected to face interim resistance at $1.5870. The element of US weakness and jawboning is expected to see the currency taper off at 1.5955. Our long term perspective continues to expect a rate cut from the Federal Reserve, which will make the $1.60 a likely target in mid next month. Support seen holding at 1.5740, backed by 1.57.

Yen Regains Risk Appetite Luster

What may have begun to look like a waning in the inverse relationship between the yen and risk appetite is now eroding as the Japanese currency joins the Swiss franc in rallying against the majors on heightened market pessimism. Last week's breach in the Dow to 2-year lows and the S&P500's nearing of the March lows has dragged the indices back into the common definition of a bear market as both are down 20% off their October highs. USDJPY breaks below the 50-day MA fir the first time since April 22. Our medium term forecasts of 100 in August, remains intact. We expect a breach of 104.30, to give way to the next key target at 103.70. Upside remains limited at 105.70.

Aussie Breaks to New Record, RBA Awaited

Aussie breaks above its 24-year high of $0.9650 to hit an all time record high of $0.9667 on rising gold, weak USD and expectations that tonight's RBA interest rate decision (12.30 am EDT) will maintain a hawkish tone towards inflation despite recognizing weakness in most sectors. The RBA is widely expected to hold rates unchanged at 7.25%. Weak consumer confidence, gradually rising unemployment and weak housing figures have not alleviated the central bank's nervousness, Downside could reach to as low as 0.9540 on persistent US equity declines and post-RBA reaction. In fact, note the daily pattern of the Aussie's retreat in afternoon US trade, following fresh session highs prior to the close of London trade. Despite support loominbg as low as 0.9570 and 0.9540, we expect Aussie to retest 0.9640 and 0.9670. Medium term outlook remains for 9.9770 and 0.9830.

GBP Capped at $1.9980

Cable rallies as a result of rising oil and weakening US fundamentals, highlighting the divergence from weak UK fundamentals. Comments from members of the Bank of England's Monetary Policy Committee indicating they considered raising rates earlier this month seem to have shut the door of any BoE easing this year, but our perceived risk of further BoE rate cuts later this year alongside the Fed has more downside room for the pair. Most notable, Governor King remarked the probability of 4.0% inflation while at the same time stated his opposition to putting the economy into recession just to avoid writing letters on inflation.

Key resistance stands at the 200-week MA of $1.9980 and 50-week MA of $1.9930, suggesting that the key pressure point remains at $2.00. We expect GBP to be a major victim of any decline in oil prices resulting from FX jawboning or unexpectedly strong US jobs figures. Note also that the Relative Strength Index is nearing the 67 level, which is the highest level since March 2008. Support starts at 1.9860, backed by 1.9800.

Published on Mon, Jun 30 2008, 13:11 GMT

Dissecting H1 FX & Gold Performance

Fri, Jun 27 2008, 15:14 GMT
by Ashraf Laidi

CMC Markets

Market turmoil deepens as oil prices push to a new record of $142.22 per barrel, triggering fresh declines in global equities. The US-centric nature of bank write-downs and macro economic weakness is prolonging broad USD weakness, which is making the current turmoil different from that of November, August and February when the unwinding of the carry trade was boosting USD, JPY and CHF at the expense of the high yielding AUD, NZD and GBP.

Dissecting Currency Returns in first 6 months

The first chart on the left shows the Swiss franc, Australian dollar and euro are the top performing currencies in terms of total returns, outperforming the Canadian dollar (worst performer), New Zealand dollar and US dollar. The British pound has also moved up from the bottom of the ranks after surging UK inflation reduced expectations of further rate cuts from the Bank of England.

Another way to gauge secular currency performance is to assess gold performance in the various currencies and to compare returns in gold terms. The chart on the right is consistent with the left the chart, showing gold is the highest performer against CAD, NZD and USD and the least performer against CHF, AUD and EUR.

The strength of the Swiss franc is underlined by the currency's dual benefiting from reduced risk appetite and its high correlation with the euro. Specifically, Switzerland's current account surplus of more than 14% of GDP is the main rationale of the currency's safe haven status. Unlike the Japanese yen, which has been hit by slowing US growth and rising oil import costs, the Swiss economy is less exposed to the US.

The Aussie continues to gain from rising prices of wheat, copper and gold as long as inflationary expectations remain robust, which continue to justify the RBA's 7.25% interest rate. Unlike in past bouts of falling risk appetite when the Aussie would drop rapidly across the board including the USD, today the currency remains close to its record highs against the dollar and the pound. This maintains our bullishness with the pair, eyeing interim resistance at 0.9635, followed by the 24-year high of 0.9665. Unlike the NZD, whose high 8.25% rate is seen hampering the already faltering NZ economy, AUD remains underpinned by surging commodity receipts and robust demand from China and rest of Asia/Pacific. Recall in our 2008 FX Preview, we anticipated AUDUSD to have 70% chance of hitting parity in H2 2008. The path remains alive and well. We also continue to favor AUD vs GBP, NZD and CAD.

EUR continues to stand among top performing currencies, partly resulting from its role of anti-USD as well as from hawkish rhetoric from the ECB. An ECB rate hike next week is likely to prompt EURUSD past $1.59, while rising oil prices, which remain propped by their own fundamental dynamics persist in boosting the single currency. These forces are offsetting the perceived cracks in the Eurozone economy.

Today's oil-driven CAD rally does not reflect the currency's overall performance of the past 6 months, which has remarkably fallen to worst performing currency due to aggressive rate cuts from 4.25% in December to 3.00% today. The Bank of Canada's active talking down of the currency has managed to offset the usual positive impact from oil prices. The role of the US downdraft on Canada's economy can be compared to that on the Japanese yen, which is another currency showing more modest performance than last year. Nonetheless, we expect USDCAD to remain capped at 1.03 in the medium term, while support is seen climbing at 0.9980.

Although JPY has lost some of its negative correlation with falling equities, we anticipate renewed but gradual gains vs USD and NZD with 102 and 77 seen as the likely targets before end of June. As long as the Fed refrains from succumbing to market and economic pressures, equities will continue to lose support, breaching key technical levels as the chart shows below. Recall last week we warned that the S&P500 was a few points away from falling below the 100-week moving average, a pattern not seen since April 2001. Yesterday, the moving average cross over did occur, a leading to a technical significance underlined by the fact price repercussions of short-term moving averages falling below longer term averages, implying that the appreciable rate of deterioration in current price trends. The importance of the relationship is also substantiated by the fact that 100-50 week average crossover of April 2001 occurred when the S&P500 dropped 13% off its March 2000 high, while the current price point coincides with a 17% decline off the October record high.

Published on Fri, Jun 27 2008, 15:14 GMT

Dollar Deepens Post−FOMC Losses

Thu, Jun 26 2008, 14:12 GMT
by Ashraf Laidi

CMC Markets

Dollar deepens post-FOMC losses after weekly jobless claims were unchanged at 384K, above expectations of 380K, pushing the 4-week moving average to 378.25K from 376K, with the continued claims rising to 3.139 mln, highest since February 2004. Markets shrug the final Q1 GDP reading showing no revision at 1.0%. The dollar losses are clearly highlighted by gold’s jump to a 1-month high of $913 per ounce.

The current dollar decline reflects an adjustment in traders’ expectations towards US interest rates after the FOMC policy statement added a phrase describing the “downside risks to growth”, while making a clear upgrade in its inflation alert. Despite the Fed’s explicit recognition of higher inflation in the statement, we consider this language largely a rhetorical shift aimed at managing interest rate and currency market expectations rather than setting up for an actual rate hike. The main basis to our rationale is

1) Prolonged liquidity concerns among banks as signaled by the rise in 6-month LIBOR, which stands at 6.19%, a few bps away from its 6-month high attained earlier in the week.

2) Labor market indicators have shown no signs of coming off their worst levels; as weekly jobless claims continue to hover above 380K, unemployment rate is at 5.5% and payrolls remain either in negative territory across all sectors or continue to weaken.

3) Housing related measures of sales, prices and construction continue to deteriorate.

Neither these factors, nor deteriorating consumer confidence and shaky stocks markets (S&P500 and Dow are 5% and 8% below their respective levels of the April 30th FOMC meeting) are likely to stabilize with higher interest rates. On the contrary, the Fed runs the risk of exacerbating these negative these dynamics, especially via accelerating erosion in capital markets. The Fed is well aware of this fact, hence the addition of the phrase “Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased”.

The intention of such dual-risk policy statement is to prevent bond markets from dragging down yields aggressively, while adding two-way risk to the currency markets and tempering the decline of the dollar. Nonetheless, next month’s expected ECB rate hike and prolonged inflationary concerns in the UK will further support these currencies against the dollar, with the euro gaining strength relative to the pound due to superior activity indicators.

The ensuing dollar decline is in line with our Pre-FOMC analysis stating “…statement to further neutralize expectations of higher interest rates for 2008 by clarifying the ensuing macroeconomic weakness as well as the fact that “markets remain under considerable stress …which should further shed modest losses in the US dollar”

Euro Gains on Renewed ECB-Fed Policy Divergence

The strengthening in the euro to 2 week highs at $1.5725 goes well beyond the geopolitical tensions between Iran and Israel. Currency traders have been offered with fresh interest-rate driven play from a Fed policy statement suggesting prolonged status quo rather than a tightening and an ECB rhetoric suggesting prolonged tightening bias backed by a likely increase in rates.

As for the oil front, OPEC’s president has just issued a statement indicating that oil prices will likely attain $150-170- over the summer. Surely, this reflects the clear dissonance in rhetoric between most OPEC ministers and Saudi Arabia’s good-faith approach to raise output by 200K. While we refer to this as a dissonance, it may well reflect a tactic by Saudi Arabia’s dual approach to simultaneously maintain its long established relations with Washington, while preserving support for the price of oil by allowing other OPEC members to make hawkish remarks such as “there’s no real demand for the increased supply”, “world remains awash with oil” and today’s remarks on $120-150 being the likely summer target.

Having broken $1.5695, EURUSD likely to garner further gains, targeting $1.5735, which is the 61.8% retracement of the 1.6018-1.5282 move. Subsequent gains seen capped at $1.5755. Support remains underpinned at 1.5675, backed by 1.5650

USDJPY Drops as Yield Spreads Turn to 2-week Lows

The consolidation in USDJPY of the past 2 weeks between 108.50 and 107.20 shows signs of a gradual retreat as the USD part of the pair is dragged down by US-centric negative dynamics with US banks, stock market and macroeconomic data. Despite the clear interest rate advantage favoring the US over Japan, 10-year and 2-year bond yield differentials have fallen off their 6-month highs attained last week to reach their lowest level in 2 weeks today. The US-Japan 10-year spread is now at 4.21%, from 4.63% in June 13, while the US-Japan 2-year spread is at 2.20% from 3.9% on June 16. With inflationary concerns reading over to Japan and falling equities seen reigniting concerns with risk appetite and USDJPY, we expect the 107.20 support to give in to 107.00 and 106.77. We expect 105 and 103 to emerge in the next 2-weeks, with 101 likely to be broken by end of July. Upside remains capped at 107.90, followed by 108.30.

GBP Breaks $1.9850

Sterling rallies on a combination of prolonged dollar weakness and hawkish Bank of England rhetoric. In their testimony to the parliamentary Treasury Committee, the Bank of England’s Monetary Policy Committee members reiterated their vigilance with the increase in price pressures. While most members said they considered raising rates at this month’s meeting, they curbed aside any expectations of an interest rate increase. Governor King’s comments were most notable indicating the probability of 4.0% inflation but at the same time stated his opposition to putting the economy into recession just to avoid writing letters on inflation.

GBPUSD is seen facing substantial resistance at $1.9880--the 50% retracement of the decline from the $2.0396 high to the $1.9361 low. We don’t foresee sterling’s bear trend to wane until a break of 1.9950-55. Support climbs to 1.9780, backed by previous resistance of 1.9830.
Best

Published on Thu, Jun 26 2008, 14:12 GMT

Retail Sales Battle vs Jobless Claims & Lehman

Thu, Jun 12 2008, 13:47 GMT
by Ashraf Laidi

CMC Markets

Stronger than expected increase in US retail sales diverges with escalating weekly jobless claims and news of embattled Lehman CFO & COO being ousted and a subsequent 9% decline in the company’s shares may. US retail sales jumped 1.0% in May, twice greater than expectations, following a sharp upward revision in the April figure to 0.4% from -0.2%. Ex autos soared 1.2%, following 1.0%. Weekly jobless claims rose by 25K to 384K, reaching their highest level since the last week of March. Continued claims jumped by 58K to a fresh 4-year high (highest since February 2004). Fed funds futures are now pricing a 100% chance of a rate hike in Q4, with which we disagree.

Where to From Here?

We mentioned in yesterday’s charts strategy piece “the dollar may post renewed gains in the event that Thursday’s release of US retail sales shows the expected 0.5% increase in May following a 0.2% April decline…This would be especially conducive for fresh USD gains against GBP (1.9480), NZD (0.7480) and gold (855)”. Indeed, over the past 24 hours, GBP has tumbled from 1.9642 to 1.9460, NZD dropped from 0.7565 to 0.7492 and gold fell from 882.15 to 867.43 per ounce. We now expect sterling losses to extend towards 1.9380, NZD towards 0.7460, and 0.7435.

Gold’s declines may have to dissipate at $855, which is just above the 200 day moving average. But note that gold’s technical set-up shows an ominous series of lower highs, which suggests ample likelihood for a retest of the 200-day MA. The last time gold traded below its 200-day MA was in August 20, 2007. The fact that it has been more than 10 months gold hasn’t tested below such a vital technical landmark is testament to the metal’s ascendance and an implicit loss of confidence in the dollar’s general health. But the recent turn of events in favor of the US dollar primarily from the US central bank have maintained the metal’s downward trajectory since March 17, which coincided with the multi-year lows in S&P500 and the Dow.

Our bearishness in equities is bolstered by yesterday’s tumble to 2-month lows in the major equity indices, supporting our thesis that the market will fail to push higher in the midst of the Federal Reserve’s explicit intentions to gradually remove its policy easing. Technicals are also set up to test 1,320 and 11,900 in the S&P500 and the Dow. Falling US stocks are expected to especially weigh on NZD and GBP against USD and JPY.

Euro Seen Stabilizing at 1.5360

Euro remains pressured near the lows after the US retail sales figures and their upward revisions are boosting the dollar across the board. Although the increased probability of an autumn Fed hike according to Fed funds futures is expected to bolster the greenback, we warn traders that positive US data have not always led to sharp losses in EUR. This time may be different, however, as these figures bolster the case made by the Fed that chances of a substantial decline in US growth have dissipated. The element of ECB July rate hike expectations is likely to help cement a bottom at the key support of 1.5360, followed by 1.5320. Upside capped at 1.5430, followed by 1.5470.

USDJPY Targets 200 day MA

The strong US retail sales data should be expected to help USDJPY breach above 108, but a key resistance is found at the 200-day MA of 108.35. The last time the pair traded below its 200-day MA was in late July 2007. Today’s US figures may trigger another “bear market rally” in equities, but the news from Lehman could stand in the way of such upside. Thus, we could well see an early run-up in US stocks, before markets absorb the reality that strong retail sales mean increased chances of a Fed tightening, at a time when the labor market remains clearly eroded. 107.60, followed by 107.20.

Cable Drops 2 cents

Sterling loses more than two cents from yesterday’s $1.9660s, largely on broadened USD gains. The Bank of England Quarterly Inflation Attitudes Survey showed a price increase of 4.3% over the next 12 Months from the 3.3% prior figure. Increased inflation only exacerbates the Bank of England’s dilemma between stimulating growth and lower inflation, but we expect the central bank will be forced to focus on the former. We expect GBPUSD to retest the 1.9440 lows, followed by 1.9410. Prolonged declines towards 1.9380 and 1.9320 (as seen in yesterday’s chart strategy) are noted. Resistance drops to 1.95.

Aussie Eyes Support 0.9270

Aussie extended its declines after the unemployment rate held steady at 4.3% and net new employment fell by 20K, shedding further drag on the Aussie. So far, the only positive element to the Aussie has been persistently high inflationary expectations justifying the high 7.25% interest rates. But with US and global stock deepening their losses and Australia ’s economy showing further signs of weakness, the Aussie may be slated to reach 0.9270-75.

Published on Thu, Jun 12 2008, 13:47 GMT

Bernanke's Speech Will Also be Key

Mon, Jun 2 2008, 13:18 GMT
by Ashraf Laidi

CMC Markets

In addition to this week’s ISM surveys and Friday's labor report, Tuesday's speech by Fed Chairman Bernanke should be instrumental in adding further certainty to the market’s probability of 2008 Fed policy. The importance of Bernanke’s speech lies in the fact that his views on the economic outlook have not been revealed since his last Congressional testimony in April 2-3. Since then, most FOMC officials have stepped up their anti-inflation rhetoric, with the more hawkish ones (Kohn, Fisher and Kroszner) implicitly dismissing the case for further rate cuts. Nontheless, the Fed's latest central tendency forecasts issued downward revisions on growth and upward revisions on unemployment. How will Bernanke balance these forces with rising inflation risks wil be the key. We expect Bernanke to sound off a firmer tone on inflation and acknowledge the relative stability in financial markets, rather than discuss any improvement on the macroeconomic front. Said differently, the speech is will more likely to eliminate market expectations for a rate cut this summer, rather than add to existing expectations of a rate hike by year-end.

Today’s release of the May manufacturing ISM and Wednesday’s release of services ISM will also be key in further gauging the extent of the recession in manufacturing and the slowdown in services as well as the employment outlook in the sectors.

May non-farm payrolls are expected to show a loss of 50K jobs in May from a loss of 20K in May, with the unemployment rate edging up to 5.1% from 5.0%. We expect prolonged losses in payrolls into the rest of the year to dampen consumer spending and force the Fed into renewed easing in Q3 once equity markets are pressured by the economic fundamentals.

Euro Struggles Despite IMF Upward Revision

Euro treads lower despite Eurozone factory PMI edged up to 50.6 in May from earlier estimates of 50.5. The figure, however, is lower than April's 50.7. The IMF revised its 2008 Eurozone growth forecast to 1.75% from initial estimates of 1.4%, but expects growth slowing to 1.25% in 2009. The Fund said inflation is uncomfortably high and expects it to remain above 3% in the near future, well above the ECB’s mandated ceiling of near 2.0%. It also deemed current ECB rates as “appropriate” and to remain steady for the rest of the year. Last week’s latest evidence of further rise in Eurozone inflation means that ECB president Trichet will preserve his hawkish stance in Thursday’s press conference. Tomorrow’s speech by Bernanke should also help determine whether the euro could recover above the $1.56 figure.

Separately, remarks from the special economic adviser to the ruler of Qatar indicating the need for action on currency policy in order to tackle surging inflation are among the recent factors raising the probability of a revaluation of Gulf currencies. The recognition of rising inflation by the Fed and the US Treasury attests to the prolonging of general inflationary pressures, thereby most likely prompting GCC countries into action on the forex front. The political factors preventing a depegging from the dollar are considerable, thus leaving revaluation as the only option. Any signs of revaluation are likely to have a negative USD reaction to the benefit of the euro.

Resistance is expected to prevail above the $1.56 figure, while downside is seen testing 1.5480 and 1.5440. We expect the euro to remain largely on the defensive ahead of Friday’s US payrolls.

Sterling Shows Why It Remains Undesired

Sterling continues to demonstrate why our bearishness in the currency remains unfazed despite gains of the past 2 weeks. The currency lost 2 cents in a few hours, reversing all the advances made in more than one week after UK mortgage approvals hit a record low of 58K in April (versus expectations of 65K and previous 63K) and total lending dropped to a 6-year low.

Separately, UK manufacturing PMI fell to 50.0 in May from 50.8, undershooting forecasts of 50.5. The figure was the lowest since July 2005. The theme of slowing business activity and rising inflation is further resounding inside the central bank. The output price index rose to 62.0 from 61.9, attaining an uninterrupted streak of 34-consecutive monthly increases.

The deteriorating data picture in the UK supports our forecast for interest rates to reach 4.25% by year-end from their currency 5.00% despite deteriorating inflation. We expect the combination of prolonged credit crunch and a weak UK consumer to shift the priority to economic growth away from the Bank of England’s government imposed inflation target.

Cable support is seen holding at $1.9580, a breach of which is likely under a stronger than expected ISM reading (above 49). Upside seen capped at previous support of 1.9660.

USDJPY Eyes 104.30

Yen bulls regain control after S&P and Dow futures moved lower in Asian trade. Stability in equity futures later in the session failed to boost USDJPY. Last week we noted our skepticism with the pair’s breach of the 105.50 resistance to a 3-month high of 105.80 due to the “challenges encountered by the market and US economy amid further increase in bond yields”. Although we expect the Fed pause to continue into Q3, we continue to disagree with forecasts calling for any rate hikes before Q2 2009. Instead, we see room for at least one more rate cut this year. Key support stands at 104.30, backed by the 100 day MA of 104.

Published on Mon, Jun 2 2008, 13:18 GMT

USD Strength, EUR Weakness Solidifies Into Midnext Week

Fri, May 30 2008, 13:29 GMT
by Ashraf Laidi

CMC Markets

US April Core PCE price index remains p 2.1% y/y, while April personal spending rose 0.2% within expectations from 0.4% in March. The reports are to further boost the dollar, especially after news of the first GDP decline in Canada since 2003. We expect USD strength to impact oil prices rather than the opposite as expectations for further stability in US payrolls keeping USD bears aside. The chart below shows the London Inter-Bank Offer Rate is ongoing further stability below the 6.00% and is well below the 6.9% highs prevailing through credit crunch crisis. The interest rate is a weighted average of selected London-based commercial banks and its calculation is currently being reconsidered. Although the rate has come down on reduced systemic risk, prolonged market expectations of a Fed pause will keep LIBOR supported via rising bond yields and prolonged macroeconomic uncertainty.

EUR Weakness to Last Into US Payrolls Week

Euro is set to end its first down week after a string of negative economic data from Germany, which underlines the increased challenges to the persistently hawkish ECB at the expense of the single currency. Germany retail sales showed an unexpected 3.3% decline in April following a 3.8% decline in March, adding to the data deterioration of the Eurozone's largest economy. Earlier this week, forward-looking GfK index of German consumer sentiment tumbled to 4.9 in June from a revised reading of 5.6 in May. Also, German jobless rose by 4K in May, while the unemployment rate stood at 7.9%.

We have long cautioned that the key to protracted losses in the euro lies in negative Eurozone data rather than positive US figures because the former is perceived as a more considerable challenge for ECB policy and for future growth considerations. Nonetheless, next week's release of US payrolls will be crucial in dictating overall dollar sentiment, including the EURUSD pair in the event of a clear break out of the current trend—such as a positive reading, which would be the first in 5 months.

EURUSD has dropped below our $1.55 target, reaching a 2-week low of $1.5460 before rounding to 1.5520. This morning's US data may act as the catalyst to a revisit of the $1.5470s in the event of a core PCE price index of at least 2.1% and a Chicago PMI of more than 49. Key support stands at $1.5420. Expect resistance to remain heavy at 1.5540 as traders are unlikely to allow dollar weakness ahead of what may be another strong week for the greenback next week ahead of US payrolls.

USDCAD Eyes Parity as GDP Drops

USDCAD spikes to 0.9960 from 0.9930 as Canada's real Q1 GDP drops by an annualized 0.3%,. Showing the first decline in 5 years, while single month GDP in March dropped 0.2% after a 0.3 decline in February. The data maintains expectations for a 25-bp rate cut by the BoC next month USDCAD resistance stands at 0.9970, followed by key resistance at 1.00, which is the 200-day MA. Support climbs to 0.9940.

USDJPY Hits 3-Month Highs

Yesterday's 105.89 high in USDJPY can be considered as a breach of a key resistance and prolonged expectations of a Fed pause may lend further advances in the pair to 106.20 but we remain skeptical due to the challenges encountered by the market and US economy amid further increase in bond yields as long as expectations of a Fed pause remain. We expect the Fed pause to continue into the end of Q3 before prolonged rate cuts emerge. We disagree with any forecasts of rate hikes before Q2 2009. Support climbs to 105.20, backed by 104.80. Key upside stands at 106.30.

Cable Seen at $1.9660

Sterling comes off the $1.9790s to $1.9700 in as USD bullishness extends on falling oil prices and increased Fed pause expectations. We continue to expect the pair to breach 1.97 and call up $1.9660 into next week. Next week, we expect the USD gains to impact the oil rather than the opposite as the catalyst becomes US data, with expectations for further stability in payrolls keeping USD bears aside. Cable resistance drops to 1.9770.

Published on Fri, May 30 2008, 13:29 GMT

Subprime Not Gone, Inflationary Oil to Stay

Wed, May 21 2008, 07:14 GMT
by Ashraf Laidi

CMC Markets

High inflation and soaring oil prices are once again dictating the action in currencies after hitting a new all time high of $129.50 per barrel. A tumbling dollar has been the order of the day, shadowing all other activity in FX markets. The higher than expected US PPI figures are also a negative for risk appetite and equities as they serve an obstacle to further Fed easing at a time when employment, manufacturing, housing and construction have been on persistent deterioration. The intensifying losses in Wall Street (Dow -200 pts, S&P -15 pts) are speeding up the yen’s gains on reduced risk appetite. The latest oil rise started yesterday after OPEC’s acting president Khelil indicated the world has enough oil and that the cartel will not have a meeting before its scheduled September meeting. Khelil’s comments countered the effect of Saudi Arabia ’s earlier agreement to the US demands to raise output by 300K barrels per day. The oil rally was intensified by oil magnate Boon Pickens' prediction for $150 oil.

Euro hits a 3-week high at $1.5680 on the dollar’s woes. Germany ’s ZEW current conditions index rose to a stronger than expected 38.6 from April’s 33.2, while the ZEW economic expectations index fell to an unexpectedly weak -41.4 in May from 40.7 in April. The current conditions index is more closely correlated with ECB interest rates than the expectations index. The euro was also boosted by remarks from ZEW Chief Economist Franz who said he expected the ECB to raise interest rates in the near-term.

But the story may be different from Germany upon tomorrow’s release of the more influential IFO survey (4 am EST). Markets consider the IFO survey to be a better indicator of Germany ’s economy because it is the survey of business sentiment rather than investor sentiment, which may be skewed by the equity market. The IFO has a strong track record in triggering notable moves in the euro. Major moves in the index have served as catalysts in triggering the euro past big figures ($1.30, $1.40 and $1.50). After having posted an unexpected string of three consecutive monthly increases between January and March, the IFO’s climate index finally retreated in April to 102.4 from 104.8, the largest point drop since September 2001 -- was instrumental in dragging the currency from its $1.60 high to $1.5650 in a matter of days. With the euro having consolidated mostly between $1.5650 and $1.5350 over the past 4 weeks, the currency requires fresh direction from the Eurozone for the latest signals in sentiment and growth expectations.

What to Make of Euro’s Dollar-Driven Gains? EURUSD firms on a combination of soaring oil prices and the stronger than expected current conditions index of the ZEW survey. We pointed out yesterday the remarks from OPEC’s acting president Khelil indicating the world has enough oil and that the cartel will not call an early meeting prior to its scheduled September meeting. Having breached the $1.5650s, EURUSD faces key resistance at $1.5700.

With oil prices surging incessantly and the Eurozone business indicators sending mixed signs, traders may give the benefit of the doubt to the single currency and potentially lifting it past the $1.5720. But another sharp decline in the IFO will is likely lead to losses past 1.56 and 1.5520s.

Aussie Extends to 24-Year High

The Aussie hit fresh 24-yr high against the USD, breaking above 96 cents following a hawkish minutes from release from the Reserve Bank of Australia's interest rate decision earlier this month. The minutes raised the risk of a near-term interest rate hike as they showed the policy board “actively considering” rates from 7.25% to fresh 12-year highs in order to combat accelerating inflation. Although the minutes did acknowledge substantial slowing in financial market conditions, the market still expects a rate hike to be the next policy change by the inflation-targeting central bank. The challenging part about predicting RBA rate decisions based on inflation is that CPI is released on a quarterly basis rather than monthly, which involves substantial time for price pressures to rebound on the back of rising commodities despite a slowdown in the real economy. We expect the RBA to raise rates to 7.50% before the end of the current quarter.

The Aussie has also been boosted by the recent rebound in gold, which emerged on the heels of soaring oil prices and fresh dollar weakness. We have persistently called for our preference for the Aussie to be one of the year’s strongest FX performers, and called long AUDGBP as our preferred trade of 2008. The pair is now above 9%.

Technically, the chart below shows the Aussie to have broken above a key trend line resistance prevailing since November, and is now ripe to call up 98 cent as the next key target. The chart also shows the pair is inside a larger upward channel, whose upper bound lies just above the 1.00 level. That means, barring any sharp reductions in global risk appetite (AUD negative) and macroweakness in Australia , traders have all the reasons to probe the parity level. Support climbs to 0.9570, backed by 0.9530. On the longer term, key foundation is firmly cemented at 0.9270.

Sterling Upside Still Untenable

Sterling pushes up to a 2-week high of $1.9724 on a combination of general USD weakness and overall strengthening in the EUR and AUD. The current gains are a reflection of oil-driven dollar weakness than improved fundamentals in the UK , thus paving fertile ground for sterling bears to function in this week on the Bank of England minutes (Wed), retail sales (Thur), CBI survey (Thur) and Q1 GDP (Fri). UK data have shown a remarkable consistency of undershooting forecast, leading to rapid and broad selling in the currency. The chart below shows a possible extension of the gains to reach $1.9755 before renewed selling prevails en route $1.95. Whether $1.9750s emerges first remains questionable, but the eventual path is more likely to end below $1.9550 and en route to 1.9500.

Yen Rallies on Whitney and Dollar Woes

Comments from Oppenheimer’s high profile banking analyst Meredith Whitney shedding further pessimism on the banking sector into 2009 are further assaulting risk appetite to the benefit of the Japanese currency. The higher than expected US PPI figures are also a negative for risk appetite and equities as they serve as an obstacle to further Fed easing at a time when employment, manufacturing, housing and construction have been on persistent deterioration. Anticipating a sharply negative open in Asia , we expect yen gains to reaccelerate and rag USDJPY towards 103.40, followed by 103.00. We expect 102.70 to emerge by end of week. Upside capped at 104.50.

Published on Wed, May 21 2008, 07:14 GMT

CPI Softens Dollar Rebound, to Boost Risk Appetite

Wed, May 14 2008, 13:32 GMT
by Ashraf Laidi

CMC Markets

US CPI rose by a smaller than expected 0.2% while core CPI also by a weaker than expected 0.1% increase, translating into an annual rise of 3.9% and 2.9% in headline and core CPI. Regardless of whether these softer than expected figures reflect the true story of inflation in the US economy, they bear positive implications for risk appetite, US equities and prolonged yen weakness and CAD strength. But the figures may temper the dollar’s recent gains as they do not necessarily shut the door on a June rate cut.

More Sterling Damage as BoE Stagflation Dilemma Intensifies

The British pound dropped nearly another full cent to a 4-month low of $1.9366 after the much anticipated quarterly inflation from the Bank of England projected inflation to surge to as high as an annual rate of 3.7% in the third quarter of this year before slipping to around 2.25% in 2 years. The BoE clearly expects further downside in growth, anticipating GDP growth slowing near 1.0% by end of 2008, with chances of a contraction before attaining 2.4% in 2 years. The central bank has left very little doubt that it has joined the Federal Reserve in facing stagflation-like challenges. But the Bank of England stands out from the rest of major central banks in that it is expected to deliver the biggest policy easing going forward, mainly due to the relatively high level of its short term interest rates currently at 5.00%.

GBPUSD to retest the $1.9360 low, below which it is seen extending losses towards $1.9335. We expect the key 1.9300 foundation to be broken within the next month once the pair caught up between further BoE cuts in June and speculation of a hold in rates from the Fed. Resistance has dropped to 1.9460 while the 200 week MA is expected to act as the next key resistance at 1.9490.

EURGBP faces further upside despite a struggling EUR vs USD as the pair exploits prolonged UK weakness. Cross pair is expected to target key resistance at 0.7965-70, which is the 61/8% retracement of the decline from the 0.8096 high to the 0.7762 low. Baring any explicit signs of Eurozone weakness, we see EURGBP following on 0.7990, with medium term outlook suggesting 0.8035 near quarter’s end.

Euro Remains Consolidated

USDJPY Supported by Shifting Attention

Loonie Flies High

Published on Wed, May 14 2008, 13:32 GMT

Dollar Cheers Sales, Ignores Autos

Tue, May 13 2008, 13:41 GMT
by Ashraf Laidi

CMC Markets

Dollar rises across the board as traders focus not on the 0.2% decline in April retail sales which was in line with expectations but on the 0.5% increase in sales excluding autos, nearly triple expectations as auto sales dropped 2.8% to 10-month lows. The other positive part of the report is the 1.9% rise in building materials. Dollar accelerates gains versus the yen, which will likely lead to broad yen weakness and a potentially strong open in Wall Street.

Euro Seen Kept Under $1.55

Euro is pressured by strong core US sales despite the decline in US retail sales. We expect the euro to remain neutral to negative i.e. within the 1.5250-1.5600 range going forward until the release of the month’s IFO, ZEW and PMI surveys. We do not buy into speculation that the ECB is preparing for a shift towards dovishness. The central bank’s inflation concerns shall remain more than lip service and will only recede in the event of starker evidence of a Eurozone slowdown. It is important to note that the ECB’s inflation mandate does not require it to stand to be ahead of the growth curve when inflation is being compromised. Although this is not the case with the Federal Reserve, we have seen this time last year how Fed officials attempted to preserve inflation expectations in check but eventually caved in to the deterioration in the credit crunch and the weakening economy.

Separately, the ECB’s latest anti-inflation message was sent by Bank of France Chief Christian Noyer indicating that the environment has become “very inflationary” and that we might be piling up inflationary pressures at world level.

We expect euro to retain weak bias, facing resistance at 1.5495-00 before retreating towards 1.5420 and 1.5370 later in the week.

Sterling Falls Despite CPI Jump

The latest manifestation of sterling’s weakness is seen in its deepening sell-off despite today’s release of higher than expected 3% annual rise in April CPI following a 2.5% reading in March. Unlike yesterday’s release of the record high PPI, the 3.0% jump in consumer inflation generated a short-lived sterling rally, despite the figure growing at its highest in 13 months, and overshooting expectations of a 2.6% rise. We cautioned yesterday that “negative macro dynamics supporting further easing are expected to cease the day. Although rising inflation is supposed to act as an obstacle for the anticipated June interest rate cut from the Bank of England, we do not regard these inflation figures as a tangible positive for the currency’”. The pound had been hit by a broadening data weakness ranging from housing, industrial production, services and construction, the positive currency impact from high inflation may.

Sterling was also dragged by further evidence of the nation’s house price slump when the Royal Chartered Institute of Surveyors showed further deterioration in UK home prices.

Sterling eyes declines at 1.9460, followed by 1.9440s. Key support stands at 1.9380. Upside capped at 1.9530.

Rising USDJPY to Face Pressure at 105

USDJPY recovery sharply from 103.50s on sharp rise in risk appetite as US retail sales show stronger than expected 0.5% increase when excluding motor vehicles. Momentum in the pair is expected to pick up further upon the opening bell, which is likely to face interim resistance at 104.80. Key resistance stands at 105.30. We do caution against excessive dollar gains shrugging the second monthly sales decline in 3 months. Support climbs to 104.20
Best

Published on Tue, May 13 2008, 13:41 GMT

Sterling Deepens Gloom, Yen Gains on Risk Appetite

Fri, May 9 2008, 14:57 GMT
by Ashraf Laidi

CMC Markets

The US trade deficit fell to $58.21 billion in March from $62.3 billion, overshooting expectations of $61.3 billion. US exports fell 1.7% after rising 1.8%, while imports tumbled 2.8% after rising 2.6%. The decline in imports was mainly owing to a temporary retreat in energy products. While much ink had been spilled over the benefits of a weak dollar on international trade, there was no relief on overall exports. In fact, as long as a falling dollar is accompanied by surging oil, the net effect is negative via rising oil imports.

Dollar struggles anew as commodities soar across the board, from oil, to gold and rice. Oil surges to $125.90 per barrel, gold hits a 1-1/2 week high of $890 per ounce and rice surges for a third consecutive day as the world’s largest rice importers Nigeria and the Philippines upped their shipments following supply disruptions in the aftermath of the cyclone in Myanmar. But it is also case of reduced risk appetite with the high yielding GBP and NZD tumbling across the board, especially against the yen following yesterday’s bigger than expected loss from AIG and the uninterrupted escalation in oil.

Sterling En-Route in Taking “Worst” Title from USD

In late 2007 we predicted the British pound to be the US dollar of 2008 and so far it has not disappointed. The currency is down 4.7% from its $2.04 high of March 14, and is the worst performer amid G10 currencies. Today, GBPUSD has lost a full cent to hit a fresh 2 ½ month low at $1.9469, two days after shedding 2.5 cents in one session. Yesterday’s decision by the Bank of England to hold rates unchanged at 5.00% was as expected as it signaled further rate cuts for the rest of the year. The UK’s high interest rates of 5.0% render the GBP vulnerable to more significant interest rate erosion than EUR, USD or JPY, hence the extended sell-off. We retain our month-end forecast of $1.9450, followed by $1.90 for Q3. The smaller than expected US trade deficit should also help drag GBP towards $1.9450 and onto $1.9380.

Loonie Gets Jobs Relief

The much anticipated Canadian jobs report showed employment rising by a net 19.2K in April following a 14.6K increase in March, beating expectations of a 10K increase. The unemployment rate rose to 6.1% from 6.0%. The report managed to boost the CAD but further volatility is anticipated for the day due as expectations of further BoC rate cuts still remain. The loonie was being sold off across the board during the Asian and European session despite oil prices soaring to a new record high of $125.80 per barrel. The jobs data provided CAD with temporary relief against the struggling GBP and CAD but USDCAD and EURCAD remain volatile. We expect surging oil and today’s jobs report to favor CAD versus GBP and NZD but maintain USDCAD capped at 1.0120. We expect losses to revisit 1.0060, followed by 1.0030.

Yen Soars on Rising Fear

Yen flexes its muscles after marked reduction in risk appetite following the AIG earnings. Out expectation for a rise in the VIX after the rare 4-day string of uninterrupted declines also helps us anticipate fresh declines in US equities. Although our 103 yen month end target has already been breached, we continue to stick by it. In the shorter term, we expect the pair to test 102.50. Key support stands at the 50-day MA of 102. Upside stands at 103.30.

Euro Rises Past $1.54 But Gains Seen Limited

Rising oil and continued hawkishness from ECB’s Trichet reinvigorated the euro to broaden its rebound, especially against the USD. Yesterday’s cover story in the Financial Times about a joint preference by the US and Europe to stem dollar weakness is no more than an extension of last month’s G7 statement about currencies and must not be taken as a change of policy. Whether the story was a PR coup by the US and Europe to pick the timing of the publication of the story in order to extend the dollar’s gains, market participants are well aware that the only meaningful change in possible for currency markets is a change in central bank policy instead of the rhetorical tack of Finance Ministers. As long as the ECB maintains its relentless hawkishness against rising inflation and the Federal Reserve is forced to leave the door open for further rate cuts, the dollar’s medium term weakness is likely to remain.

Surging oil prices and mixed US data will continue to slow pace of the euro’s recent decline. Support is seen cropping up to $1.5420, backed by $1.5360. Upside remains capped at $1.5480, with subsequent resistance being downgraded to 1.5520 from 1.5550.

Revisiting Thursday’s FX charts strategies pointed to further declines in GBPUSD, NZDJPY and a rise in the VIX index which is bearish for equities. The first two are well in our projected direction, with NZDJPY tumbling from 80.35 to 78.55, breaching below the 79.20 support. Cable tumbled from $1.9562 to $1.9469, nearing our expected target of $1.9450. Our anticipation of further pullback in equities with a rise in the VIX has yet to play out. We expect yesterday’s bigger than expected loss from AIG and the uninterrupted escalation in oil will give traders little reason to hold on to gains before the weekend.

Best

Published on Fri, May 9 2008, 14:57 GMT

USD Unable to Follow up, GBP Down Across the Board

Mon, May 5 2008, 14:58 GMT
by Ashraf Laidi

CMC Markets

We focus today on the unfolding divergence between the rally in US equity markets of the past 3 weeks and the macroeconomic data in the US which have swayed from neutral to deteriorating. Friday’s release of US payrolls triggered a rally in equities and the dollar partly on a decline in the unemployment rate and a smaller than expected decrease of payrolls. But markets also rallied on the Fed’s announcement to expand its TAF lending program and increase its swap lines with the European Central Bank and Swiss National Bank less than an hour before the release of the labor report.

Therefore, we reiterate our calls for cautiousness that the improved state of equity markets is a result of the Fed’s persistent liquidity operations rather than an improved economic outlook. After all, payrolls have shown losses for the past four straight months and the unemployment rate remains in the 5.0% handle. The sectoral deterioration has not abated, with construction, manufacturing and retail all continuing to shed jobs at the same pace as in Jan and Feb. The improvement largely emerged from an upswing in temporary hiring.

The implications for consumer demand merit close attention, which is why the Fed has urged to remain on data watch.

We disagree with the notion that the Fed’s removal of the negative outlook phrase from its FOMC statement was due to their knowledge of a better than expected labor report. Instead, the omission was due to relative stability in financial markets as well as the Fed’s increased preoccupation with accelerating inflation. Again, the Fed remains on data watch, but its preference to pause from cutting rates in June is due to inflation and not improved economic outlook. One should also ask what will be the elements holding equities together when earnings season is over?

Our focus on equities is related to the existing correlation between risk appetite and the Japanese yen. But the rest of the activity in currencies remains clear. Some strengthening in the dollar has indeed materialized, but key levels have yet to be breached against the yen and the euro, which will be visited individually below. Similarly, gold has held above the key $840 foundation and is now at $868 per ounce.

Today’s 10 am EST release of the April services ISM is expected to show decline to 49.5 from 49.6 in March. Employment ISM was at 46.9 in March and in February, while new orders rose to 52.2 from 50.8.

Euro Firms Above Key Support
The euro has gained a full cent from Friday’s $1.5362 lows, as the currency succeeded in stabilizing above the major support of 1.5345-50. ECB’s Trichet today reiterated the importance to contain rising inflationary pressures amid speculation of a divergence among the Governing Council’s view on inflationary pressures and slowing growth. Only a reading above 50 and a rise in employment index in the ISM survey will likely drag the euro closer to the 1.5420s, but support will remain solid at 1.5380. Meanwhile, 1.5480 and 1.5520 will function as the near-term upside targets.

USDJPY Still Fails at 105.50
Just as the dollar failed to break above the key 1.5350 support against the euro, it is unable to breach above its 100-day MA against the yen, at 105.50. It would take convincing rise in the services ISM past the 50 figure as well as an increase in the employment component to make the 105.50 a reality today. Failure of doing so may trigger profit taking in US equities, which would be an extension of the retreat in S&P futures in Monday Asian trade. A successful breach of 105.50 would require a close above 105.55-60. We expect downside to emerge near 104.80 and 104.50.

Sterling Remains the Big Loser
Another day passes confirming our bearishness in the British Pound. Despite the dollar’s pullback against EUR and JPY, the currency is gaining substantial ground against GBP, which shed nearly half a cent to $1.9660. Lower lows and lower highs continue to dictate technical course for the pair, with support standing at 1.9645. Positive ISM to drag cable towards 1.9610. Upside to face resistance at 1.9720.

Best

Published on Mon, May 5 2008, 14:58 GMT

Why Optimism Remains Premature?

Mon, Apr 21 2008, 15:03 GMT
by Ashraf Laidi

CMC Markets

Dollar and sterling are the main losers as the yen and euro dominate in today’s quiet trade, reflecting a renewed retreat in risk appetite. Last week’s growing optimism is running into resistance as the major US equity indices fail to breach above the key technical levels of 1,390 and 12,900 in the S&P500 and the Dow respectively. Commentators and pundits alike have erroneously stated that last week’s highs in US equity indices broke important technical levels. The Dow has not only failed to breach above a key trend line resistance of 12,920, prevailing since the October highs but also failed to breach the 50% retracement from the same high to the January lows. Similarly, the S&P500’s major resistance stands at the 1,410 trend line resistance acting since the October 10 highs. We remind our readers that these recurring failures are no coincidence but instead a technical failure that is largely in synch with prolonged economic uncertainty.

The notion that the worst of the credit crisis is behind us and that US equity indices have reached bottom was given a firm boost late week when markets remarkably shrugged a worst than expected earnings and further writedowns from Citigroup. IBM and Google’s earnings helped to improve overall sentiment and reinvigorate risk appetite at the expense of the Japanese yen. But sentiment is drifting lower after the 77% decline in Bank of America earnings. Last week’s strong earnings were largely a reflection of relatively robust foreign demand and of the weak US dollar. In the event that equities continue to rally simply on the notion that the “worst is behind us”, they will risk diverging with the stark macroeconomic reality that is highlighted by soaring energy costs and rising unemployment. The near bankruptcy of Bear Stearns has become a benchmark of market risk and fear, desensitizing market participants from what is likely to be a slow and long deterioration in US labor markets and an increasingly retrenched US consumer. This week’s release of retail sales is expected to show a 0.3% decrease in March following a 1.0% increase, while ex auto sales are seen up 0.1% from -1.1%. The week will also give way to further corporate earnings reports. Next week will see Fed decision, US payrolls and the first revision of US Q1 GDP and whether it would have shown a contraction.

Next Jobs Report to Elucidate Economic View

We remind readers of the following facts in US labor markets. In the 2000-02 recession, there were as many as 15 consecutive months of negative payrolls between March 2001 and May 2002 producing a monthly average of 148K. In the 1990-91 recession , the longest streak of losing payrolls was 11 consecutive months --between July 1990 and May 1991-- producing an average of 147K. In the current slowdown (not yet officially declared a recession), we’re only in the third straight monthly decline in payrolls, with the monthly average standing at 59K . Thus, to be consistent with previous recessions, payrolls will likely register negative readings for the rest of the year into Q1 2009. This also means that the unemployment’s recent rise to 5.1% is here to stay and the rate is most likely to climb to as high as 5.9-6.0% by year end.

Yen Regains Strength as Optimism Fades

The aforementioned fundamental and technical rationale of the unfolding gauge of market and economic risk is imbedded into increasingly inconclusive gains in the yen crosses. We expect USDJPY to retest last week’s 104.64 highs and falter at the 105 level before charting a renewed pullback towards the 102.20s. Escalating weakness in Japanese fundamentals such as the downgrade of economic conditions by the BoJ and Cabinet are serving to slow the yen’s climb, and offering the G7 comfort as far as currency movements are concerned. Given the spread of layoffs in the auto and finance sectors, we cannot foresee the US April labor report to show a net creation of jobs nor a decline nor a drop in the unemployment rate below 5.0%. But before getting to the jobs obstacle, markets will have to face a test in next week’s FOMC decision in the event a 25-bp rate cut is delivered. We do not expect markets to maintain the same optimism and resilience they have shown recently. The economic repercussions of rising layoffs, falling purchasing power and prolonged loss of home equity maybe in the 4 th or 5 th inning, but are far from the end. 105 yen is likely to act as the next barrier, but 101.50-102 will more likely prevail by mid May.

Sterling’s High Profile Failure

Just as US equity indices failed to break their respective technical requirements for prolonged gains, sterling has failed to chart a convincing breach of the $2.00 mark. We mentioned in Friday’s FX charts strategy that “the high profile rally to $1.9980 from $1.9600 earlier this week was as high profile as the failure to break above the key $2.00 resistance, suggesting that the technical picture remains largely in synch with the fundamental landscape”. Indeed, GBPUSD today topped put at $2.00 before falling to $1.9835. The expectations of at least 75-bps in interest rate cuts from the Bank of England should keep cable below $2.00 and recall the $1.95 by month end.

Published on Mon, Apr 21 2008, 15:03 GMT

Euro Soars as CPI Justifies Hawkish ECB

Wed, Apr 16 2008, 12:12 GMT
by Ashraf Laidi

CMC Markets

Euro surges to a new all time high of $1.5966 after Eurozone March inflation was unexpectedly revised to a record 3.6% y/y from the initial 3.3% estimate, validating the European Central Banks’ relentless hawkish rhetoric and further dampening any chances for a near term interest rate cut. A broad euro rally is accompanied by a deepening dollar sell-off, prompting oil to a new record of $114.46 and lifting gold to a 1-week high of $939 per barrel. Oil’s rally is also prompted by reports of a peak in Russian production.

The extent of resulting dollar weakness is especially highlighted by its decline against the floundering British pound, which has remained on a continued downtrend against all major currencies for the past 4 weeks. It is worth noting that the yen’s rise versus the dollar is not a reflection of falling risk appetite as the currency is being pressured by most of the major currencies. Therefore the theme of falling dollar, rising commodities is likely to prevail throughout the rest of the trading day, with negative earnings surprise being the main downside to this assessment.

China’s decision to raise its reserve ratio on banks for the 16th time since 2006 is having little impact on global equities, but may further complicate the climate for the already tumbling Chinese indices. The People’s Bank of China raised its the reserve requirement by 0.5 percentage point to a record 16% to stabilize escalating credit growth better manage overall.

It will be busy 8.30 am EST when US CPI, housing starts, building permits are due, followed by industrial production at 9.15 am and the Fed’s Book at 2.00 pm. The Markets are bracing for a possible upside surprise in the headline CPI, beyond expected 0.3% following a February figure, with the core CPI seen up 0.2% following a flat figure. Recall that yesterday’s release of a higher than expected PPI boosted the dollar across the board, but that may also be a result of better than expected Empire manufacturing report.

The 9.15 am release of March industrial production is expected to show a 0.1% decline following a 0.5% drop, while capacity utilization is seen at 80.3% from 80.4%.

San Francisco and Philadelphia Fed presidents Yellen and Plosser are due to speak at 11.30 am 12.30 pm respectively. Yellen’s speech will be more of use to the market as it will cover economic outlook.

Euro Nears $1.60 on 3.6% CPI, US CPI May Stop Road to $1.60...for Now

EURJPY is seen extending gains towards 161.45-50, followed by 161.90, due to the combination of better than expected earnings from JP Morgan Chase and Coca Cola a possible recovery in risk appetite and US equity indices. Support climbs to 160.70.

EURGBP rally remains a textbook rally in foreign exchange market as the EUR is boosted on rising inflation and robust economic fundamentals while the GBP rests on a slippery slope of further rate BoE cuts that may amount to a total 100 bps. Yesterday we mentioned “Upside capped at 0.8075, followed by 0.8095”. We stick with this call.

Sterling Downtrend Remains Firmly Cemented

Yen Retreats the Least Against USD

Published on Wed, Apr 16 2008, 12:12 GMT

Yen rises across the board

Fri, Apr 11 2008, 13:26 GMT
by Ashraf Laidi

CMC Markets

Yen rises across the board as financial markets shift to defensive mode after General Electric reported a 6% decline in Q1 profits and lowered its 2008 guidance. The fact that the world’s 3rd largest company has disappointed on both actual earnings and projections is likely to reduce risk appetite for the day, thus, further boosting the low yielding yen and franc, at the expense of the higher yielding currencies. Losses may extend further as the start of the earnings season will likely usher in similar despondent reports from similar conglomerates We may also see broad a retreat in the dollar, rather than declines in the higher yielding Aussie, Kiwi and sterling as has become the case over the last few weeks.

While the notion of US dollar turning into a funding currency (low yielding instrument for carry trades) has been knocked around for the past 4 months, the materialization of such a phenomenon is being increasingly witnessed in global currency markets, as was the case throughout this week. This week’s record highs in the euro at 1.5912 may have occurred on the back of new record high in oil but the

The G7 meeting starting today into the weekend will be notably characterized by a wide menu of suggestions and recommendations on alleviating the unfolding losses in banks and containing the macroeconomic fallout from current market turbulence, but is unlikely to have any tangible impact on financial markets. Aside from the current crisis in credit markets and the unofficial recession in the US, the distinct aspect of this week’s G7 meeting is the apparent dissent between the IMF-under the new leadership of Dominique Strauss-Khan-and the US regarding the projected slowdown of the US economy and the solutions to combating the supporting troubled banks.

In currencies, there are very few novelties the G7 finance ministers and central bankers can introduce in the way of remarks besides the adopted mantra that excessive currency movements are undesirable. ECB president Trichet and his colleagues are expected to reiterate that importance of a strong dollar. The futility of this rhetorical policy has already been cemented beyond FX trading circles and its restatement will only pave the way for further dollar weakness in the medium term, as the Federal Reserve is forced to cut interest rates again this month by at least 25 bps.

Yen Posts Gains as Markets Fear GE

AUDJPY has already dropped by over 60 pips to 93.80 and is expected to extend losses towards 93.60 until encountering the 93.20 trend line support. Upside capped at 94.30.

Euro Eyes 1.5880s

EURGBP treats near its latest record high of 0.8030 and could extend potentially prolong its ascent towards the 0.8050s as the pound is expected to chart a prolonged decline into the rest of the quarter.

Sterling’s consolidation to slip lower

Published on Fri, Apr 11 2008, 13:26 GMT

BoE Cuts, Dollar Tumbles, Euro Soars

Thu, Apr 10 2008, 12:13 GMT
by Ashraf Laidi

CMC Markets

The interest rate decisions of the Bank of England and the European Central Bank were meant to take center stage, but it was accelerating dollar sell-off across that dominated throughout Asian trade and the morning European session, hitting a new low against the euro at $1.5912. Record highs in oil have led the rally in metals all at the expense of the greenback. There was no surprise in any of the two interest rate decisions as the BoE cut rates by 25 bps to 5.00% and the ECB held at 4.00%.

As ECB president Trichet prepares to speak at the press conference at 8.30 am, we will obtain the weekly jobless claims will draw attention are expected to have dropped to 385K after last week’s 38k jump to 407k, which was the highest reading since Sept. 17, 2005 (week following Hurricane Katrina). The less volatile 4-week MA had jumped by 15.8K to 374.5K, highest since Oct. 2005. Continued claims rose to 2.937 mln, the highest since July 17, 2004. Markets await the status on what the Labor Department referred to as seasonal difficulties arising from the Easter Holiday. Yet even if previous and latest drop back below the 400K handle, the 390K territory remains consistent with the newly hit 5.1% unemployment rate in the March report. terrmay be revised down to the 390sKin the following week, but the climb remains consistent with recessions than the 360-70s seen earlier.

Also at 8.30 am EST is the US February trade balance expected to have improved to $58 billion from $58.2 billion.

Sterling to Deepen Post-BoE Cut Losses

The Bank of England made the widely expected decision to reduce interest rates by 25 bps to 5.00%, the third rate cut of the current easing cycle, which began in December. . Sterling hold steady after the Monetary Policy Committee stated inflation would remain high before easing later in the year on spare capacity. The MPC added that sterling weakness will support exports, making yet another reference to the weak currency. MPC officials have often talked down the pound, either as a forecast or a theoretical statement. High inflation has served as an obstacle to the hawks in the Monetary Policy Committee made as price growth hit a 9-year high of 2.5% in February. Nonetheless, BoE Governor Mervyn King has repeatedly stated in past testimonies his forecast for a retreat in inflation toward the latter part of the 2-year projection period.

Since assuming independence in 1997, the BoE led an active monetary policy, displaying more frequency in policy cycle shifts than its US , Japanese and Eurozone counterparts. It took five months for the central bank to shift from rate hike in July 2007 to a rate cut in December, while it took 15 months for the Fed to shift from the final tightening of 2006 to the rate cut of last September. The ECB also took more than a year to shift from one cycle to another. Such frequency in policy shifts is a reflection of the size of the economy, in contrast with the US , Japan and the Eurozone. This aspect may also help explain the 75-100 bps in further interest cuts priced in for the BoE later this year.

Despite the emerging damage in the dollar, we expect sterling’s indirect strength to taper off and push back cable towards $1.9740. Key support stands at $1.97. We continue to deem any bouts of sterling strength as a manifestation of USD weakness, which makes it a bear trap for GBP. Upside seen capped at 1.9840.

Opportune Euro Soars to Fresh Record Highs

USDJPY to Break Under 100

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Published on Thu, Apr 10 2008, 12:13 GMT

Triple Failures, Sterling's Tumble & Euro Resilience

Tue, Apr 8 2008, 13:37 GMT
by Ashraf Laidi

CMC Markets

The charts below confirm the major equity indices’ failure to breach above moderate technical barriers, which suggests possible downside ahead. The failure of the S&P to exceed more than 3% above its 50-day moving average is now in place. Now that the indices have failed for the third time to breach above their respective resistance level (marked by greenline), we expect them to extend declines towards 12,350 and 1,330 in Dow and S&P respectively. Such retreat in risk appetite will likely cap USDJPY at 102.50s and trigger fresh declines towards 101.70. More below.

At 10 am is the February forecast for US pending home sales expected down 1.0% to 84.9 after having been flat in Jan. The year on year change is expected to show a decline of as much as 21% following -19.6%, -24.2% and -19.8% in Jan, Dec and Nov respectively.

The 2 pm release of the FOMC minutes from the Mar 18 rate decision will shed more light on the Fed’s decision to opt for a 75-bp rate cut instead of the expected 100-bp move including the 2 dissenting votes, but may not offer hints on the magnitude of the rate cut in the April meeting. Despite an apparent stabilization on the systemic risk front, we continue to expect a half point cut later this month due to the unambiguously deteriorating picture on the macroeconomic front.

Sterling Breaks Key Support

One day after we highlighted our case for further declines in the British pound, the currency hits a 5-week low, shedding more than two full cents from its $1.9920. We stated our expectation for a 25-bp rate cut this due this Thursday as a fundamental argument. But today’s release of the latest figures on UK house prices has increased the downside momentum in the currency. The March index from Halifax, the UK’s largest mortgage lender, showed a 2.5% fall in house prices, the biggest drop since September 1992 (when pound broke off the ERM in reflection of economic contraction), following a 0.4% decline in February. The annual decline was 1.1%, lowest since December 2002. Last week’s release from Nationwide showed a 0.5% drop in February.

Euro Exploits Weak US, UK Fundamentals

USDJPY Weak Tone Remains the Norm

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Published on Tue, Apr 8 2008, 13:37 GMT

Dollar Rebound To Emerge on Back of Sterling

Mon, Apr 7 2008, 15:54 GMT
by Ashraf Laidi

CMC Markets

While the market is pricing a 65% probability for a Bank of England rate cut to 5.00% from 5.25% this Thursday, we deem rate a cut to be a “done-deal” as the central bank cannot afford to undergo further systemic and economic risk by leaving rates above 5.00% especially at a time when the highly leveraged UK consumer is being increasingly stretched by accelerating declines in UK home prices.

The chart below shows that the UK interest rates have further downside from 5.25% to 4.25% later this year, which will boost the US-UK 10 year spread and drag down GBPUSD towards $1.970 and 1.9620. We expect $1.9450 by end of the month, while upside to remain limited at $2.020.

Euro Capped at $1.5850

Euro was pressured by remarks from UAE central bank chief Al Suweidi indicating a continuation of the current foreign exchange regime, with no plans drop or revalue its currency peg to the dollar. The reiteration of these remarks come despite the forming of a committee studying the pros and cons of the current peg reporting to UAE prime minister and Dubai ruler Sheikh Mohammed bin Rashid al-Maktoum. Denying any change in the inflationary currency regimes by Gulf State monetary officials has become the norm, despite double digit inflation rates resulting from pegging to the falling dollar and the soaring prices of foodstuffs. The leaders are also well aware that dropping any hints towards a revaluation or shift to a basket of currencies would accelerate the fall of the dollar and oblige them to take a bigger hit to the hundreds of billions in USD-denominated assets held by the State’s sovereign wealth funds.

What was a clearly dismal US March jobs report on Friday confirming a deteriorating labor market in the United States failed to extend the euro’s push higher towards the $1.58 figure. This weekend’s G7 meetings in Washington , DC will coincide with the semi-annual IMF/World Bank meetings, thus, naturally dissuading traders to add to euro longs in the event that officials reinforce their stance against excessive currency moves. But formalities aside, it is not the G7 meeting that will stand in the way of any fresh euro strengthening but a combination of GBP weakness indirectly dragging EUR lower and further worries of struggling banks in continental Europe .

Having said that, the various support levels underpinning the euro are stacked up in defending the single currency at $1.5550, 1.5450 and the notably solid support of $1.5350, which coincides with the a 38% retarcement of the rise from the Feb 7 to the Mar 17 high. The aforementioned weakening in US fundamentals will maintain the Fed on the easing side for the rest of the year. Upside capped at $1.5780. Key resistance stands at $1.5830.

USDJPY Upside Capped at 103.50

USDJPY resilience is largely emerging on yen weakness as risk appetite picks up an on an increasingly calm financial markets. Last week’s write downs from UBS and Citigroup were taken in stride by a market community that may be also complacent in shrugging a broadening and deepening erosion on the macroeconomic front. The argument that further economic weakness is already being discounted in the market does not take into consideration the number of layoffs (white & blue collar) in the pipeline, as well as the repercussions to an already fragile consumer spending power. The other part of the puzzle is corporate earnings, which are already in the red.

We continue to integrate USDJPY and rest of yen crosses into performance of US stocks, whose strengthening rebound towards the key 12,770 and 1, 285 levels in the Dow and S&P500 respectively are further rewarding risk appetite at the expense of the Japanese currency. Nonetheless, for newfound strength in momentum, we;; have to see a breach in the S&P500 above 1,390, which is 3% above the 50-day moving average, a technical requirement underlined by its repetitive failure even since the index topped out in October. Our longer-term assessment indicates that in order for the bull to reassert itself, a close above 1,400 has to take place.

USDJPY faces 103.50 resistance, which is the 61.8% retracement of the decline from the 108.21 high to the 95.73 low. 103.85-90 follows as the next barrier—trend line resistance from 114.63 high of Dec 28. We expect 102 to be tested in second half of month, followed by 100 as we approach the Fed decision.

Best

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Published on Mon, Apr 7 2008, 15:54 GMT

Macro Erosion Takes Over from Market Turbulence

Fri, Apr 4 2008, 14:10 GMT
by Ashraf Laidi

CMC Markets

Dollar drops across the board after March payrolls dropped lost 80K following a downward revision of 76K (from -63K), while the unemployment rate jumped to 5.1% from 4.8%, the highest since September 2005. Average hourly earnings rose 0.3% matching the previous figure and consensus forecasts.

Comparing to previous recessions

The 2000-02 recession had as many as 15 consecutive months of negative payrolls between March 2001 and May 2002 producing a monthly average of 148K, while in the 1990 recession lasting for 11 consecutive months between July 1990 and May 1991, producing an average of 147K. In the current slowdown (not yet officially declared a recession), we’re only in the third straight monthly decline in payrolls, with the average standing at 59K. Thus, to be consistent with previous recessions, payrolls will likely register negative readings for the rest of the year into Q1 2009. This also means that the unemployment rate will likely climb to as high as 5.9-6.0%

Why and How 1.0% Fed Funds Before year End?

The 0.3 point jump in the unemployment rate to its highest level since September 2005 confirms what we mentioned following yesterday’s 407K reading in jobless claims, namely a 1.0% interest rates before year’s end. With 2.25% in today’s fed funds rate, we expect the Fed to go for 50 bps later this month as there is no meeting scheduled in June, therefore we doubt whether the market psychology could sustain operating smoothly without a Fed easing for 2 months. Producing a 1.75% Fed funds in April, the Fed is then scheduled to meet five times for the rest of the year, which is sufficient frequency for cutting rates by an aggregate of 75 bps a the economy traverses the worst phase of the current.

USDJPY to test 101.50

Euro Capped at $1.58

USDCAD Supported at Parity

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Published on Fri, Apr 4 2008, 14:10 GMT

Systemic Risk May be Out, But Recession is In

Thu, Apr 3 2008, 13:56 GMT
by Ashraf Laidi

CMC Markets

The +38k jump to 407k in weekly jobless claims was the worst reading since Sept. 17, 2005 (week following Hurricane Katrina). The less volatile 4-week MA jumped 15.8K to 374.5K, highest since Oct. 2005. Continued claims rose to 2.937 mln, highest since July 17, 2004. The Labor Department did note seasonal difficulties arising from the Easter Holiday . The 400K handle may be revised down to the 390sKin the following week, but the climb remains consistent with recessions than the 360-70s seen earlier.

The report leaves little doubt to whether the US economy is in a recession, and supports our expectations for interest rates to reach 1.0% before year-end. 50 bps in April will take fed funds to 1.75% later this month, leaving 75 bps for the rest of the year is a highly plausible occurrence.

Today’s report confirms what we said two weeks ago about markets’ false sense of optimism/comfort arising from the lack of “systemic risk” news, ignoring the macroeconomic realities of the financial crisis which are here to stay and spreading.

Revisiting last week’s strategy piece (Mar 25) about the S&P 500 inability to rise more than 3% above its 50-day moving average, the validity of this pattern may not augur well for the index. The chart below shows that since having reached its record high in October 2007, the S&P500 has had 34cases of failed rebounds. Today’s jobless claims report is the fundamental catalyst for the S&P500’s failure to regain the 1,380 resistance and find the 1,260 low.

We stated that in order for the index to break this pattern on the upside, it would have close above 1,380-5 level. On Tuesday, the high reached 1,377, still not good enough. The 1,382 level also marks a key trend line resistance, which acts as a pressure point since February 4. Once having failed to breach above 1,380-5, we expect to see a renewed pullback in the S&P500 towards the 1,300, before extending losses to the 1,257 lows.

Friday’s payrolls report may act as a key catalyst, fuelling the possibility of breaching above the 1,380s in the event of a stronger than expected showing. A weak reading will intensify the selloff in equities in light of the recent failure in the index.
CURRENCY IMPLICATIONS: Considering the persistently strong correlation between risk appetite and the yen--with the currency used to purchase risk (equities, gold and oil) --renewed losses in stocks will refuel the yen and the Swiss franc after these two currencies have suffered from the recent bounce in stocks. The implications for USDJPY are illustrated in the chart below.

USDJPY to Peak Out at 103.30s

Just as we write that that the USDJPY implications from the S&P’s failure are negative, the US jobless claims deliver. Similarly, the implications for USDJPY in the event of this equity failure are for renewed losses towards 102.30, followed by 101.80. Upside remains capped at 102.80.

US Jobless Claims Saves Euro from Poor Data

EURUSD soars from $1.5520s to 1.5580s on the US jobless claims, which confirm that recession is here and interest rates will likely reach 1.0% before year-end. 50 bps in April will take fed funds to 1.75%, leaving 75 bps for the rest of the year is a highly plausible occurrence. EURUSD resistance stands at 1.56020, followed by 1.5650.

The jobless claims figure was alleviates the Euro from the previous selloff, which took place following weak services data. Eurozone retail sales fell 0.5% in February for an annual decline of 0.2%, following an increase of 0.5% and 0.2% m/m and y/y in the prior month. Markets had expected sales to rise by 0.2%. It was the biggest monthly rise in 3 months.

Eurozone services PMI fell to 51.6 in March from February’s 52.3, nearly matching consensus forecasts of 51.7. The price index hit the highest in 9 months. Germany ’s services PMI fell to 51.8, while Italy ’s edged up to 48.8 from 47.2. France ’s index slipped to 57.3 from February's 58.2, while Spain ’s index tumbled to 40.9 from 46.1, the biggest decline of the series since it was created in 1999.

Poor US Data to Delay Worse for Sterling

Despite today’s US weekly claims, we retain our broadly negative assessment for GBP, as we expect next week’s anticipated BoE rate cut to open the door for 3 more rate cuts of 25-bp moves. Separately, UK services PMI hit a 6-momth low when it fell to 52.1 in March from 54.0 in February, undershooting expectations of a smaller decline to 53.3. The input prices index rose to a record high 66.2 from 65.6.

We expect interim upside to reach $1.9865-70, followed by $1.9920. Friday’s payrolls may even call up 1.9990, at which point it will serve as a selling point for the pair ahead of BoE easing. Support climbs to 1.9760 and 1.9810.
Best

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Published on Thu, Apr 3 2008, 13:56 GMT

Equities' Quarterly Glance, Yen & Kiwi

Mon, Mar 31 2008, 15:03 GMT
by Ashraf Laidi

CMC Markets

A Quarterly Look at the Dow, S&P500

Last week we mentioned that the S&P 500 would need to breach 3% beyond its 50 day moving average in order to shake out the bearish spirits in the index. But failure to cross above 1.370, is now giving rise to 1,300. The quarterly charts below for the Dow and the S&P 500 are technically aligned for deeper declines ahead. We assert that the S&P500 support at 1,260 coincided with the Dow’s holding at the 11,634, which is well below the 2000 high of 11,750. We deem this to have been a viable breach of the 2000 low and further erosion is in the works as early as this week, with Friday’s labor report to be the likely catalyst. The long term nature of these quarterly charts also allows for the possibility of more substantial rebounds to as high as 1,400 in the SP500. Such forcast is in line with our FX outlook for a prolonged sub 100 yen/dollar rate and deeper losses in GBP.

Yen Broadens Strength, Caution Urged Ahead of Tankan

Yen rallied across the board today as risk appetite recedes, but this evening’s release of the Bank of Japan's quarterly Tankan survey on business sentiment is expected to show a sharp decline in business confidence. Markets will also mull planned capex and the forecast for the July survey. The tankan may trigger yet another short term break out above the 100, where we see substantial resistance at 100.50. Support starts at 99.40, followed by 98.70.

Euro to Test $1.60

Another day passes and another valid reason for the euro to test near its $1.59 record high and hit a fresh record at against the pound at 79.70 pence. The flash estimate for Eurozone inflation surged to a record 3.5% in March, exceeding consensus forecasts of a 3.3% reading. data showed on Monday, effectively ruling out any near-term ECB rate cuts despite a further weakening of economic sentiment and falling inflation expectations. On Friday, ECB Gov Council member Axel Weber said the ECB would not cut rates any time soon and that present level of rates maintain price stability in the region. Earlier in the week, ECB JC Trichet said ECB interest rates were appropriate. Both of the statements boosted the euro. Today’s inflation report is the reason why markets bid the single currency \higher each time they hear the same inflation vigilance from Fed officials vigilance listen to the ECB’s hawkishness.

EURUSD carries the technical demeanor to reach towards the $1.59, which is expected to be breached at 1.5950. This week’s array of key US data on ISM services, manufacturing, ADP and payrolls bolsters chances of $1.60 this week as the potential for further negative US news broadens by the day. Support climbs $1.5650, backed by 1.5590.

Cable Downed by Data, King

More bad news for the beleaguered pound after the UK services sector index grew 0.5% in the 3 months ending in January, the weakest pace since May 2005. Separately, Bank of England Mervyn King all but supported further declines in the pound when he described the current sell-off as merely correction of previous strength, adding that inflation will come down in the long term.

The latest report showing UK housing deterioration is the Hometrack price index, which fell 0.2% in March and up 0.4% from a year ago. Last week, a separate home price measure fell for the the fifth straight month in March, while consumer confidence dropped to lowest in 15 years.
With the a 25bp-rate cut secured by the Bank of England this month, it’s a matter of time before cable extends losses towards $1.9750, which is the 61.8% retracement of the 1.9360-2.0396 rise. Upside faces increased pressure at 1.9920, followed by 1.9960. Medium term target stands at 1.9650.

EURGBP hits its third daily record high finally breaks above the 79.10 pence high to a new record of 79.20 pence. We expect further gains to as high as 79.40 pence, before a retreat down to 78.80.

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Published on Mon, Mar 31 2008, 15:03 GMT

Equities' Quarterly Glance, Yen & Kiwi

Fri, Mar 28 2008, 15:32 GMT
by Ashraf Laidi

CMC Markets

A Quarterly Look at the Dow, S&P500

Yen Broadens Strength, Caution Urged Ahead of Tankan

Euro to Test $1.60

Cable Downed by Data, King

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Published on Fri, Mar 28 2008, 15:32 GMT

Pound Down Across the Board, US Consumers Follow

Fri, Mar 28 2008, 13:20 GMT
by Ashraf Laidi

CMC Markets

The 0.1% increase in February personal is the weakest in more than a year and wraps up a dismal week of consumer related data, while heightening the fear of the Federal Reserve that the credit crisis and economic slowdown is trickling down to an already overstretched consumer. Personal income rose by a robust 0.5%, following 0.3%

Core PCE price rose 0.1%, dragging the annual rate to 2.0%, from 2.2% and lower than the expected 2.1%. .

These figures are a stark reminder to market participants who may have grown complacent with the absence of systemic risk-related news ignoring the macroeconomic realities weighing on consumers and corporate earnings.

The British Pound demonstrates why it may be the least favored currency amid the G10 nations besides the US dollar. The currency fell by more than 1.5 cents against USD, while hitting fresh record lows against at 79.20 pence against the euro. UK home price growth fell for the fifth straight month in March, while consumer confidence hitting its lowest in 15 years. Earlier in December we called the pound the “dog currency of 2008” due to the fact that its high interest rates suggest the biggest downside ground for rate cuts among the industrialized nations, considering the pace of declines in housing and the implications for the highly leveraged UK consumer. With UK interest rates standing at 5.25% and the market pricing a 100bps in rate cuts for the year, such magnitude of rate cuts is behind the erosion of the currency.

The University of Michigan consumer sentiment survey’s final release for March is seen at 70 from the preliminary 70.5.

Euro Powered by Further ECB Hawkishness

There are multiple ways for the European Central Bank officials to reiterate their inflation preoccupation, and each time they do so, the euro pushes higher across the board. ECB Gov Council member Axel Weber said the ECB would not cut rates any time soon and that present level of rates maintain price stability in the region. The fact that ECB officials are staunchly reiterating the suitability of current level of interest rates when the euro is at record highs suggests very little about a sharp a retreat in the in the currency any time soon. The comments were instrumental in shoring up the currency after an earlier decline following a drop in French consumer confidence.

Separately, German import prices rose 1.1% in February m/m, nearly twice the 0.6% rate in January. .

EURUSD is expected to maintain its consolidation within the $1.5760-$1.5860 range, but US consumer weakness is likely to test the 1.5865-70 resistance, after which we should see considerable downside pressure at $1.59. Oil prices continue to play a major role in boosting the pair, especially as they breach above the $107 level. Support remains underpinned at 1.5770, backed by 1.5720.

EURCHF Eyes 4-week trend line resistance

Cable Eyes Further Downside, Capped at $2.0040

EURGBP finally breaks above the 79.10 pence high to a new record of 79.20 pence. We expect further gains to as high as 79.40 pence, before a retreat down to 78.80.

USDJPY Probes 100 Yen

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Published on Fri, Mar 28 2008, 13:20 GMT

ECB To Remain Passive Towards Euro Strength

Thu, Mar 27 2008, 14:34 GMT
by Ashraf Laidi

CMC Markets

US jobless claims fell 9K to 366,000 last week, with the Easter Week shutdown in Puerto Rican claims offices partly attributed for the decline. The GM strike in Michigan and Ohio plants continues to weigh on the employment situation, and raises expectations of a third consecutive monthly net decline in non farm payrolls. We may also see a rebound to the 5% level in the unemployment rate.

US Q4 GDP remained unrevised at 0.6%, while corporate profits fell 3.3%.

ECB Will not Do Much on the Euro

Euro is losing over a full cent from yesterday’s $1.5840 high after ECB president Trichet reiterated his concern for excessive currency moves. Nonetheless, Trichet did tacitly justify the currency’s appreciation by indicating that Eurozone credit is growing “very strongly”, Eurozone fundamentals “remain strong”, and that the region is not observing the same credit crunch as in the US . Trichet also reiterated the need to anchor inflationary expectations. With such tacit justification for the euro’s strength, it leaves very little ground for the EC B to intervene, hence, any potential interference in the currency may stem from the need to temper the rate of appreciation, rather than reversing the course.

According to a wire report citing a unnamed “G7 Source”, European government officials are increasingly irritated with the US on its passive handling of the dollar ahead of next month’s G7 meeting. But the situation is more complex than that. Some officials in the US may express impatience with the European Central Bank’s persistently neutral-to-hawkish monetary policy. Many have suggested that an ECB easing would not only help the global economy and complements the Fed’s easing, but also would help stabilize the dollar’s decline/euro strength. The flawed part of such argument is not only associated with disregard for the ECB’s inflation mandate, which, is currently breached by more than a percentage point, but also due to Europe’s relative economic strength vis-a-vis the US. Aside from the contrast in consumer and business confidence between Europe and the US (today showed another string of improvement in European confidence figures).

On the data front, Germany ’s GfK consumer confidence rose to 4.6 in April versus an expected 4.4, while Italy ’s retailers' confidence rose to 110. 7 in March versus expectations of 110.3. .

Interim support holds at the 3-day support at $1.5720. We expect further declines to stabilize at 1.5690, which are followed by rising support at 1.5660 The prolonged contrast of economic data between the US and the Eurozone Germany is greasing the wheels for a euro climb towards the $1.5980s, but the market will yet have to show the necessary confidence in breaching above the $1.60 level.

Another 3-Steps-Up-2 Steps Down for the Yen
Sterling's Gains Remain Short-lived
EURGBP

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Published on Thu, Mar 27 2008, 14:34 GMT

Another IFO Boost for the Euro, $1.60 In Sight

Wed, Mar 26 2008, 14:48 GMT
by Ashraf Laidi

CMC Markets

The prolonged contrast of economic data between the US and the Eurozone Germany may grease the wheels for the euro to reach the $1.60 figure as early as next week.

Unexpected weakness in US durable goods is accelerating dollar losses across the board after Germany ’s IFO business survey had surged to a 7-month high earlier today. Durable goods orders fell -1.7% last month, versus expectations to of a 0.8% increase, with the broad weakness seen in the declines of 2.6% and 1.6% in both ex-transport and ex-defense orders.

t was a strong IFO business survey that pushed the euro above the $1.50 level a month ago for the first time and it is a 7-month high in the March IFO survey that’s giving the euro a 1.5 cent rebound following last week’s sharp losses in the currency. Germany ’s main business sentiment survey surged to a 6-month high at 104.8 in March from 104.1, defying expectations of a retreat towards 103.4. The IFO current assessment index rose to 111.5 from 110.3, exceeding forecasts of 109.8, while the business expectations index climbs to 98.4 from 98.2 versus, against forecasts of a 97.8.

As we mentioned earlier this week, IFO survey has proven a key inflection point in the euro’s momentum shift during the 10-year life of the single currency. The chart below shows the strong positive correlation between the IFO’s climate index and ECB interest rates, suggesting that expectations of an ECB 2008 rate cut will diminish significantly. Continued US data weakness-such as further sub-50 readings in the US ISM services and manufacturing surveys and a third consecutive monthly net loss in US payrolls due next week, may push the single currency to as high as $1.60 in the second week of April . Such contrast in data strength presents a powerful rationale for the currency to gain further ground ahead. .

At 10 am EST US new home sales are expected down 2.3% to 578K in February, with the annual decrease seen as much as 32%. The months supply --shows how many months it takes for all new homes to be sold--will be scrutinized as it is expected to breach the 10-month figure.

Euro’s Jumps on Contrasting European-US Fundamentals

The contrast between yesterday’s release of US consumer confidence and consumer expectations at 5-year lows and 35 year lows against further multi-month highs in Germany’s business sentiment surveys should give another powerful boost to the euro, bringing it closer to the $1.60 level, especially that the currency has retreated for 5-consecutive days, a required element for further momentum accumulation. Next week’s ISM and non-farm payrolls reports from the US may be instrumental in extending the euro towards the previous $1.59 high. Further euro strengthening will surely draw ECB policy makers into making further jawboning about the currency levels.

US new home sales data will play a factor in determining whether we’ll see $1.5785 as early as today, but the possibility of $1.59 this week shall depend upon overall global market appetite as well as Friday’s US consumer spending. Support climbs to 1.5550, backed by 1.550.

Yen Sill Fired Up Across the Board

Sterling Remains Dollar’s Saving Grace

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Published on Wed, Mar 26 2008, 14:48 GMT

Euro Faces IFO Test

Tue, Mar 25 2008, 16:18 GMT
by Ashraf Laidi

CMC Markets

The 10 am EST release of the US existing home sales will kick off this week’s round of housing related figures, which will includes Tuesday’s release of the January home price index and Wednesday’s February new home sales. Existing home sales are expected to drop 0.5% to 4.85 mln in February as the month’s supply is expected to hit a new high at 10.5 from 10.3.

With financial markets shut in Europe, China and Hong Kong for Easter Monday Holiday, liquidity in the US session is expected to remain lower than normal and so is the fear element. But weaker than expected sales figure may trigger renewed erosion of risk appetite. Concerns with commercial finance company CIT seeking emergency funding and selling assets to remain in business have cropped up, with the implications for small business finance looking bleak.

Euro Awaits IFO Test

Last week’s euro tumble will be reassessed ahead of Wednesday’s key IFO survey on German business sentiment. The February climate index rose to a 3-month high of 104.1, posting its third consecutive monthly increase, while the situation index jumped to 110.3 from 107.9, regaining its November high. Just as the IFO survey’s strengthening has been persistently instrumental in boosting the euro to new highs, disappointing IFO releases have also proven to trigger sharp declines in the currency. Considering the euro’s present shaky sentiment, a report below 104 may accelerate losses towards the key $1.5350 support, which is the 38% retracement of the rise from the Feb 8 low. A breach of 1.5350 is seen testing 1.5300, followed by 1.5280. Upside seen capped at 1.5460,with key resistance standing at 1.5520.

Yen’s to Retain Strong Tone

After briefly breaching above the 100 yen level in thin trading, USDJPY drifts back to 99.60s. The currency may come under renewed pressure on improvement in risk appetite. The continued leadership vacuum at the Bank of Japan is giving way to speculation of a near-term rate cut. We do not expect a rate cut any time soon as the latest economic data do not warrant action that would erode the central bank’s interest rate ammunition. No judgment on the latest liquidity situation in credit markets can be made until we’re well into full functioning mode later in the week when traders return to their desks.

The 4-hour chart is testing the 5-day trend line at 99.50, which is sustained by the 99.20 low. Our medium and long term assessment remains for the pair to hover below the 99 figure and reach to as low as 95 towards the end of Q2.

Sterling to Stabilize for Now

Rightmove’s index on UK home prices slowed to 0.8% m/m from 3.2%, translating to an annual increase of 5.0% from 5.8%. The Financial Times reports that UK homeowners are increasingly facing problems in refinancing their mortgages. Last week’s damage in the British pound was fuelled by a combination of commodity-driven USD gains and deteriorating fundamentals in the UK , underlined by rising chances of a BoE rate cut next month.

Cable stands just above the 50-day MA of $1.9775, with upside remains limited at 1.9840. Any additional gains are seen capped at 1.9870. Support to emerge at 1.9780. Risk for prolonged selling below 1.9750 will depend on overall risk appetite and the state of equities later in the week.

EURGBP continues to stabilize at 0.7760, followed by the 0.7730 trend line support. Upside target stands at 0.7810

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Published on Tue, Mar 25 2008, 16:18 GMT

Dollar Boosted by Commodity Correction

Thu, Mar 20 2008, 15:24 GMT
by Ashraf Laidi

CMC Markets

The Philly Fed survey improved to -17.4 in March from -24 (lowest since February 2001) but remains negative for the fourth straight month. The new orders index stands at -9 from -10.9, posting its third negative figure for the third straight month.

The leading indicators index fell 0.3%, posting its 5th consecutive decline as the 10-variable index reflects the broadening slowdown in the US economy.

The latest reading of US weekly jobless claims showed a 22k increase to 378k last week, versus expectations of a 3K rise. This was highest level since October 2005, while continuing claims rose to their highest since 2004. The current deterioration in jobless claims is further confirmation of recession, but the NBER-- body in charge of officially calling recessions has yet to continue determining the beginning of the downturn, which we expect to have begun in December 2007.

The dollar’s broad gains emerge as prolonged global equity declines trigger further reduction in risk appetite, prompting speculators to take funds off the table from rallying commodities. Whether it is profit taking in commodities or simply to meet margin calls in tumbling equities, the commodities sell-off is occurring to the benefit of the US currency. Gold prices tumble more than $115 per ounce to $905 per ounce, on its way to make its biggest weekly decline in 25 years. Oil prices fall by more than $7 towards the $100 level.

The commodity currencies (CAD, AUD and NZD) are the biggest losers during the current phase of falling commodities, which is negative for equities. The fact that this is a holiday shortened-trading week and today markets triple witching hour with the expiration of individual an index option and futures contracts suggests that further volatility is ahead today. All markets will be closed for Good Friday tomorrow.

Euro Decline is no Reflection of European Fundamentals

The broad euro correction emerges on the heels of deleveraging in credit markets, which is prompting profit-taking in commodities to the benefit of the US dollar. The 2-cent decline in the euro is no reflection of Eurozone fundamentals, but a sign of resulting unwinding in dollar selling trades, which were dragging the dollar across the board.

Eurozone preliminary Manufacturing PMI fell slowed to 52.0 as expected in March, while Germany’s PMI slowed to a better than expected 54.9.

EURUSD selling has yet to extend towards the $1.5350 support, which is the 38% retracement of the rise from the Feb 8 low. It is worth noting that the closely watched 50- and 200 day moving averages are at $1.4940 and $1.43, suggesting that further euro erosion is in the works. Subsequent support stands at 1.5280, followed by 1.5255. Upside limited at 1.5470 and 1.5520.
Separately, German MOF: Reiterates that growth dynamics remain strong || Sees no sign of a significant consumer spending rebound || Price risks are restraining consumer spending || Economic dynamism to slow in 2008 || Trade will boost 2008 growth

USDPY Capped at 100

Sterling Bears the Worst of Both Worlds

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Published on Thu, Mar 20 2008, 15:24 GMT

FOMC FX Preview

Tue, Mar 18 2008, 13:48 GMT
by Ashraf Laidi

CMC Markets

US housing starts fell to 0.6% to 1.065 mln in January, above the expected 1.000 mln, but building permits fell 7.8% to 978k, well below the 1,023 mln expected and the lowest level since Sept 1991. Permits for construction are the more forward looking indicator than the actual starts, therefore the figures suggest further weakness to come in residential construction.
Feb PPI rose 0.3% (exp 1.0%), and core PPI rose 0.5% (exp 0.2%).

Markets continue to price a full probability of a 100-bp rate cut in the fed funds rate. Regardless of whether the Fed cuts the by 75 bps or 100 bps this afternoon, the dollar is bound for deeper losses against the euro and the yen into the rest of the week and the month. Either outcome will take the dollar’s rate disadvantage with the euro at the worst level since November 2002. Stronger than expected earnings from Goldman and Lehman as well as aggressive Fed easing will likely provide a short term boost for carry trades and lift GBP, AUD and NZD higher against the USD and JPY.

Yen to Step Aside for Fed’s Aggressive Move
We expect the yen to continue its temporary retreat in the midst of expectations for an aggressive 100-bp cut by the Fed, which should reenergize risk appetite trades for the short-term. Readers should be aware of the “bear market” rally phenomenon in equities, which is characterized by fierce one-day rallies of as much as 3.00% that are often reversed in a matter of 1-2 days. This was common during the beginning of the 2001-2 bear market as these rallies proved detrimental to short-term traders anticipating persistent declines.

A 100-bp rate cut has the potential to carry USDJPY to as high as 98.70 and 99.00 amid sharp rallies in equities, but the interest rate differential handicap of the US dollar is expected to prevail and trigger further USD selling. A 75-bp cut may not trigger the same degree of gains in equities and could drag the pair to as low as 97 and 96.30.

CAD Capped by Slowing Inflation
The loonie was hit across the board after CPI rose 1.8% y/y in February, following a 2.2% increase in January, while the core CPI rose 1.5% following a 1.4%, beating expectations of a 1.2% increase. The core rate remains well below the Bank of Canada’s preferred 2.0% level, thus, supporting expectations for at least 25-bps cut next month. Stepping back from the short term fluctuations of USDCAD, we note an upward consolidation with rising support at 0.9820 and 0.9860, with the upside capped at 0.9980 and 1.0020. Current CAD strength is triggered by improved sentiment for risk appetite and equities, which may drag USDCAD back towards 0.9820 and 0.9780 at which point we should expect strong foundation to take hold.

CADJPY: :

Euro Remains Supported:

EURCAD:

Sterling’s Boosted by Inflation:

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Published on Tue, Mar 18 2008, 13:48 GMT

Lack of Coordinated Cenbank Intervention Highlights Negative USD Fundamentals

Mon, Mar 17 2008, 15:50 GMT
by Ashraf Laidi

CMC Markets

NY Fed’s Empire Index plunges to -22.2 in March from -11.72 in February, versus expectations of -7.0.

The 9.15 am release of the US industrial production figures expected at -0.1% from 0.1% will steer short-term interest in the pair, especially if a decline of more than 0.2% is in the works.

Q4 current account deficit drops to $173 billion from $177.4 billion in Q3 as the decline of the dollar boosted the trade part of the imbalance. Yet our concern going forward, is with falling US equities, which have proven an increasingly important component in financing the widening trade gap.

Sunday evening’s announcements from JP Morgan to purchase Bear Stearns for $2 per share (compared to Friday’s close of $30.85) and the Fed's 25-bp cut in the discount rate to 3.25% had caused a brief rally in the US dollar, which was followed by continued erosion across the board. The Fed’s announcement to triple the maximum maturity of discount window loans to 90 days and its $30 billion in funding of Bear Stearns less liquid assets not only indicated the grave situation posed to the counter party risk involved, but also highlights the increased ineffectiveness of the Fed’s historic liquidity injections yet to date.

Despite these historic liquidity injections and the Fed’s historic weekend decision to cut interest rates, our expectations lean towards a 100-bp cut in the Fed funds rate to 2.00%, brining the short-term rate well below the level of inflation. As the Fed has stated, these massive injections of liquidity are aimed at maintaining the market fed funds rate from falling below the 3.00% benchmark target. This will leave the Fed no choice but to come up with a shock rate by as much 100 bps in its benchmark target tomorrow so as to ease the cost of loans among commercial banks and keep it at those low levels.

Lack of Coordinated Cenbank Intervention Highlights Negative USD Fundamentals

Despite jawboning from Japanese government officials addressing the sharp rise in the yen, The only meaningful interventionist remarks serving to slow the strengthening yen were those by Japan’s LDP policy chief Tanigaki indicating the need for international cooperation. Indeed, currency traders are unlikely to temper the yen buying unless there are signs, or intentions of coordinate central bank intervention to support the dollar and cap the yen against the major currencies. Continued statements by officials pointing out the undesirability of excess currency moves will therefore prove of no effect, unless the central banks demonstrate some type of joint effort. Nonetheless, considering the rapid loss of the dollar’s interest rate differential and the ensuing deterioration in US economic fundamentals, central banks are unlikely to commit billions of reserves in intervention that would only to be eroded by counter speculative pressures due to the fundamentally-driven nature of the current moves in foreign exchange markets.

In the event that the Fed cuts by 100-bps tomorrow, the US-Eurozone interest rate differential will drop to 2.00%, the biggest US interest rate deficit since November 2002. The interest rate differential story is not the only theme haunting the US dollar onwards. Fears of continued prolonged financial market erosion and debt writedowns extending the macroeconomic weakness to business and consumers will lead to a prolonged recession and further punishing the dollar’s fundamentals.

Gold’s Prolonged Strength Despite Crises Sends Message

Unlike in the market meltdowns of May 2006, February/March 2007, July/August 2007 and November 2007 when gold prices dropped significantly, gold strength remains at record highs. Aside from weakening fundamentals, the broadening liquidity injections from global central banks are contributing to gold’s push to new record high against the US dollar at $1,032 per ounce as well as record highs against all major currencies. There is, however, the possibility that significant declines in US equities will prompt funds to realize their gold gains to meet margin calls in their credit and equity books. In this case we’d expect sharp dollar gains versus GBP, AUD and NZD.

Canadian Dollar to Remain Broad Loser

In our Sunday evening note we mentioned the CAD to be the broad loser in the current market turmoil partly due to the resulting decline in oil from $111.76 high to $110.14 as the global economy comes under threat. The close relationship between the Canadian and US economies is also contributing economy to CAD’s losses. USDCAD seen regaining 0.9950 targetting 0.9980, with support standing at 0.9890 and 0.9850. CADJPY dropped beyond our 96.80 target to 96.40 before rebounding to 97.70. We expect renewed losses towards 97.20 and 96.50.

Sub-100 Yen is Here to Stay

Remarks from Japanese officials referring to the need for coordinated measures were the only source of temporary yen retreat. Barring any temporary corrective measures to as 97.30 and 97.60 yen, we expect USDJPY to find renewed losses towards 96.30 and 95.80. Our month-end forecast is now at 97, followed by 94 before end of Q2. Looking at a 13-year monthly chart of USDJPY, we note that the lows of 2005, 2000 and 1995 were all preceded by a rebound due to Fed rate hikes. Since rate hikes are currently out of the question, we should see further declines to as low as 90 by year end.

EURUSD Supported By ECB’s Silence

The lack of any meaningful interventionist remarks from the ECB underlines the euro’s strength. After hitting an all time high of $1.5904, EURUSD stands at 1.5775, finding support at 1.5720. We expect subsequent foundation at 1.5660. Resistance starts at 1.5840, but upside capped at 1.5880. The 9.15 am release of the US industrial production figures expected at -0.1% from 0.1% will steer short-term interest in the pair, especially if a decline of more than 0.2% is in the works.

EURCAD settles at 1.5645 after surpassing our 1.5715 target to 1.5805. We see renewed gains towards 1.5680, followed by 1.5730.

Sterling’s High Yield Catches Down with it

Sterling drops across the board as the high yielding currency is increasingly expected to lose its yield luster from the current crisis, which will hit an already weakening UK economy. GBP drops from $2.0228 to $1.9995, exceeding our Sunday evening target of $2.0070. The Bank of England’s decision to inject a special loan facility of GBP 3 billion was also responsible for the currency’s damage. GBPUSD faces renewed losses back to $2.0030, followed by key double bottom at $1.9980. We expect the foundation to be broken, calling up the $1.9955. Upside capped at 2.0080.

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Published on Mon, Mar 17 2008, 15:50 GMT

Intervention Ahead?

Fri, Mar 14 2008, 15:00 GMT
by Ashraf Laidi

CMC Markets

The unchanged reading in US CPI and Core CPI should act as a euro positive as it encourages the Fed to pursue the more aggressive easing alternative of 75 bps next week. Whether the stated decline in gasoline prices will last remains uncertain, yet we do not rule out the possibility that prolonged weakness in consumer demand will help dampen inflationary pressues as has been the case in all previous recessions. All in all, the flat reading in both headline and core is an aberration as consumer demand has not yet shown marked declines.

Intervention Ahead?

Dollar recovers off its lows amid speculation that the world’s major central banks will mount coordinated intervention to stabilize the rout of the dollar. This is leading to several debates, one of which, whether the present decline is disorderly and the other being whether intervention will be effective. Current conditions in the US currency are quickly testing the limits of chaos as the slide increases in breadth and speed. Given the anticipated decline in US interest rates and the prolonged deterioration in the US economy (retail sales, unemployment and confidence surveys all pointing to recession), the dollar is quickly nearing a crisis point. The major central banks may start off with coordinated verbal intervention, expressing their unanimous concern with “recent excessive moves in currency markets”, or issue more forceful remarks threatening to intervene in the markets. While such remarks will undoubtedly have an effect, currency speculators will in all likelihood test the mettle of such intervention by extending dollar selling/, yen buying because the current fundamentals are increasingly stacked in the favor of the current forex moves. Central banks could then shift towards covert intervention via commercial banks to draw the attention of the market and keep speculators at bay. The next (and most effective form of intervention) is for central banks to mount the coordinated intervention followed by an announcement of their action. Speculators are unlikely to go without a fight, especially that the Federal Reserve show no signs of ending its aggressively easing monetary policy.

The 10 am EST release of the University of Michigan consumer sentiment survey could well decline below the expected 69.0 from the prior 70.8 to as low as 65. But we do warn of possible run ups in the dollar despite worse than expected data as was the case after yesterday’s release of the poor retail sales data. We suspect that overt yen selling buying from Japanese accounts was in play and may see similar action today. The effect of such moves, however, is unlikely to sustain itself.

USDJPY to Remain Under 101.40

Euro Support at $1.55

Sterling Vulnerable at $2.02

Aussie & Kiwi to Extend Losses

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Published on Fri, Mar 14 2008, 15:00 GMT

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More Dollar Selling Amid Depeg Rumblings
Wed, Mar 12 2008, 13:46 GMT
by Ashraf Laidi
CMC Markets

The positive dollar impact of yesterday’s coordinated central bank operations is already proving unsustainable as the US currency falls across the board, lifting the euro to less than a third away from yesterday’s all time high of $1.5496. The euro high was reached minutes after stronger than expected ZEW sentiment survey from Germany , but reversed all of those gains immediately after the central bank liquidity injections.

Currency Reserve Element Dragging the Dollar

The latest dollar selling is partly triggered by remarks from UAE finance minister mulling the depegging of the dirham away from the US dollar, while similar remarks are said to be coming from Jordan , something that we have not heard before from the Kingdom. As oil prices continue to prove the $109 area and the dollar testing new lows on a daily basis, the Arab nations of the Gulf will find it increasingly unsustainable to peg their currencies entirely to a falling dollar at a time when their imports from the Eurozone are accounting for a bigger share of total imports than they do from the US. UAE and Saudi Arabia have resorted to salary increases and price caps on foodstuffs, but these are proving unsustainable for the large expatriate and non-civil servant segments of the populations. While the most likely solution for these currency regimes would involve a move towards a basket of currencies of which the dollar will make up a large share, a collective announcement of such a move would be more than a symbolic blow to the dollar’s currency reserve status. Currency traders will deem this “reserve” element as an added reason to sell the dollar, in addition to the cyclical elements (related to falling US growth and interest rate differential) and structural elements (related to widening US budget deficit and existing trade deficit).

Today’s void from the lack of US economic releases will likely be filled by attention on US equities as all eyes will be on whether Tuesday’s sharp rally will maintain its momentum. At a time when the US dollar has fallen more than 20% in trade weighted terms over the last two years and US equities have shed 18-20% from their November highs is raising the alert among foreign investors especially as US equities have made up an increasing share of foreign financing of the US trade deficit. The sliver lining of the falling dollar was seen in yesterday’s release of the falling US trade deficit, but the downside is clearly illustrated in the rising oil portion of US oil imports, which has doubled to 18% over the last 6 years.

Euro Targets $1.5530

EURAUD:

EURCAD:

Falling USDJPY Eyes 102.00

Shaky Sterling Nears $2.0100

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Published on Wed, Mar 12 2008, 13:46 GMT

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Trichet's Warning Unlikely to Destabilize Euro
Mon, Mar 10 2008, 14:42 GMT
by Ashraf Laidi
CMC Markets

ECB Trichet's remarks hit the wires indicating his concern about excessive currency moves, which we believe could drag EURUSD to as low as $1.5250.

UAE Ponders Dollar Depeg, USDJPY Eyes Sub 100

After the dollar broke to a 5-year low of 101.38 yen on Friday, we see a 90% chance for the currency to drop under the 100 yen level as early as this week amid a combination of reduced risk appetite (broad declines in global bourses) and deteriorating interest rate differentials weighing on the US dollar as the Fed is expected to cut rates by at least 75-bps this month. Such a rate cut could take the form either via a 50-bp inter-meeting rate cut this week, followed by a 25-bp rate cut at its March 18 meeting, or the full 75-bp easing on March 18. (More on yen forecasts below) The other piece of piece of news weighing on the dollar is the announcement from the central bank of the United Arab Emirates that it will set up a task force at depegging its currency from the US dollar. The announcement implies that the UAE will move towards a basket of currencies, which would include a revaluation of the dirham-USD exchange rate, rather than simply revaluing its dollar peg. Abandoning the 100% dollar peg by the UAE will pressure Saudi Arabia into taking the decision as the public suffers from falling purchasing power, to the extent of triggering tensions across the Kingdom. The importance of these announcements is also underlined by an expected repricing of OPECs’ revenues in a basket of multiple currencies from solely a dollar-based pricing.

No Ordinary Recession

Earlier this month we stated our staunch disagreement with the emerging view in currency markets that the Fed’s aggressive rate cuts will bring to the dollar the same growth-driven rally as that of 2001-2. Late last year we made the call that the dollar would strengthen into the first half of Q1 2008 before retreating lower as the Fed will be forced to resume cutting interest rates to the extent of further driving real interest rates further below zero. Out of the several factors distinguishing the current environment from that of 2001 is the purpose of the Fed’s easing. The rate cuts of 2001-02 were driven by conventional dynamics of macroeconomic slowdown (cooling business activity, weak GDP growth, rising unemployment and falling equities). Today, the relatively untested Federal Reserve officials find themselves in uncharted territory highlighted by the following factors:

1. Rising Commodities & Falling Dollar Show no Ordinary Recession: The Fed’s task of shoring up growth is already being complicated by persistent inflationary pressures that are unlikely to abate as was the case in past economic contractions. In addition to record high commodity prices, the current recession is not accompanied by a strong dollar as in the last 3 recessions. The unfolding commodity and currency dynamics are contributing to the stagflation-like conditions that will exacerbate the steepening of the yield curve and the dilemma of the Federal Reserve.
Interestingly, the Bernanke may have already hinted to us we’re already in a recession he said today’s; conditions were more challenging than in 2001. Despite the Fed’s stepping up of liquidity operations, it will be forced to slash interest rates to 2.00% by end of Q2 and we see about a 70% chance of 1.50% fed funds rate by end of year. The payroll report is an indisputable negative for the already damaged dollar especially considering the ECB’s tacit support for its record-high euro as it uses currency policy to contain inflationary pressures rather than monetary policy.

2. A pronounced shortage of money market liquidity (requiring liquidity injections beyond those of Sep 2001), unwillingness of lending by commercial banks, uncertainty regarding the size of remaining write-downs and the resulting impact on banks’ rating, capital cushion and bottom line. Tightening lending requirements for private households and business are also expected to weigh on overall capital formation and aggregate demand.

3. The macroeconomic fallout from:i) falling prices of new and existing homes on construction and consumer spending 2) falling sales of new/existing homes 3) increased layoffs in housing-related industries, banking/finance and manufacturing jobs, will impose a severe test on consumer spending once the post-holiday sales season is behind us.

The repercussions on employment will only get worse as the latest four employment reports have shown. In Friday’s February jobs report, the 3-month moving average of payrolls fell to -15K, the first negative figure since August 2003. Payrolls in the once strong services sector fell to a 3-year low of 26K, well below their 3-month average of 57K.

Fed funds futures are now pricing more than 30% chance of a 2.0% rate by June, which has been our assessment since Bernanke’s speech last week. The steepening yield curve is further widening the 10-2 year spread to 210 pts, largely due to declines on short end rather than increases on the long end as markets price more than 50% chance of a 75-bp rate cut this month. This also means that the markets’ pricing expectations are allowing for the probability of an inter-meeting rate cut prior to the March 18 meeting.

Yen Awaits Rate Cuts, Equity Corrections and Interventions

Euro Eases Momentum But Remains Supported

Sterling Eyes $2.20250

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Published on Mon, Mar 10 2008, 14:42 GMT

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Gloomy Jobs Offset by Fed's Operations..for Now
Mon, Mar 10 2008, 08:34 GMT
by Ashraf Laidi
CMC Markets

The impact of the Fed's extra liquidity injections is serving to stabilize equities and the dollar, but as we have previously seen, the impact of these operations is largely short-term oriented and may trigger further sharp market pullbacks ahead (and reduced risk aversion) on fears that injections may reduce the need for aggressive Fed cuts ahead.

US non-farm payrolls posted a 62K decline in February (consensus +25K) following a revised -22K from the previous -17K reading. The unemployment fell to 4.8% from 4.7% (consensus 5.0%), while average hourly earnings rose 0.3%, translating into an annual growth rate of 3.7%.

The dollar began to rally on the unexpected decline in the unemployment rate but is now broadening its gains on the Fed announcement to step up its liquidity operations, which may reduce the likelihood of a 75-bp rate cut this month. The unemployment rate had fallen due to a shrinking labor force and declining participation rate. Sharp losses in equities are likely to help the dollar stabilize against the high yielders (Aussie, Kiwi and even EUR), but losses are expected to be pronounced against JPY and CHF. We continue to warn that USDCHF has a 70% probability of hitting parity as the franc’s gains have outpaced those of the yen. More on FX reaction below.

The weakness in payrolls is especially highlighted in the following:

1) The 3-month average of payroll has fallen to 15K, the first negative figure since August 2003.

2) Payrolls in the once strong services sector fell to a 3-year low of 26K, well below their 3-month average of 57K, which is the lowest since August 2003.

3) Retail payroll in Dec and Jan were revised to negative, leading to a negative reading in the last 3 months (Dec, Jan and Feb), which is the longest strong of below-zero readings since Dec 05-Feb 06.

Despite the poor jobs report, equity futures are showing a rise after the Federal Reserve announced it will raise the amount of liquidity in its TAF auctions to $100 bln to "address heightened liquidity pressures in term funding markets". Separately, the ECB has issued a statement indicating it is willing to provide extra dollar liquidity, as it did back in January 22 and Dec 12. The Fed has just announced it will conduct its first 28-day term repo operation today and make it into a weekly basis.

Fed funds futures are now pricing more than 30% chance of a 2.0% rate by June, which has been our assessment since Bernanke’s speech last week. The steepening yield curve is further widening the 10-2 year spread to 210 pts, largely due to declines on short end rather than increases on the long end as markets price more than 50% chance of a 75-bp rate cut this month. This also means that the markets’ pricing expectations are allowing for the probability of an inter-meeting rate cut prior to the March 18 meeting.

Inter-meeting Fed Cut Warning

Despite expectations of renewed loses in USD vs JPY and CHF, we caution against the increased probability of an emergency Fed rate cut in which case it will trigger USDJPY to as high as 102.80 and USDCHF to 1.0260. GBCHF rebound may extend 2.07, while EURGBP eyes 0.7580. The Fed is in the process of gauging activity in the inter-bank market before possibly following up with an inter-meeting cut if need be. Meanwhile, we expect neither the momentum in EUR or gold to have waned as the current pullback is largely technical than fundamental. EURUSD support stands at 1.5290, GBPUSD at 2.0080 and AUDUSD at 0.9270.

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Published on Mon, Mar 10 2008, 08:34 GMT

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Trichet Cannot Derail Euro Rally
Thu, Mar 6 2008, 15:02 GMT
by Ashraf Laidi
CMC Markets

Anti-USD factors are increasingly stacking up, with record highs in $105.90 oil and $992 gold, as well as the Bank of England’s widely decision to hold rates unchanged adding to the losses. All eyes shift to the ECB press conference (8.30 am EST) and bank president JC Trichet’s insights on the surging euro. We expect Trichet to pay extra care in jawboning the euro’s strength in order not to risk provoking substantial declines in the currency, in which case would accelerate importing inflation via surging oil. The more likely outcome would be for Trichet to reiterate the strong dollar policy, while possibly reiterating the generic statement that excessive currency moves are always undesirable.
Jobless claims fell by 24K to 351K from revised 375K territory or drops to its expected 360K, but the continued claims jumped to their highest level since Sep 2005. This will be positive news for the yen, especially against the CAD following negative building permits. While the relationship between monthly payrolls and weekly claims had weakened over the past year, the last 8 weeks have seen a recoupling as payrolls have regained their upward tone.

January pending home sales are expected to have dropped 1.0% in January following a decrease of 1.5%, 3.0% in the prior months.

Fed speeches from NY Fed’s Geithner (1pm), Boson’s Rosengren (7.30 pm) and St Louis Poole (8pm) will provide only passing interest now that the Fed Chairman Bernanke has allowed the door open for as much as 75-bp rate cut. Accordingly, the 10-2 year spread has widened to as over 200-bps reflecting expectations of at least 100 bps in rate cuts before the end of Q2.

Euro Powers to $1.5350 as Trichet Seen Hands Off

EURCAD: Euro likely to reclaim 1.5110, followed by 1.5150 amid data releases from Canada (see below for Canada’s releases), with support climbing to 1.5030.

JPY Regains Footing Amid Ongoing Credit Worries

GBP Gains on BoE, USD Woes, Eyes $2.0120

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Published on Thu, Mar 6 2008, 15:02 GMT

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Post−ADP, Pre ISM Strategy
Wed, Mar 5 2008, 15:48 GMT
by Ashraf Laidi
CMC Markets

Dollar retreats after the 23K decline in the February ADP survey on private payrolls emerges as a more despondent showing than the expected increase of 10K. The ADP survey’s effectiveness in predicting private payrolls has been significantly misleading over the past 3 months, which implies that an upside surprise in today’s release (greater than the 10K forecast) is unlikely to trigger a material reaction in currency and foxed income markets. Private payrolls make up about 85-90% of the total payrolls. Recall the January ADP signaled an increase of 126K private sector from 42K in December, well below the 1K jobs reported by the Bureau of Labor Statistics. The 1K increase was for private payrolls while the overall figure stood at -17K. Accordingly, we’re more likely to see a negative dollar reaction to a weak figure (consensus forecast at 10K) than prolonged upside in the event of a strong figure, which was far from the actual case today.

The services ISM is expected to have edged up to.47 in February from 44.6 in January, which was the lowest since March 2003. The rebound is unlikely to cause any substantial dollar recovery as it remains below the 50-territory. Renewed yen gains are seen in the event that both the employment and new orders indices post the second monthly reading under 50.

Factory orders are expected to have dipped by 2.0% in January from the 2.0% rebound in December.

The Beige Book survey from the 12 district banks should tell a broadly more downbeat story than the January survey, which noted that “economic activity increased … at a slower pace compared with the previous survey period.” The importance of today’s survey is diminished by the gloomy assessment communicated by Fed Chairman Bernanke in his last two testimonies as well as the Fed’s latest negative revisions for GDP and unemployment.

Yen Pullback Stabilizes After ADP, Ahead of ISM

Euro Eyes $1.5230s

Sterling Seen Regaining $1.98 on US Weakness

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Published on Wed, Mar 5 2008, 15:48 GMT

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Pre−ISM FX Strategy
Tue, Mar 4 2008, 09:00 GMT
by Ashraf Laidi
CMC Markets

Dollar stabilizes its broad selling as currency flows shift to unwinding of carry trades, which weighed primarily on the higher yielding Aussie, Kiwi and sterling to the benefit of the yen and the Swiss franc. Yen dragged the dollar below the 103 level to a fresh 3-year low of 102.60, while sending sterling under the 204 level for the first time in 2 years. The Swiss franc is also rallying significantly, dragging the rallying euro to a 2-year low of 1.57 francs. Yet it is the yen that is getting the best of the franc, as CHFJPY hits a 1-week low at 98.81.

These aforementioned developments do not mean dollar weakness is behind us. Gold has hit a fresh all time high of $984 per ounce, making the $1000 a highly plausible event this week, especially in the midst of potentially recession-like US data on manufacturing, services, construction and jobs.

Manufacturing ISM Gauged Against Chicago’s Levels

The 10 am EST release of ISM manufacturing is expected to drop to 48 in February from January’s 50.7, with the focus largely on the employment and new orders indices, both of which fell below 50 over the 2 prior months. Considering the 68 correlation between the ISM manuf and Chicago PMI, traders may be pricing in a whisper number far lower than 48 following the 7-point tumble in the Feb Chicago PMI to 44.5, which was the lowest in 6 years. The 13.5-point plunge in the employment index to a 6-year low may also augur badly for the ISM.report as well as Friday’s labor report.

The services ISM is due on Wednesday, along with the ADP survey on private payrolls, factory orders and the Beige Book. Pending home sales and jobless claims are due on Thursday, followed by non-farm payrolls and unemployment rate on Friday.

Also at 10 am is the Jan release of construction spending seen down 0.8% from -1.1%, -0.4% and -0.9% in the prior 3 months. The deteriorating picture in construction may also suggest further losses on construction jobs.

The ISM and construction figures will help determine the fate of equity indices and hence the prospect for further carry trade unwinding. Note that the S&P500 would have posted its fifth consecutive weekly rise had it not for Friday’s 2.7% decline to 1,330.. We expect a retest of the 1,300 level as early as mid week, which coincides with the 50-week moving average. A retest of this level may also be accompanied by fresh gains in JPY and CHF across the board.

Yen Powers Ahead, Intervention not in Sight

Euro’s Boosted by by More Positive Data

EURCAD Analysis

Sterling Remains Capped at $1.99

Aussie Awaits Key Sales Data

AUDGBP

AUDCAD

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Published on Tue, Mar 4 2008, 09:00 GMT

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Euro Rally Seen Broadening
Thu, Feb 28 2008, 13:31 GMT
by Ashraf Laidi
CMC Markets

Quiet FX sessions in Asian and European trade as markets turn to the revised US Q4 GDP figures and the increasingly relevant weekly claims on unemployment insurance both due at 8.30 am. EUR eased off yesterday’s $1.5145 highs to $1.5100 as dollar selling somewhat stabilized but the overall tenor remains largely USD negative.

Euro Unlikely to Drop Below $1.50 Soon

More positive news from the Eurozone’s largest economy as German unemployment dropped to 8.6% in February from 8.7% in January, while the number of unemployed fell by 75K people, exceeding forecasts of 50K decline. Aside from the fundamental underpinnings (back to back business sentiment strength from IFO survey and rising Eurozone inflation), the euro’s rise against the dollar is seen maintaining momentum as not only it is part of a broader USD weakness courtesy of the Fed’s willingness to compromise inflation for further rate cuts, but also part of a wider euro rally. This is clearly seen in the euro’s notable rally versus strong currencies such as AUD and NZD.

The other reason the euro is expected to maintain, if not add to rising momentum, is that the ECB is unlikely to jawbone the recent run up due to the advantages of currency strength in containing the costs of soaring oil prices. With Eurozone inflation more than a full percentage point above its preferred 2.0% inflation ceiling, this rally is here to stay. As for concerns as to whether the currency is too strong for the Eurozone, the euro’s trade weighted index against 12 currencies has not yet regained the highs of mid January.

Excluding any jawboning from Eurozone politicians, we expect EURUSD to remain underpinned at 1.5060 backed by 1.5020. Today’s US data carry the potential of boosting the pair towards $1.5120, followed by 1.5145.

EURCAD: We add to our Tuesday call favoring EURCAD as CAD bullisness is seen on the wane ahead of Tueasday’s BoC rate decision. We expect the bounce to reach towards the 50-day MA of 1.4815, followed by 1.4855. Downside risk to this strategy emerges from potential jawboning by the ECB regarding the euros’ currency strength. Drastic calls from political figures such as French Pres Sarkozy may also temper the current boost to the currency, but we expect ECB hawkishness to prevail especially at a time when soaring oil prices are fuelling the already rising inflationary pressures. Possible target stands at 1.49 next week, with key foundation stands at 1.4640.

EURGBP: Now that the pair has broken above our previous objective of 75.75 to 76.10, we see interim retreat towards 75.85 and 75.70, where stability is expected to be established. Before renewed run-up towards the 76.00 figure.

EURNZD: The pair has risen past our objective of 1.8520 and 1.8595 to 1.8620. we expect further gains in the euro vs the kiwi as due to 1) the decline in New Zealand’s Business Confidence index, which tumbled to 9-month lows in February to -43.9 from -4.9; 2) potential nervousness causing general drag on high yielding AUD and NZD against lower yielding currencies 3) contrasting momentum play between EUR and NZD. We look for further upside towards 1.8620, and onto the 50-day MA at 1.8660.

Sterling Rebound Capped at $1.9890

Since sterling’s rally has occurred largely on the back of USD weakness, we consider this an unconvincing sign for cable, which remains bearish in our view. But we cannot discount the possibility of further US data weakness, which could be an issue if US GDP comes in below 0.8% and weekly jobless claims rise above 350K. Upside capped at $1.9870, followed by 1.9890. Support stands at 1.9830.

USDJPY Awaits US Data and 1395 S&P

We maintain our medium term bearishness in USDJPY despite the pair’s sharp breach of the 4-week trend line support of 106.80, which we now expect to act as interim resistance on the current 106.40s. Upside to remain pressured at 106.70. USDJPY support seen retesting 105.90, with key foundation at 105.45.

It is important to bear in mind the S&P500 and whether it is able to breach above the key 1,385-90 levels, which are the 50-day MA, 3-month trend line resistance and 50% retracement of the decline from the November 12 high to the January 23 low. Stochastics indicate a possible excess in momentum at the said level. Strength of the rally shall be tested against whether the index closes above 1,395. Failure to do should keep NZD under pressure and boost the EURNZD pair.

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Published on Thu, Feb 28 2008, 13:31 GMT

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Currency Tipping Points
Wed, Feb 27 2008, 14:50 GMT
by Ashraf Laidi
CMC Markets

Today’s record lows in the US dollar ($1.50805 vs EUR), record highs in gold ($965 per ounce) and record highs on oil ($102.08 per barrel) mark a key tipping point in currency markets as traders further downgrade the U.S. currency to a low yielding asset. Rather than subscribing to the notion that the Federal Reserve’s aggressive rate cuts are a positive for the U.S. economy and, hence the US currency, or postulating the notion that European and other economies are months away from joining the U.S. into pain mode, the greenback is being damaged across the board on the notion that the ultra low interest rates at the expense of escalating inflation is the only way forward to prevent further spreading of the US recession.

The tipping point of the latest highs in gold and oil clearly emerge from yesterday’s slide in the US dollar when a combination of back-to-back unexpected increases in Germany’s IFO business survey and dovish remarks from one of the Federal Reserve’s most credible figures (Donald Kohn) downplaying the durability of inflation risk at a time when price pressures have picked up in speed on the consumer and producer levels.

The consequences of pronounced dollar declines are the following:

1. Broad declines in the US stocks and bonds. Although a lower dollar has proven positive for US equities, broad USD selling, such as in early July, and mid November has proven a general negative for US asset markets due to the erosion in the denominated currency.

2. Fed Falls behind both inflation and recession curve. Further increase in inflation through not only a higher oil import bill but falling affordability of other commodities will further constrain the task of Federal Reserve policy makers and place the central bank behind both the inflation curve and the growth curve.

3. Mideast currency reaction. Despite rising oil prices, the tumbling dollar will further press oil- producing nations in the Gulf to adopt hard decisions about their unsustainable currency regimes, which are pegged to a tumbling dollar. Any comments indicating such intentions will risk exacerbating the currency sell-off as was proven last year. Although a certain complacency has prevailed--suggesting that Gulf nations will not risk eroding the value of hundreds of billions of USD-denominated investments-- swallowing the pain of devalued holdings is seen as the lesser evil than prolonged erosion of purchasing power and personal incomes to which national governments’ sole solution is salary hikes and subsidies.

4. Central bank reserve diversification . Currency reserve diversification is not just the subject of Middle Eastern central banks but is also the concern of other central banks accumulating the bulk of their reserves in US dollars. Although IMF and BIS data have shown no marked reduction in US dollar holdings, falling US bond yields and a US dollar coupled with multi-decade highs in the commodity currencies of Australia and Canada will likely prompt central banks to consider diversifying into these currencies.

Dollar remains under pressure after US durable orders fell 5.3% last month, undershooting expectations of a 4.0% decline. Ex-transportation orders fell 1.6% due to a 13.4% decline in transportation marked by a 30.5% plunge in aircraft orders.

Fed Chairman Bernanke’s testimony at 10 am EST is expected to reiterate the downside risks to economic growth are the underling concern of the central bank. The key question is whether Bernanke will signal the magnitude of the easing at the March FOMC meeting. In the event that he reiterates Donald Kohn’s comments indicating that growth fears remain the principal priority then markets will raise the likelihood of a 50-bp rate cut, especially after the latest figures in housing, consumer durables and continued sharp declines in mortgage applications. We expect Bernanke to stick to the “we will do what is needed” mantra, which will open the door for half a point move and trigger broad declines in the dollar.

Federal Reserve Vice Chairman Kohn’s speech on the economy and monetary policy at 12.15 pm will serve to guide the direction of the markets’ pricing of a 50-bp rate cut next month.

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Published on Wed, Feb 27 2008, 14:50 GMT

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Euro's Eroding Momentum
Mon, Feb 25 2008, 14:48 GMT
by Ashraf Laidi
CMC Markets

Yen weakens across the board in an otherwise quiet Monday session in Forex as markets await this morning’s release of the U.S. report on January existing home sales. Risk appetite rises across the board on the back of Friday’s late session rally in US equities prompted by talk of a bailout for struggling bond insurer Ambac. The only fresh news out of the weekend is talk of a possible $3 billion capital injection from German bank Dresdner as part of a rescue plan for Ambac. We remind that the combination of lack of data and comforting statements has proven to be a positive, albeit temporary combination for risk appetite and equities, only fur these gains to dissipate on the release of economic data. Recall the dollar sustained broad declines late last week following the Philly Fed index tumble to 7-year lows for the second consecutive month and the Federal Reserve’s worse than expected downward revisions for growth and unemployment.

The 10 am EST release of US new home sales is expected down 1.6% in Jan to 4.81 million after a 2.2% decline in Dec. Considering the weak momentum in the euro, a decline of no more than 2% may send the single currency lower below the 1.48 figure as it may not be deemed weak enough to boost interest in the currency.

The rest of the week’s key US data/events are Feb consumer confidence (Tuesday), Jan new home sales and Fed Chairman Bernanke’s testimony to the House (Wednesday), Q4 preliminary GDP and weekly jobless claims (Thursday) and Dec personal income, core PCE prices and Feb Chicago PMI (Friday).

Euro’s Serious Case of Failed Momentum

The euro get off to a weak start for the week, drifting towards the $1.48 figure from Friday’s 1.4862 high, which was also the highest level since February 1st. It is worth calling into attention the euro’s relatively rapid pullbacks each time the pair hits a multi-week or multi-month high. This was demonstrated on February 1st when an unexpected decline in U.S. payrolls sent EURUSD to a 10-week high of 1.4955 before closing a 1.5 cents off its high on the day. Other similar days were Feb 11, 12 and 19th. Despite stronger than expected PMI figures and dismal U.S. economic data, the euro’s failure to retain and build on its gains maybe case of weak technical factors, which could be exasperated by negative fundamentals.

Tuesday’s release of Germany ’s IFO business sentiment survey may act as the fundamental catalyst to prolonged losses. The 4 am release of the IFO is expected to show a retreat in the climate survey index to 103.0 from 103.4, and a decline in the current assessment index to 107.3 from 107.9. A decline of no more than 1.0% in today’s US new home sales releases may weigh on the euro. We expect resistance acting on 1.4840, followed by substantial selling at 1.4870. Interim target stands at 1.4770, followed by 1.4740.

EURJPY Downside Ahead

Yen Slammed by Ambac Talks

Sterling Capped at $1.9710

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Published on Mon, Feb 25 2008, 14:48 GMT

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USD Broadens Losses, CAD Drops on Sales
Mon, Feb 25 2008, 08:28 GMT
by Ashraf Laidi
CMC Markets

The dollar remains on the defensive in the aftermath of yesterday’s Philly Fed survey, which fell to 7-year lows for the second consecutive month. The report came one day after the Federal Reserve downgraded its outlook on growth and unemployment to levels worse than most economists had anticipated. Reinforcing the dollar decline was a stronger than expected report on Eurozone services, which reduced the likelihood of an ECB rate cut. The contrasting picture between these two large currency blocs is pushing gold to $950 per ounce, just below last night’s all time high.

EURUSD at 2 1/2 week Highs

The euro extended its gains further against the beleaguered dollar after a preliminary estimate of the Eurozone’s services PMI rose to 52.3 in Feb from 50.6 in Jan, beating estimates of 51. The reported overwhelmed an earlier release showing Eurozone factory orders down 3.6% in December, the worst level in seven years in December.

Euro strength is accumulating versus the dollar and sterling but faltering against the yen amid broadening global equity losses. Although markets have priced in lower Eurozone GDP growth in 2008 to 1.8%-1.6%, the possibility of a hold in ECB rates throughout the year is not priced in, which could help the euro remain boosted across the board. This explains our rationale intermediate retreat in the currency towards $1.42-43 before a subsequent rebound towards $1.55 in H2.

EURJPY’s struggled below 159 to as low as 158.53 amid talk of failed hedge fund in the US and equity market declines in Asia and Europe . EURJPY recovery is seen dissipating at the159.40 territory, which is just below the 38% retracement of the Dec 28 high to the Jan 22 low. Bias remains weak, with preliminary support at 158.40, followed by 158.

Loonie Drops on Falling Core Sales

We noted in yesterday’s video commentary found on your CMC+ Platform that EURCAD was set up for breaching above the 1.5 figure onto 1.5050 from 1.4990. 1.5080 remains key target into next week, with resistance standing at 1.5120.

Yen Propped by Equity Loses

GBPJPY

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Published on Mon, Feb 25 2008, 08:28 GMT

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EURUSD at 2 1/2 week Highs
Fri, Feb 22 2008, 15:24 GMT
by Ashraf Laidi
CMC Markets

The euro extended its gains further against the beleaguered dollar after a preliminary estimate of the Eurozone’s services PMI rose to 52.3 in Feb from 50.6 in Jan, beating estimates of 51. The reported overwhelmed an earlier release showing Eurozone factory orders down 3.6% in December, the worst level in seven years in December.

Euro strength is accumulating versus the dollar and sterling but faltering against the yen amid broadening global equity losses. Although markets have priced in lower Eurozone GDP growth in 2008 to 1.8%-1.6%, the possibility of a hold in ECB rates throughout the year is not priced in, which could help the euro remain boosted across the board. This explains our rationale intermediate retreat in the currency towards $1.42-43 before a subsequent rebound towards $1.55 in H2.

EURJPY’s struggled below 159 to as low as 158.53 amid talk of failed hedge fund in the US and equity market declines in Asia and Europe . EURJPY recovery is seen dissipating at the159.40 territory, which is just below the 38% retracement of the Dec 28 high to the Jan 22 low. Bias remains weak, with preliminary support at 158.40, followed by 158.

Loonie Drops on Falling Core Sales

We noted in yesterday’s video commentary found on your CMC+ Platform that EURCAD was set up for breaching above the 1.5 figure onto 1.5050 from 1.4990. 1.5080 remains key target into next week, with resistance standing at 1.5120.

Yen Propped by Equity LosesGBPJPY

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Published on Fri, Feb 22 2008, 15:24 GMT

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Markets Awaits Philly Fed
Thu, Feb 21 2008, 14:53 GMT
by Ashraf Laidi
CMC Markets

Little FX reaction to 9k decline in initial claims to 349k, which is a net negative following the 10K upward revision in the prior figure to 358K. The 4-week moving average rose to 360.5K, the highest since October 2005.

All eyes turn to the Philly Fed survey ( 10 am EST not noon ) for the latest evidence on regional manufacturing. The survey will be especially scrutinized for whether the February figure has rebounded to -10 after collapsing to a recessionary -20.9 in January from December’s -1.6. Most notable about the latest plunge is that the -20.9 figure was the worst figure since October 2001, which was a result of the September 2001 attacks. Thus, for the index to post a similar plunge without any acts of terrorism reflects the sudden dip in confidence. The January decline was broad-based, showing -15.2 in new orders from 12 and -1.5 in employment from 3.8. The Philly Fed covers 3 states, ranging from Eastern Pennsylvania, southern New Jersey and Delaware .

Also at 10 am EST is the index of leading indicators seen flat in Jan following -0.1% and -0.2% in Dec and Nov.

Yesterday’s Fed downgrade of the economy was more substantial than most forecasts, lowering its 2008 GDP growth projection to 1.3%-2.0% from 1.8%-2.5% made in October and raising its unemployment rate projection to 5.2%-5.3% from 4.8%-4.9%. But the Fed’s increase of its inflation forecast to 2.0%-2.2% from 1.7%-1.9% before a subsequent decline in 2009 suggests that a short-term inflation rebound could complicate the Fed’s easing task. Nonetheless, the case has proven that even Fed Chairman Bernanke, a central banker favoring inflation targeting, is ready to slash rates at the expense of above target inflation.

Euro Awaits Philly Fed

EURJPY Faces Double Top

Sterling ’s Lifted by Sales Rebound

USDJPY Remains Vulnerable

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Published on Thu, Feb 21 2008, 14:53 GMT

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Fed's Growth Projections to Overhsadow Inflation
Wed, Feb 20 2008, 16:00 GMT
by Ashraf Laidi
CMC Markets

Despite the 0.8% increase in Jan housing starts to 1.012 mln, building permits (the more appropriate leading indicator) fell -3.0% to 1.048 mln, while Dec starts were revised to -14.8% from -14.2%.

Both headline and core CPI rose by more than expected in Jan, up 0.4% and 0.3%, pushing the y/y rate to 4.3% and 2.5% respectively. But this is unlikely to prevent the Fed from projecting lower core PCE for 2008 and 2009. These high inflation figures will prolng selling in equities and further boost the yen as they further complicate the Fed's easing campaign.

The resulting impact of the data is leaving markets jittery, which is a broad positive for the yen. We expect prolonged robustness in the currency going into the Federal Reserve Board’s projections.

Fed’s Growth Projections to Overshadow Today's CPI

The 2pm EST release of the Jan FOMC meeting will be accompanied by the Fed’s latest forecasts known as central tendency projections, which will give the latest forecasts on GDP growth, unemployment rate and inflation as measured by core PCE. Since the forecasts are not quarterly, they will not clearly tell us whether the Fed is forecasting two consecutive quarterly growth contractions i.e. definition of recession--but markets could come under severe pressure once the Fed affirms further slowdown in its forecasts as Chairman Bernanke alluded to in last week’s Congressional testimony. Recall that in October 2007 the Fed downgraded its 2008 GDP forecast to 1.8%-2.5% from July’s forecast of 2.5%-2.75%, and this time may actually decrease the lower end of the range to 1.5% from 1.8%. It will also likely raise the upper end of its 2008 unemployment rate forecast to 5.0% from 4.9% in October. The Fed may polish its tone by stressing a rebound in H2, but stocks and the Japanese yen are expected to move in opposite directions (stocks down, yen up) after the projections.

Sterling Eyes $1.9370

Euro Targets $1.46 For Week

EURJPY

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Published on Wed, Feb 20 2008, 16:00 GMT

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Favorite "Play of 2008" Alive & Well
Tue, Feb 19 2008, 14:33 GMT
by Ashraf Laidi
CMC Markets

Favorite "Play of 2008" Alive & Well

While central banks in most industrialized economies are either reducing interest rates or expected to do so thus year, the Reserve Bank of Australia is expected to further raise its rates to fresh 12-year highs. Overnight, the RBA revealed in the minutes of its policy meeting this month a debate whether to raise rates by 50-bps. The central bank ended up raising rates by 25-bps to 7.25% to counter rising wage and price inflation. Last week, the Aussie hit multi-month highs after Australia ’s unemployment rate unexpectedly fell to a 34-year low of 4.1% last month from 4.3% in Dec. Interest rate futures are now pricing an 80% probability of a 25 bps rate hike next month. Diverging interest and GDP growth rates were the backbone of our December calls for broad Aussie gains versus GBP, EUR and USD.

Specifically, we called favoring AUDGBP pair as our “favorite trade of 2008” as the pair is now up 7.5% year to date. Considering the prolonged downturn in UK housing, the resulting downturn in the British economy and the need for the Bank of England to slash rates by 75-bps to 4.50% this year, we expect the Aussie to reach the 50-British pence mark later this year, which is the highest since March 1997.

AUDUSD: We continue to see a 60% chance for the Australian dollar to reach parity against the US dollar later this year, especially in the event that global risk appetite remains largely intact. Interim resistance stands at 92.70 cents, followed by 93.20. Prolonged strength in the price of wheat and copper, all of which are major Aussie exports, shall also will also bolster the currency’s standing and the nation’s trade balance.

Euro Capped at $1.4780

Euro ekes out fresh gains amid a combination of rising risk appetite and prolonged USD weakness in the aftermath of the long holiday weekend. Friday’s 1.9% annual increase in French non-farm payrolls and a 4.4% annual increase in Spanish inflation for kept the bears at bay. Although tomorrow’s release of the US housing starts and building permits figures for January may signal further deterioration, our optimism for prolonged euro/usd gains remains guarded as we expect the market to retest preliminary support at 1.4650 and 1.4620. Upside capped at 1.4780, followed by 1.48.

Our bearish EURAUD outlook signaled last Thursday is on track as the pair has dropped from 1.6300 to 1.5995.as expectations of further RBA tightening contrast with increased pressure on the ECB to cut rates before end of Q2. Nonetheless, our positive AUD outlook versus EUR remains more limited in scope than that against GBP and USD.

Yen Drags Dollar

The overnight decline in USDJPY to 107.50 from 108.25 is a reflection of overall dollar losses than JPY strength, which is reflected in a rebound in gold to $925 per ounce and the aforementioned jump in EURUSD above $1.4720. But the yen remains weak against non USD currencies as risk appetite returns to global markets. The lack of US economic releases may make way for modest gains in equities today, which maintain negative pressure on the USD, especially ahead of tomorrow’s starts/permits report. Interim support stands at 107.20, followed by 106.60. Upside capped at 107.80.

Sterling Heads South on Northern Rock Consequences

Sterling sustains broad damage as the nationalization of UK mortgage lender Northern Rock is expected to shed employment losses in the banking industry, weigh on already struggling lenders and exacerbate the government’s poor finances. While our month-end call stands at $1.9500, we see the possibility of testing 1.9420 this week. Sterling’s ability to make corrective bounces of at least 50-75 pips allows the possibility for a rebound to as high as 1.9560 (38% retracement of 1.9720-1.945), but resistance weighs at 1.9600 (50% retracement of said move), which may be challenged on tomorrow’s US housing data.

Loonie Drops on Soft CPI

Canada’s CPI rose 2.2% in the year ending in January, while core CPI rose1.4%, well below the 2.0% target, which opens the door for a 25-bp cut to 3.75% next month. Dovish comments from Bank of Canada Governor Carney support this outlook and open the door for 3.50% by year-end. The 2.9% decrease in Dec wholesale sales just released now should help boost USDCAD towards 1.0080. Pressure stands at 1.01. Support climbs to 1.0020.

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Published on Tue, Feb 19 2008, 14:33 GMT

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NY Fed Dips, Indus Prod Awaited, 45−day Notice Looms
Fri, Feb 15 2008, 15:47 GMT
by Ashraf Laidi
CMC Markets

The NY Fed’s Empire index drops to -11.72 in February from 9.03, versus expectations of a 6.5 reading. Both employment and new orders components fell below zero, while prices paid rose to 47.37 from 40.24. Most notable about this release is that the NY Empire series have proven consistently more resilient that the national ISM survey, Philly Fed and Chicago PMI.

Yesterday we saw the advantages of a weaker dollar in the decline in the US trade deficit while today we see the inflationary implications through the 1.7% increase in January import prices (0.6% ex petroleum). The annual increase was 13.7%, the highest since 1982.

45-day Notice for Redemptions May Strike Again: Today marks the last day of the 45-day period by which clients of some hedge funds are required to give notice to withdraw their money. This was valid on August 15 and November 15 when markets sold off aggressively in each of those days. As of August 15th, the S&P500 was down nearly 5% since the beginning of that quarter, prompting many clients to withdraw money off the table, which led to hedge funds’ selling and trigger a 1.5% decline on that day. On November 15, the S&P500 was down 5.7% as of the beginning of Q4, producing a 1.4% decline on the day. As of today February 15, S&P500 is down 9.2% since the beginning of the quarter, which will likely trigger clients’ notices, prompting funds to sell. The S&P500 and Dow may shed 1.7%-2.0%, or up to 25 and 180 points respectively today. Accordingly, falling risk appetite may trigger broad rallies in the yen against selected high yielding currencies such as the NZD, CAD and GBP to come under renewed pressure.

The 9.15 am EST release of industrial production is expected to show a 0.1% rebound partly due increased utility output following 0% and 0.3% in Dec and Nov, but manufacturing is expected down 0.1%. Capacity utilization is seen unchanged at 81.4%.

Euro Attempts to Close above $1.47

EURUSD pushes higher despite the rise in Eurozone current account deficit. But the 1.9% annual increase in French non-farm payrolls and a 4.4% annual increase in Spanish inflation for January is keeping the bears at bay. Germany’s finance minister said the financial market crisis may last throughout the year 2008, but sees no signs of recession in his country. None of the Eurozone politicians are demanding any economic stimulus for Germany of Europe, despite calls from the IMF supporting fiscal relief.

Euro’s rebound past 1.4660 near the 1.47 figure should be scrutinized on whether it will close above 1.47, in which case it could suggest prolonged strength next week. Failure to close above 1.47 raises the odds of a subsequent pullback to as low as 1.4580.

We continue to remain bearish EURAUD on expectations that a 25-bp rate hike by the Reserve Bank of Australia to 7.25% next month and escalating inflation expectations. While these expectations are bullish for Aussie across the board, our choice against the euro is backed by the recent euro bounce, which we deem unsustainabe in light of increased signs of slowing in the region. EURAUD has already fallen from last night’s 1.62 to 1.6120 and is expected to test 1.60 support, followed by 1.597.

Further Yen Gains Seen

Yen posts broad gains versus the majors, dragging USDJPY by 100 points to 107.50 as global equities come under pressure following Bernanke’s reiteration of further deterioration in the US housing and labor markets. Risk appetite traders are ignoring talk of a Japanese recession, especially after yesterday’s release of stronger than expected Q4 GDP. Interim support stands at 107.20, followed by 106.60, especially in the event of a negative reading in US Industrial production. Upside capped at 107.90.

A possible extension of equity losses is seen shedding further declines in AUDJPY and GBPJPY to 97.00 and 210.50 respectively.

Sterling Eyes 1.9580

Sterling charts a broad retreat on a combination of a pullback in equities and profit-taking in a currency expected to sustain at least 75-bps in rate cuts this year. The inflation rhetoric of the Bank of England is deemed as a temporary booster of the currency and an opportunity for the bears to target selling against all currencies. CAD may be the only pair against which GBP could fare relatively better due to the widely expected easing from the BoC. Expect losses to stabilize near 1.9560. Upside seen capped at 1.9640.

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Published on Fri, Feb 15 2008, 15:47 GMT

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45−day Notice May Strike Again
Fri, Feb 15 2008, 15:38 GMT
by Ashraf Laidi
CMC Markets

The NY Fed’s Empire index drops to -11.72 in February from 9.03, versus expectations of a 6.5 reading. Both employment and new orders components fell below zero, while prices paid rose to 47.37 from 40.24. Most notable about this release is that the NY Empire series have proven consistently more resilient that the national ISM survey, Philly Fed and Chicago PMI.

Yesterday we saw the advantages of a weaker dollar in the decline in the US trade deficit while today we see the inflationary implications through the 1.7% increase in January import prices (0.6% ex petroleum). The annual increase was 13.7%, the highest since 1982.

45-day Notice for Redemptions May Strike Again: Today marks the last day of the 45-day period by which clients of some hedge funds are required to give notice to withdraw their money. This was valid on August 15 and November 15 when markets sold off aggressively in each of those days. As of August 15th , the S&P500 was down nearly 5% since the beginning of that quarter, prompting many clients to withdraw money off the table, which led to hedge funds’ selling and trigger a 1.5% decline on that day. On November 15 , the S&P500 was down 5.7% as of the beginning of Q4, producing a 1.4% decline on the day. As of today February 15 , S&P500 is down 9.2% since the beginning of the quarter, which will likely trigger clients’ notices, prompting funds to sell. The S&P500 and Dow may shed 1.7%-2.0%, or up to 25 and 180 points respectively today. Accordingly, falling risk appetite may trigger broad rallies in the yen against selected high yielding currencies such as the NZD, CAD and GBP to come under renewed pressure.

The 9.15 am EST release of industrial production is expected to show a 0.1% rebound partly due increased utility output following 0% and 0.3% in Dec and Nov, but manufacturing is expected down 0.1%. Capacity utilization is seen unchanged at 81.4%.

Euro Attempts to Close above $1.47

Further Yen Gains Seen

Sterling Eyes 1.9580

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Published on Fri, Feb 15 2008, 15:38 GMT

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Euro ZEW Reprieve Seen Temporary
Tue, Feb 12 2008, 14:10 GMT
by Ashraf Laidi
CMC Markets

Euro firms towards the $1.4550s after receiving a reprieve from an unexpected improvement in Germany ’s ZEW confidence survey. Another data-free day in the US will divert the focus away from currency specific issues towards earnings releases as well as the Democratic primaries in Maryland , Virginia and Washington , DC , whose total of 168 delegates is the biggest since Super Tuesday and could give Barack Obama his first lead on the delegates count.

San Francisco Fed president Janet Yellen (non\-voter) will speak on the economy at 11.05 am as she is expected to give her odds of recession and take on inflation. Last week Yellen said she was not confident that inflation could be avoided. Thursday’s Congressional testimony by Chairman Bernanke is widely expected to maintain the door open for further rate cuts, yet the deciding factor on market’s reaction will be any new warnings on inflation.

Euro Receives ZEW Reprieve for Now

Euro stabilizes above $1.45, receiving a reprieve from an unexpected improvement in Germany ’s ZEW confidence survey. The survey’s expectations index rose to -39.5 from a 15-year low of -41.6, versus forecasts of -45.0. The investor sentiment component, however, did fall to 33.7 from 56.6, its lowest level since September 2006. The European Commission’s 2008 GDP forecast for the Eurozone stands at 1.6%, compared to 1.8% by the ECB and the Bundesbank. Despite today’s ZEW report, downside risks remain for the single currency from an economic and risk appetite perspectives. Lingering rumors of a possible €6-8 billion write-down from German bank IKB continue to make the rounds but talk of a government bail out are offsetting these fears.

Any extended eurp rebound shall remain capped at 1.4580, keeping the short term consolidation centered near the 1.45 figure, with support at 1.4480. Wednesday’s release of US Jan retail sales will set the tone for the pair with forecasts of a deterioration in the headline rate from -0.4% to -1.0%. Interim support stands at 1.4460, backed by key foundation at 1.4430.

Yen Capped at 107.70s, Awaits US Retail Sales

Sterling Eyes $1.9460 Despite CPI Rise, Inflation Report Next

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Published on Tue, Feb 12 2008, 14:10 GMT

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February FX Strategy
Thu, Feb 7 2008, 08:11 GMT
by Ashraf Laidi
CMC Markets

We expect the dollar and the yen to emerge as the broad winners in February, dragging the European and antipodean currencies (AUD, CAD, NZD) lower amid deepening signs of a slowdown in the Eurozone and the UK , and further reduction in global risk appetite. We do not anticipate the Fed to be forced into an inter-meeting rate cut this month partly due to Fed Chairman Bernanke’s scheduled Congressional testimony on the economy next Thursday, which will act as the next driver of market interest rates. Renewed sharp losses in equities will inevitably trigger speculation of an inter-meeting move, but the Fed is expected to hold off as the past 225-bps cuts have yet to take effect into the full economy. We expect another 125-bps in fed funds rate cuts for the year.

Yen Propped by Risk Reduction

The yen continues to assume the role of the only currency to maintain persistent downside pressure on the greenback mainly due to recurring bouts of risk appetite reduction in an increasingly shaky global investor confidence. The recent recurrence of broad yen gains during disappointing US data (even against European and antipodean currencies) is likely to persist throughout the month. The currency impact of escalating chances for a Japanese recession will be offset by renewed reduction in risk appetite.

One way to highlight the extent of shaky confidence in US equity indices is the fact that most “up days” in the broad indices resulted from announcements rather than earnings or data. Such announcements included the Bush stimulus package, M&A announcements, talk of capital injections in struggling bond insurers, words of confidence by the same insurers that they have enough capital and other doses of psychological boosts of confidence. Nonetheless, it is increasingly apparent that markets have grown increasingly prone to earning outlooks and expectations rather than earnings announcements of the past quarter. The threat of MBIA’s downgrade by S&P and Fitch has not been alleviated and neither has the resulting downgrade of insure debt. The next test of confidence in yen pairs will be gauged ahead of the next retest of the 1,300 level in the S&P.

USDJPY is seen supported at 104 during the month, while EURJPY and GBPY are seen extending losses towards 150 and 104 respectively. This week’s upcoming G7 meeting should have limited effect on currencies as finance ministers and policymakers mull the extent of the global slowdown.

Euro Declines Ahead Despite Hawkish ECB

The euro’s sharp reversal in the aftermath of Friday’s dismal US payrolls manifests the market’s unwillingness to test the $1.50 target on technical and fundamental basis. Yesterday’s release of the Eurozone services PMI showing a decline to 4 ½ year low at 50.6 in January from 52.0, and a contraction (below 50) in Germany, Italy and Spain, highlight the emerging downside risks to the regional economies and the deteriorating policy dilemma of the European Central Bank with inflation creeping up to 3.2% from 3.1%, well over the bank’s preferred 2.0% target. Playing the role of the “anti-dollar”, the euro may be expected to regain its highs in light of increased evidence that the US economy is already in recession. But markets are expected to be more punishing to the single currency than the greenback as the ECB hawkishness is increasingly perceived to be untenable and even threatening to the 15-nation area. Eurozone retail sales fell for the third consecutive month in December, reaching their lowest level in the 11-year history of the series.

Thursday’s press conference from ECB chief JC Trichet is likely to maintain the same

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