A Thanksgiving-shortened week in the US will not prevent it from being a busy calendar week (US Exist/New home sales, Pers. pending, Q3 revised GDP, German Q3 GDP, German IFO, Canadian retail sales). CAN Sep retail sales 13:30 GMT expected to slow to 0.6% from 0.8% and core sales (ex autos) exp at 0.4% from 0.5%. USDCAD faces interim TL resistance at 1.0750, followed by 1.0795 (from Aug 17 high) with support starting at 1.0595. CATCH ASHRAF OM BLOOMBERG TV Monday 10:15 GMT (5:15 EDT)
MONDAY: Existing-home sales; two-year note auction; earnings from Campbell Soup, HP, ADI and Brocade
TUESDAY: GDP (2nd look); Conference Board consumer confidence; Sheila Bair press briefing; Five-year note auction; Fed minutes; Earnings from American Eagle, Barnes & Noble, Dollar Tree, Hormel, Medtronic and TiVo
WEDNESDAY: Weekly mortgage apps; weekly jobless claims; durable goods; personal income; Reuters/U of Mich consumer sentiment; new-home sales; weekly crude inventories; 7-year note auction; Earnings from Deere, Tiffany
THURSDAY: Thanksgiving—all US financial markets closed
FRIDAY: Black Friday—US markets open but NYSE closes early
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LONDON (Reuters) - Trades betting on higher commodities and equities and a weak dollar may see a quick and sharp reversal if a renewed rise in oil prices fans inflation concerns and prompts early exit from ultra-easy monetary policy.
These trades exploiting high correlation between the dollar, dollar-priced commodity prices and related shares have been a key feature of the year-end rally as investors grow convinced that policymakers in the developed world would keep interest rates near zero.
The dollar has hit a 15-month low against a basket of major currencies .DXY, fuelling gains in dollar-priced commodities. Gold hit an all-time high above $1,152 an ounce this week, while global commodities benchmark Reuters-Jefferies CRB index .CRB hit a 3-1/2 week peak.
The only piece missing in this correlation puzzle is crude oil, which has been stuck in range just below $80 a barrel and is not making new 2009 highs. Relatively tame oil prices have helped keep inflation concerns in check, allowing policymakers to keep flooding the system with huge liquidity and underpin the economic recovery. Once oil prices take off however, central banks around the world might withdraw this support more quickly than investors think, which would destabilize the correlation trades.
"There is loads of cash on the sidelines and there's been a constant trickle into the market and keeping the tide going," said Paul Kim, director of portfolio management at FundQuest. "They will keep the foot on for a little bit more but that's until when inflation risks come in. That's very worrying for central banks. There is a definite danger."
Next week's release of the minutes of the Fed's November meeting would give more clues to their thinking.
At their last meeting on November 3-4 Federal Reserve policymakers reiterated a pledge to keep interest rates extraordinarily low for an extended period.
Fed officials have been also stressing that inflation is not an immediate threat as a weak economic recovery and a grim outlook for jobs keep price pressures in check.
PUMPING IN
Investors pumped money into emerging market assets and commodities as the dollar fell in the week ending November 18.
Reflecting the lack of a strong rally in oil, energy sector funds posted a modest outflow for the week.
The BofA Merrill Lynch monthly fund managers survey showed the net overweight position on commodities stood at a record high of 25 percent this month, while their net equity overweight position also increased slightly from October.
And inflows into equities and commodities are driven by investors taking money out of low-yielding money market funds. U.S. money market funds saw an outflow of $50.41 billion this month alone, pushing their assets down to $3.29 trillion in the week ended November 17, according to the Money Fund Report.
"Today, with zero, or near zero interest rate policies, we see a repeat of rapid carry trades and leveraged capital flows that are once again creating asset bubbles in the emerging markets," Donald Tsang, head of the Hong Kong Monetary Authority said in a speech earlier this week.
REVERSAL RISK
The dollar index has lost nearly 7 percent this year, with near zero dollar rates driving the quest for high-yield assets outside the United States.
"As the dollar is the currency of international settlements, its use in carry trades will have a greater effect on dollar denominated assets than the yen did when it was used in carry trades," BNP Paribas said in a note to clients.
But the risk of a sharp reversal looms. Triggers could well be signs of tightening in countries other than the United States but emerging markets, where they are experiencing robust growth.
"Chinese tightening, more rate hikes in the 'fast movers' and less liquidity could, when combined with the 'soft patch' we see coming, add up to a more nervous period for risk markets," BNP Paribas said.
"Thus, we see the dollar as likely to have something of a rally next year."Read more…
The US Dollar finished the week higher against all major currencies except the Japanese Yen, but the downtrodden currency failed to break key range highs against the Euro and other important counterparts. Forex markets remained highly indecisive and traders were seemingly unwilling to bust the Euro/US Dollar exchange rate from its multi-week range. Our DailyFX 1-Week Volatility Index continues to trade near its lowest levels of the year, and it seems FX Options traders are pricing in similar range trading for the holiday-shortened trading week ahead. A number of historically market-moving economic releases may nonetheless force sharp intraday price moves through mid-week trade—especially given the state of relative unease across key asset classes.
The North American Thanksgiving holiday means that markets will likely become illiquid through later-week trade, but earlier-week price action could produce big US Dollar moves on several important reports. The first on the ledger is the admittedly unpredictable Existing Home Sales report, which often goes unnoticed but occasionally produces great equity market volatility. The following day brings the second release for Q3 Gross Domestic Product figures, Conference Board Consumer Confidence survey results, and the minutes from the Federal Open Market Committee’s most recent policy-setting meeting. All three events have been known to force considerable moves in the S&P 500 and US Dollar, and it remains important to watch for surprises from each.
Fed Chairman Ben Bernanke recently shook US Dollar markets when he said that the Fed was paying close attention to exchange rate moves. Markets will pay very close attention to any and all references to the US Dollar through the Fed’s discussions—especially as the Greenback trades near significant lows versus the Euro and other key counterparts. We admittedly put low odds on any explicit mention of the US Dollar in the Fed minutes, but such low expectations could make for extensive volatility if we do see the Fed talking the dollar higher. Suffice it to say, traders should be on the lookout for post-Fed financial market price moves. Personal Income and Spending, Durable Goods Orders, and New Home Sales reports round out the week of significant US Dollar event risk. Any one of these releases could likewise spark big moves—especially in the relatively illiquid trading session before the US holiday.
The US Dollar remains in an uneasy range against major counterparts, and exceedingly low volatility expectations suggest that it may remain restricted through the week ahead. Many weeks ago we argued that extremely one-sided FX Futures and Options positioning meant that a substantive US Dollar correction was inevitable. We have indeed seen the Greenback bounce off of range lows, but positioning has subsequently corrected and does not necessarily point to further Dollar gains. This leaves us in a very uncertain position, and we may need to wait for a large shock across financial markets to force substantive shifts in trends. FX Options put low odds on any such occurrence in the week ahead, however, and low volatility expectations leave markets primed for further range trading. – DR
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Here is a chart showing how G7/G8 (which is now G20) finance ministers and central bankers meeting has coincided with major tops and bottoms in the EUR/USD.
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Bernanke’s support for the U.S. dollar and Federal Reserve President Lacker’s comment this morning that the central bank is paying close attention to the value of the greenback has driven the buck higher against all major currencies. The last time Bernanke surprised the market with a comment on currencies was back in June 2008. Although the EUR/USD initially fell, it quickly resumed its uptrend and went onto break 1.60. (This is a correction from the previous chart used)
I am a long term USD bear Why The Dollar Could Fall Another 5-7 Percent but as a trader first and analyst second, I know that uptrends do move in straight lines.
Take a look at the chart and make your own judgement. I am leaving for the Las Vegas Traders Expo tomorrow. Come by the GFT booth to say hi if you are attending.
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On this quiet trading day devoid of any market moving U.S. data, we take this opportunity to share some tips that we have to help you improve your forex trading. Regardless of whether you are learning to trade for the very first time or seasoned, we hope that you find these tips useful. Feel free to add your own tips in our comment section!
TIP #1 Buy High and Sell Higher
Believe it when they say that the trend is really your friend. When you trade currencies, you are trading the outlook of a country and typically the economy of a country will get progressively better or progressive worse and rarely will it be better one minute and worse the next. This is why trends are so dominant in the forex market. For example, take the performance of the Australian dollar against the U.S. dollar. In 2008, the Australian dollar fell for 5 months straight against the greenback in a move that shaved more than 35 percent off the value of the Aussie. However almost as quickly as the Aussie sold off in 2008, in 2009 it appreciated by approximately the same amount over the course of 9 months. Trends in currencies can last for weeks, months and in some cases, even years. Therefore by buying high and selling higher or shorting low to buy back lower, you put yourself on the side of the trend which should help to improve your trading. People who fight the tape on the other hand could be extremely frustrated if they try to do this with currencies.
TIP # 2 Entries and Exits are Equally Important
Ask a pilot what is more important – the takeoff or the landing and ask a surgeon whether it is more important to get the first incision or the sutures right and they will most likely tell you that both are important. Traders should have the same mentality when it comes to entries and exits. Unfortunately most new and even seasoned traders spend hours looking for trading strategies that give them the best possible entries. Exits however are usually relegated to nothing more than an afterthought. This type of behavior is one of the single biggest reasons why many people have difficulty making money from trading. In fact I am sure that everyone reading this article had the experience of watching their trades move favorably initially only to reverse violently and be stopped out. This is the central reason why exits are just as important as entries especially when you are trying to capture a big move. This is why it may be fruitful to employ the use of trailing stops because if you are aiming for a 5 percent move, the worst thing that could happen is for the trade to move 4 percent in your favor and then turn around. By using trailing stops, you can lock in profits along the way which is essential to maintaining a positive edge.
TIP # 3 Look Beyond 2:1 Risk Reward Ratios
Trading or investing 101 states that in order to profit in the long run, you have to maintain a 2 to 1 reward to risk ratio. This means that for every $1 that you risk, you should look to make at least $2. Unfortunately in the forex market, this may be difficult to achieve, particularly for short term traders. Let us consider a short trader who is looking to make 20 pips on a trade. If he was to maintain 2:1 risk / reward ratio, his stop would need to be 10 pips. However 10 pips is just little bit more than the spread for many currency pairs which means that the risk of being stopped out is very high. Alternatively if a trader knows that “support” is 50 pips away from the current price, then to maintain a 2:1 ratio, he would need to have a take profit of 100 pips. Given that 100 pips is typically the average high to low range of a currency pair, it may be difficult to make100 percent of an intraday move on a short term trade. A 1 to 1 risk reward ratio can also work as long as the strategy has an accuracy rate of 65 percent or greater which tends to be a bit more suitable for short trading. For example if you putting on a momentum trade after an economic release, your target and your stop may only be 20 pips because you are looking for immediate continuation. However in order for this to yield net positive results, you would to make sure that you are right much more often than you are wrong.
TIP # 4 Techncials and Fundamentals Both Matter
Many currency traders focus primary on chart reading because it is simple and straightforward and they believe that everything is factored into the price. This may be true to some extent and I believe that technical analysis is useful, particularly on a short basis, trading solely on charts is akin to walking around with blinders on. Fundamentals not only determine the current trend in exchange rates, but for any major technical trend to change, fundamentals need to change as well. On a more granular level, day to day economic data can also alter the short term trend in a currency pair or trigger a breakout. So it is extremely important for people employing technical analysis to be aware of economic data that will be released so that you can properly assess the risks to your trade.
TIP # 5 Do Your Homework
Finally, it is important to do your due diligence not only in terms of the trading strategies that you learn but also in terms of the brokers that you choose to trade with. One of the biggest benefits of the foreign exchange market is the ability to test drive strategies on virtual demo accounts. Make sure you can make money on the strategies while trading on a demo or a small sized account before diving head in. In terms of brokers, make sure that you are test out a number of brokers before you commit to one of them so that you can compare their services and pricing to see who really has the highest integrity.
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Cable,Here is my weekly chart. As you can see today looks like we are going to close with an outside bar. 16713 has been breached but failed to hold. I would expect some retracement next week but will be looking to short todays final close if we continue down.
Cable is struggling to hold 16700 level. Close below on weekly chart opens up downside.We also have been held by 50% fib levels. Is Cable running out of steam?
Cable is struggling to hold 16700 level. Close below on weekly chart opens up downside.We also have been held by 50% fib levels. Is Cable running out of steam?
U.S. stocks extended a global drop as concern grew that the rally has outpaced the prospects for economic growth. The yen and the dollar strengthened, oil tumbled and yields on Treasury three-month bills turned negative for the first time since financial markets froze last year.
The MSCI World Index of equities 23 developed countries dropped 1.7 percent at 4:31 p.m. in New York, its steepest loss this month. The Standard & Poor’s 500 Index fell 1.3 percent to 1,094.90 as Bank of America Corp. downgraded chipmakers, sending Intel Corp. and Texas Instruments Inc. down at least 3.4 percent. The yen climbed against all 16 of its most-traded counterparts and the Dollar Index rose as much as 0.5 percent. Aluminum and copper led declines in industrial metals.
Stocks slid amid speculation the eight-month, 68 percent rally that drove the valuation of the MSCI World Index to the most expensive level in seven years already reflects forecasts for a 25 percent rebound in corporate earnings next year. The Organization for Economic Cooperation and Development doubled its growth forecast for the leading developed economies next year to 1.9 percent in a report today, while saying that mounting debt burdens will keep the expansion in check.
“It makes perfect sense that the market’s going to take a little bit of a breather,” said Michael Mullaney, who manages $9 billion at Fiduciary Trust Co. in Boston. “Sentiment had gotten a little too bullish.”
Fall From Peak
The S&P 500 retreated from a 13-month high for a second day even as the Labor Department said the number of Americans filing claims for unemployment benefits held at a 10-month low and the Federal Reserve Bank of Philadelphia’s general economic index rose more than estimated. The Dow Jones Industrial Average lost 93.87 points, or 0.9 percent, to 10,332.44.
Rates turned negative on some bills maturing in January, according to Sarah Sobeck, a Treasury trader at primary dealer Jefferies & Co. The three-month bill rate was at 0.0051 percent, the least this year. Six-month bill rates dropped to the lowest since 1958. Treasury bills turned negative last December for the first time since the government began selling them in 1929 as investors scrambled to preserve principal and were willing to sacrifice returns in the months following the collapse of Lehman Brothers Holdings Inc.
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the “systemic risk” of new asset bubbles is rising with the Fed keeping interest rates at record lows.
‘Painful Level’
“The Fed is trying to reflate the U.S. economy,” Gross wrote in his December investment outlook posted on the Newport Beach, California-based company’s Web site today. “The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks.”
The two-year note yield fell five basis points to 0.70 percent at 4:24 p.m. in New York, according to BGCantor Market Data. The 1 percent security due October 2011 rose 3/32, or 94 cents per $1,000 face amount, to 100 18/32. The yield touched 0.6759, the lowest since Dec. 19. It fell to an all-time low of 0.6044 percent on Dec. 17.
Today’s slide in the S&P 500 was the biggest since Oct. 30, when the benchmark for U.S. stocks dropped 2.8 percent.
Intel, the world’s largest maker of semiconductors, fell 4.1 percent and Texas Instruments, the second-biggest, dropped 3.4 percent. Dan Heyler, head of Asian semiconductor research at Merrill, said the supply of chips is growing faster than demand, putting earnings at risk. Intel and Texas Instruments were lowered to “neutral” from “buy” and the global chip industry was cut to “negative” from “positive.”
Chip Stocks, Alcoa
Semiconductor stocks in the S&P 500 lost 3.7 percent as a group, the largest tumble among 24 industry groups.
Alcoa Inc. declined 3.9 percent for the second-steepest drop in the Dow as aluminum, copper, lead, nickel and tin all retreated.
ConocoPhillips, the third-largest U.S. oil company, slipped 1.9 percent and Chevron Corp. lost 2 percent as crude fell for the first time in four days. Schlumberger Ltd., the world’s biggest oilfield-services provider, lost 3.3 percent. Crude for delivery next month tumbled 2.6 percent to $77.50 a barrel.
Energy producers in the S&P 500 fell 2.1 percent as a group, the biggest drop among its 10 industries. Technology shares, the largest group in the index, lost 1.6 percent and contributed the most to the decline.
‘Grossly Overvalued’
Bank shares slid after Meredith Whitney, the analyst who correctly predicted in 2007 that Citigroup Inc. would cut its dividend, said lenders “are still grossly overvalued” and reliant on government purchases of mortgage-backed securities.
JPMorgan Chase & Co., the second-largest U.S. bank, and Wells Fargo & Co., the fourth-biggest, each dropped 1.9 percent. The S&P 500 Financials Index slumped 2 percent.
Writedowns of mortgage-backed debt contributed to a combined $1.7 trillion of losses by financial companies globally since the beginning of 2007. Mortgage delinquencies have continued to rise as job losses render consumers unable to stay current on their debt payments.
One out of every six home loans insured by the Federal Housing Administration was late by at least one payment and 3.32 percent were in foreclosure in the third quarter, the highest for both since at least 1979, the Mortgage Bankers Association said today.
Share Sales
Asian stocks declined, dragging the MSCI Asia Pacific Index down for a third day, as share-sale plans at Japanese companies raised concern the value of existing holdings will be reduced. Mitsubishi UFJ Financial Group Inc. sank 3.7 percent and Nomura Real Estate Residential Fund Inc. slumped 8.6 percent after filing to sell stock.
The yen appreciated 0.6 percent against the euro and 0.3 percent against the dollar. The dollar advanced 0.3 percent to $1.4916 versus the euro as it strengthened against all 16 major counterparts except the yen.
“The yen and U.S. dollar have been supported by the continued upturn in risk-averse conditions,” Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in a report. “Current conditions remain unfavorable for risk assets, leaving them vulnerable to a correction lower.”
The combined economy of the OECD’s 30 member countries will expand 1.9 percent next year and 2.5 percent in 2011, the Paris- based organization said. Output will contract 3.5 percent this year. The 2010 forecast compares with the 0.7 percent growth predicted by the OECD in June, when the major economies were just beginning to emerge from their worst recession in more than half a century.
Losing Confidence
President Barack Obama said in an interview with Fox News recorded in Beijing that the U.S. must get the federal deficit under control. If the government continues to pile up debt, “people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession,” he said.
Sales of coupon-bearing Treasuries will increase to $2.38 trillion in the fiscal year that began Oct. 1, from $1.81 trillion in the prior 12 months, primary dealer Goldman Sachs Group Inc. said in a report on Oct. 20.
The U.S. will auction $44 billion of two-year notes on Nov. 23, $42 billion of five-year debt on Nov. 24 and $32 billion of seven-year securities on Nov. 25. The $44 billion in two-year notes matches a record and the five- and seven-year amounts are both records.
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Earlier this week, Asian & European markets showed another failure to respond to Mondays 1.4% gains in US equity indices (Dow & S&P), further highlighting the unsustainability of the gains in indices, which had become increasingly dollar-driven (caused by prolonged USD weakness resulting from Fed officials failed attempts to support it) instead of improved economic figures. Indeed, the absence of further improvement in fundamentals (4-month lows in Oct industrial production, slowing core Oct retail sales and 6-month lows in Oct housing starts) underscores the role of USD weakness as the main driver to higher equities.
Yet, while the dollar index hit fresh 15-month lows on Monday at $74.68, oil failed to regain its interim resistance of $80.50 (not even mentioning the year high of $82). Such failure was especially prominent following the higher than expected decline in oil inventory drawdown. Last weeks brief break below $76 underscores the emerging bearishness in the fuel, which suggests a swift renewal of fresh shorts to retest the 75.53, which is the 38% retracement of the rally from the 64.98 low to the 82.06 high. And should the pattern of previous down cycles repeat itself in oil, a steeper decline could be in the woks, likely calling up the 73 handle.
Oil's inability to preserve rallies in the face of USD weakness reflects the lack of sustainability of speculative flows to elevate the fuel as real demand falters (shown by 2 consecutive weekly higher than expected builds in oil inventories). The chart below shows a downward drift in the Oil /EURUSD ratio, resulting from a more rapid appreciation in the euro (more rapid depreciation in USD) than an appreciation in the price of oil. Note how this pattern occurs after a rise in the ratio in October, which emerged as a result of a more rapid increase in oil relative to the rise in the euro. Said differently, oil is losing its ability to respond to USD weakness. Thus, any catalyst driving USD strength (stocks correction, Chinese remarks on commodities or less dovish rhetoric from Fed officials), would especially accelerate oil selling.
Oil's relative weakness has also been highlighted against equities (S&P500 and Dow), as the equity/oil ratio surged to a 4-week high. Interestingly, US equities have outpaced those in Japan (Dow/Nikkei at highest since Dec 08), UK (Dow/FTSE at 3-month highs). Could relative strength of US equity indices be the product of currency weakness and not much more? We have already raised the S&P500s recurring failure to recover 50% of the decline from the 2007 record high to the 2006 low (1,120). The equivalent 50% retracement for the Dow stands at 10,335, which was broken on Mon, Tues, Wed but has yet to do so for the week (on Friday).
A weekly close below the 10,335 in the Dow, below 1,120 in S&P500 and a confirmed downtrend in oil (close blow $79 and 5th straight weekly lower high), would establish markets fading dynamic for risk appetite. This was already established on the currency side, amid the protracted yen strength. We warned last that yen strength would continue outperforming the much-talked-about-USD strength by pundits. Deepening weakness in oil and equities would help stabilize USD (instead of propping any major rally beyond 7%), but JPY will continue to show the greater rebound, Subscribers to our Intraday Market Thoughts are kept informed of the periodic shifts in risk appetite and the interpaly between the USD dollar and Japanese yen in drawing risk aversion flows.
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