Bearish view on the EURO

Friday, November 28, 2008

Finexo warnings about potential volatility here as we come into month end during thin US markets have so far proved unfounded, as markets have barely moved over the last 24 hours despite a flurry of very ugly data out of the EuroZone yesterday (cratering November confidence levels) and Japan overnight (we looked at household spending, industrial production and small business confidence - we're note sure what that strange jobless rate number is all about). The tendency remains for equity averages to tick higher and risk aversion generally showing signs of fading slightly, though nothing looks convincing so far. Still, beware the end-of-month fix today, which could create a bit of hectic activity. US markets are open for a half day of trading today. The "Thanksgiving Surprise" of 2006 happened on a Friday, when EURUSD zoomed through 1.3000 for the first time in a long time. Though looking at the context of the 2006 move, it had been preceded by a very large move on Wednesday of the same week that was clearly applying pressure to the key 1.3000 resistance level. By strange coincidence, the 1.3000 level is also in play here two years later, and it appears that Euro is working itself into an either/or situation again.

We have made our bearish view on the EUR fundamentals clear, but let's see if the market is listening...any attempt back through 1.3000 and 1.3080 would put the bearish view on hold until/unless a strong reversal appears. 1.2800 is needed for the bears to get a better technical argument for a further fall. With the ECB meeting next week and EURUSD tracking interest rate differentials relatively well again, we will get a resolution to this soon. Continued attempts by equities to rally and a hawkish ECB would probably send the pair on another wave higher. Our preferred scenario, however, has the ECB finally forced into a more dovish stance, perhaps surprising on the rate cut size (as the overnight rate should clearly have been 125 bps lower than it is currently at least a month ago) and the broader market rolling back over into risk averse mode. In the medium term, we can't conceive of any scenario that spread between European 2-year rates and US 2-year rates (currently around 109 bps vs. 200 bps in mid September and lowest daily close at 90 bps in late October) from shrinking further towards parity.

Awaiting next week for important events

Next week sees a whole slew of central bank announcements and important economic data. The major US data includes the two major ISM surveys and the employment report on Friday, which unfortunately looks like it will be an absolutely terrible one, considering that consensus payroll expectations are already lower than at any point during the 2001 recession. The BOE, ECB, RBNZ and RBA will all announce rate cuts next week as well. More on those next week


Currency Updates by Finexo

Wednesday, November 26, 2008

Currencies followed the pattern one would generally expect lately as Wall Street staged another sharp and impressive rally which saw the major averages up as much as 17% from Friday's lows. EUR/USD and EUR/JPY were higher and the commodity currencies were the star performers, with USD/CAD swooning as much as 400 pips on the day. JPY crosses were the hardest hit as one might expect. Now, with the first layer of resistance breached, we try to determine how long this move can extend. Counter-trend rallies are difficult to gauge and very difficult to trade. Our overwhelming conviction is that the world is headed for more trouble in the medium term and that we still haven't priced in the extent of economic malaise and the deleveraging that is still in the pipeline. US Treasury Secretary, Henry Paulson and his team are busy trying to focus more on the consumer right now. This is because it is clear that the liquidity injections are stopping at the vaults in the banks and not reaching out to consumers, an unanticipated consequence of their prior efforts. We have to wait and see what they come up with next.

The UK's Darling was out with the UK pre-budget report yesterday, which, as we mentioned yesterday, contains an odd mix of promises to stimulate the economy through various short term measures but also talks up plans for fiscal austerity down the road to stem the avalanche of red ink that the shortfall is tax revenues will generate. The expected plans to cut taxes on companies' foreign dividends were also a part of the report. All of this seems to be an effort to ensure foreign holders of large amounts of sterling not to liquidate their holdings as the UK fiscal situation looks precarious at best in the years to come. Looking at the EUR/GBP cross, it doesn't appear that investors are especially comforted so far, and we would need sub 0.8330 level to even discuss the idea of a rebound in the pound.

Our conviction is that EUR is still way over-priced in the bigger picture. When these bouts of risk willingness hit the market, it seems that EUR should be a much smaller beneficiary than it was in the kind action we saw yesterday. Yes, EUR was not as strong as the commodity currencies at times yesterday, but it should under perform more than it has and some of its strength in the big picture is simply due to premium the market places on liquidity and the fact that much of the Emerging Market trade is versus the Euro. Eventually, the EUR could face a more extended bout of weakness: if there is anything that the past rounds of banking system problems have shown us, it's that European banks were as bad as or worse than their US counterparts, but that disclosure only comes later. Many have estimated that the large European banks are even more leveraged than their US counterparts, so we can only watch and wait for the next cracks to show. Yesterday's German IFO business survey was brushed aside by the market, but it was far worse than expected at 85.7, showing the worst Business Climate sentiment in 15 years and close to the record low just below 85. We also should expect that European Central Bank rates will quickly come into line with BOE and Fed rates, meaning the meeting next week should see at least 50 bps of easing (and ought to see 125 bps, but the European Central Bank has been dragged - kicking and screaming all the way....).

On the technical side, our model of the situation suggests that this is a classic rally within a bear market. Using the US S&P500 as our global proxy for inter market action (JPY crosses, major USD crosses, etc) the maximum this rally can extend and still remain in the "comfort zone" for our expectations is around 900. This could correspond with EUR/USD trying up toward 1.3250 or even 1.3400 on a blow-off and EUR/JPY perhaps toward 130.00 again. Considering our jaundiced view of the situation, though, we would prefer to wait for signs of a reversal and look for ways to short this rally in risk appetite. The first signs of a reversal come in around 1.2715 on EUR/USD (that pesky 21-day moving average) with a more profound reversal evident if the pair trades below 1.2600. Those levels could change slightly if we go on to etch new highs in the short term.

Some have suggested that the moves here late in the month (later than it actually looks because the US Thanksgiving holiday means that most workers are off on Thursday and Friday, so for US markets, the month effectively ends tomorrow.) are due to portfolio rebalancing, an idea we talked about late last month, when the market rallied furiously in the last four days of the month. To repeat the idea is that you buy more of the assets that have underperformed (stocks in October and November), and sell more of the assets that have outperformed (especially bonds in November) in order to get the correct percentage allocations in your portfolio. We would suggest that having been bitten once by rebalancing in October (anyone doing the above enhanced losses dramatically in November), the effect could be far smaller this month. This means that the situation should clear up by Monday on whether this is a sucker rally or a one that has longer legs.


Market Overview by

Monday, November 24, 2008

US Economy

The US government was forced to ride to the rescue of the Citigroup over the weekend, as it became clear of the course of last week that the bank would fail without prompt action from the authorities. The details of the rescue package are unique compared to recent measures, but then again, the US Treasury, Fed and other financial authorities have been forced into a lot of creativity and changes in tactics since the entire credit implosion debacle began. Citigroup was a horribly mismanaged company during the later phases of the credit bubble and put on enormous risk in its later phases, when risky assets were already ridiculously overpriced. Citi was clearly too big to fail.

Many have talked up the risks to the US economy due to the two-month transition period between presidents and lack of action until Obama takes the reigns, and it appears that Bush and Obama are trying to address this - Obama with a stimulus package on the order of $500 billion designed for signing on the day he goes into office and signals that plans to raise taxes on the wealthy will be delayed, and Bush's man Paulson now indicating that he will swing into action with the second half of the TARP rescue fund after signaling as recently as last week that he was going to leave these funds for the next administration to deal with. Paulson's plan will supposedly try ease household borrowing and further stem foreclosures, though there were no specifics. The negative momentum in the data doesn't seem to showing many signs of slowing and we wonder what the employment situation will look like in the retail sector in the US after the Christmas shopping season is behind us, as it is likely that many are retailers are on life support and could look to shut down or slash costs after what is shaping up to be an ugly and cold (literally, with record cold recently in many parts of the US) end of the year for sales.

US equity markets supposedly took heart that the NY Fed governor Geithner was named as Obama's Treasury Secretary, but we wonder whether this was just an excuse for the late Friday rally. Mr. Geithner is considered a key figure in many of the responses brought by the Fed so far in this crisis. It makes eminent sense that Obama chooses someone from the Fed rather than from the financial services industry, as no bank has remained untainted in this crisis.

Anything to like about GBP?

UK Chancellor Darling is expected to announce an emergency budget today at the so-called pre-budget report today, with new measures including a temporary reduction of the VAT from 17.5% to 15.0%. Other measures are also on the table, but the FT is also reporting that Darling is also out talking up tax increases on the wealthy, so the signals are a bit mixed. One potential bullish development for GBP was a story out Friday about a potential tax change on corporate taxes in the UK that could see massive repatriations of overseas profits. This is a story worth watching, especially as GBP has been the punching bag of the G7 and any new positive spin on the pound could really shock market positioning.

Read more at:


SNB out with a surprise 100 bp cut. CHF sentiment has taken a dramatic turn. Will CHF crumble further?

Friday, November 21, 2008


  • Switzerland SNB lowered Libor Target Rate by 100 bps to 1.00%
  • US Nov. Philadelphia Fed out a -39.3 vs. -35.0 expected
  • Bank of Japan kept target rate at 0.30% as expected

Market Comments by Finexo

The SNB was out yesterday with a surprise 100 basis point cut that dropped their target rate by half. This sent CHF into a tailspin after it had finally shown signs of reversing a bit to the strong side yesterday after the recent meltdown in equities. We have been scratching our heads at the extended bout of CHF weakness despite weaker and weaker equity markets and a rather negative view on the events in Euro-land and perhaps grown a bit complacent in our CHF view, as we expected it to remain strong as long as equity markets were weak and risk appetite low. The UK Telegraph's Evans-Pritchard, one of the better market pundits out there over the last year, helps explain in an article this morning why the Swiss Franc has taken a dive. The BIS estimates that Swiss Banks have loaned some 50% of GDP to emerging markets - chiefly the Eastern European countries. With EM under so much pressure, it appears that the market is beginning to fret the risk of default and inability to repay outstanding debts - and this is weighing on the franc, with the shock SNB move a sign of near-desperation on the central bank's part.

Our default view has been that CHF would remain strong as long as risk aversion was on the agenda, but now we're wondering if this view is wrong due to the potential woes in the Swiss banking sector. That may be the new dominant theme compared to CHF's traditional safe haven status. We turn neutral on CHF here - and recognize the significant risk that CHF could go into a further sharp decline as market positioning might not be ready for an extension of CHF weakness. EURCHF is poised at its 55-day moving average around 1.5375 and GBPCHF is looking at its 21-day moving average here around 1.8250. If CHF depreciation is not stopped here, it may continue to crumble sharply. As a background note, it's very difficult to "choose your favorites" in an environment where every country has its own awful set of problems. It's one big "Least Ugly" contest out there...

The short term market focus on the US big three automakers reached a climax yesterday as at first it appeared that a deal had been struck, but then it emerged that no deal was imminent and that the automakers would be forced to submit business plans to congress by Dec. 2, after which a new vote on a potential $25 billion bridge loan would be made. Our view is that in the end, we will see the automakers bailed out one way or another, but the Congress is being far tougher on them than previously, and it remains to be seen whether they might be allowed to fall into Chapter 11 to ease pressure from creditors and allow for a reorganization. We seriously doubt that a total liquidation of these companies would be allowed to take place, though Chrysler may get absorbed by GM eventually. The car company focus had the USD back and forth all day, and the lack of a deal is seen for bearish CAD as automotive parts are one of Canada's key exports and risk of Detroit failure would weigh heavily on the loonie. USDCAD retested the 1.3000 level yesterday.

If feels like the currencies are decoupling somewhat from moves in equity markets after observing yesterday's action, in which JPY crosses were the only reliable movers in synch with equities - and even the JPY crosses didn't hold new lows convincingly. It feels like the market may be putting out feelers for a new theme and we turn a bit more cautious here until/unless the technical breakouts prove what the markets want to do. We find it significant that the tremendous input from government bond markets and equties (Dow slicing through 8000, etc...) has failed to generate a more convincing move in EURUSD. So let's see 1.2400/1.2330 fail in EURUSD and then we'll be more convinced that this stronger USD trend will continue in the short term.

Watch the economic calendar today for the preliminary readings of November European Services and Manufacturing PMIs for an indicator on how fast the EuroZone economy is decelerating. Yesterday, the US weekly jobless claims number reached a new high not seen since the early 1980's. There is no sign that the pressure will ease up and we wonder what the fate of many services jobs will be after what is likely to be a brutal Christmas shopping season in the US.


It seems that EURCHF is at a crossroads here at the 55-day SMA around 1.5380. Either the franc finds support here or the risk is that CHF sees a capitulation and unwinds even further toward perhaps 1.5800.


Euro Shrinking

Thursday, November 20, 2008

I pulled out some of my old rate differential charts for a look at how rate spreads on the 2-year German notes were faring vs. US and Japanese counterparts. It is clear that the massive unwinding of the European Central Bank’s expectations is coinciding with the shrinking of the 2-year spreads as the market factors in more relief from ECB President, Jean-Claude Trichet and his board. This process is not necessarily complete, and there is still plenty of room for a further capitulation from the ECB. The German-US 2-year differential is still over 100 basis points (bps) - down from almost 200 bps in July. This differential could easily drop to 50 or below in the near term. The same goes for German vs. Japanese rates, which could have further to fall and already suggest that EUR/JPY should be trading at new lows right now.

EUR/CHF: why is it this high? Rumors were flying about USD/CHF related barriers yesterday around 1.2100, which have obviously fallen now, and USD/CHF has recently moved through its 200-week moving average around 119.70, so the USDCHF focus and recent range trading could be one of the reasons for EUR/CHF's ability to shoot higher and higher recently (and stopping out a likely over-positioned short market) But surely at these levels, the weak hands have been stopped out and we should be focusing on lower levels from here --- we only can wait and see.


Bad time for world economy, Forex and commodities

Wednesday, November 19, 2008

US Recession and Inflation

The latest round of inflation data are indicating that the rate of inflation is decelerating faster than anticipated. The United Kingdom Consumer Price Index (CPI) fell -0.7% on an annualized basis in a single month and the Retail Price Index (CPI) fell at the fastest rate in 20 years. The US Producer Price Index (PPI), the lead indicator, fell a full percentage point in October, from 6.2% to 5.2%. The talk has quickly shifted to deflation, which is certainly a significant risk in the near term with powerful asset deflation, commodity deflation and plummeting consumer demand conspiring to compel a slowdown in inflation. The US Christmas shopping season will likely see retailers chopping prices deeply to get customers through the door and today Marks and Spencer, a large British Retailer, announced a one-day, 20% off everything sale. A look over at the white hot government printing presses and endless stimulus plans that are being discussed should reassure us that the situation we are least likely to find ourselves a few years down the road is deflation - as a reversion to inflation is far more likely eventually. For now, however, deflation is king and the data on inflation is a clear argument for the all of the major central banks to lower their rates to essentially zero in the coming quarters. This will continue to weigh on the carry trades and favor the USD and the JPY.

World Equity Market

Nervousness in equity markets was obvious yesterday. According to the market updates at Finexo, the S&P 500 toyed with the idea of testing the 818 low on the December Future, but rejected the sell-off once again, this time ahead of the low, and rallied sharply into the close after two straight days of swooning sharply into the close – there are no easy identifiable patterns here. Likewise, JPY crosses tested lower and the USD was a bit stronger as well before easing back after the rally in risk. The persistent rally in fixed income is giving the JPY a tailwind as falling interest rate spreads between the rest of the world and Japan usually tend to do. So as consolidation ranges constrict in EUR/USD and EUR/JPY and the market wrings its hands wondering what to do next, we wait and watch the major equity index levels for signs that a new meltdown is in the works, which is still the scenario we endorse until proven otherwise. This would trigger a new leg up on the USD and the JPY. 8000 on the Dow cash index and that 818 level on the S&P 500 futures are interesting levels to watch.


For the major currency pairs, pull up a daily chart and a 21-day simple Moving Average (MA), which has become the latest obsession whether you are looking at the EUR/USD, EUR/JPY, USD/JPY or AUD/USD. In the absence of a clear direction over the last several days, this technical level has become an intense focus. The danger is that it suddenly becomes worthless as we suspect that it is a bit of a self-fulfilling technical level at this stage. Once real flow hits the market due to a new surrender in equities or on the flip-side, a huge rally, the MA will fade in importance. Still a break above this level and a hold into the close would be a significant technical development here and now.


Be careful out there, the potential for volatility is every bit as high as it has been at any part of the recent cycle and the relative calmness we have seen of late could be the calm before an intense new storm once these ranges fall.



Tuesday, November 18, 2008


* Japan Q3 Housing Loans rose 4.2% YoY
* Japan Oct. Department Sales fell -6.8% YoY vs. -4.7% in Sep.


This is one of the more potent trades in an environment of easing interest rates and falling equities (in other words, broad risk aversion). The pair seems to have become stuck in range lately, but it feels like we are nearing a decision point in which we either see a strong rally through the 21-day moving average that further neutralizes the chart in the short term and extends the expectations for further range trading, or a sharp sell-off through the rising line of consolidation that could set up new lows for the pair. We prefer the latter scenario, but would like to see a drop through the 120.00 area and the line first.

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G20 issues a grab bag of hopes and promises

Monday, November 17, 2008

G20 issues a grab bag of hopes and promises, and pushes real decision making out to the spring of 2009 and an Obama presidency.

Japan slips into recession. Currencies relatively calm after last minute meltdown in Friday's North American session.


  • Japan Q3 GDP out at -0.1% QoQ vs. 0.0% expected and Q2 growth revised down to -0.9%
  • Japan Q3 GDP Deflator out at -1.6% YoY vs. -1.7% expected
  • UK Nov. Rightmove House Prices fell -7.1% YoY vs. -4.9% in Oct.
  • Australia Q3 Retail Sales out at +0.1% YoY vs. +0.4% expected

Events Today:

  • Norway Oct. Trade Balance (0900)
  • EuroZone Sep. Trade Balance (1000)
  • US Nov. Empire Manufacturing (1330)
  • US Fed's Hoenig to Speak (1400)
  • US Oct. Industrial Production and Capacity Utilization (1415)
  • US Treasury Secretary Paulson to Speak (2330)
  • Australia RBA November Meeting Minutes (0030)
  • Japan Oct. Department Store Sales (0530)

Market Comments:

The market action on Friday was clearly all about nervousness ahead of the weekend's G20 meeting, with US equities rising sharply to new highs late in the afternoon, only to hit an air pocket and fall an astounding 6% in the final hour of trading. Currencies followed suit, with EURUSD again knocking on the 21-day moving average resistance up around 1.2800 only to close the day at 1.2600. Liquidity must have been awful for such moves to have taken place.

The G20 outcome was largely as expected: lots of talk and little action. Any major decision, should it come, will have to wait until after Mr. Obama is sworn into office in two months time. The G20 is set to reconvene on April 30 of next year, though the G20 statement discussed March 31 as a deadline for policy recommendations - this is a date to mark in our calendars. Still, there were a few points of interest from the meeting. Perhaps most interest for the future of international banking regulation was a reference to a new "college of supervisors", basically a group of bank regulators from the major economies that would monitor banks and meet regularly to perhaps recommend coordinated policy. Interestingly, and addressing one of the great risks to the global economy going forward, the G20 made a very clear statement on the perils of protectionism and set the goal of resuming the Doha round of WTO trade talks - let's all hope that this effort bears fruit.

Most of the very long G20 statement and measures are focused on the problems that got us here in the first place, which isn't of much help at the present time. The market was perhaps hoping for concrete stimulus measures to prop up growth, but these will clearly have to wait until spring, as will any major reform of the IMF, another focus for EM country stability. Japan offered to help the IMF with funds ahead of the weekend, raising hopes of more international coordination, but of the other countries with the biggest reserves, like China, Russia and Saudi Arabia, their focus will be domestic stimulus above all else as these three countries have regime legitimacy issues should their economies spiral out of control. All in all, the G20 has done little to alter the global landscape and is perhaps a mild disappointment at best, as no stimulus action plan is on the table at this time. This raises the risk that the USD and JPY continue to strengthen, though with momentum coming out of the market lately, we'd like to see, for example, EURUSD breaking below 1.2400 again for proof that we have more wood to chop in the near term on the risk aversion theme.

The economic calendar this week is rather lightly populated. We've got quite a bit of inflation data on tap, both from the UK (UK CPI/RPI tomorrow), from the US (PPI tomorrow, CPI on Wed.), and from Germany (Producer Prices on Thu.) though this is not much of a focus at present. A few articles are out talking up the prospect of deflation and potentially the sharpest fall in monthly CPI since 1949. The BOE Minutes are out on Wednesday. We have two of the regional US manufacturing indices out this week, and any ability to post new lows would be remarkable as these surveys tend to bounce sharply higher once they have gone super-negative due to the comparative nature (so November relative to October has to be worse than October relative to September, etc.. for the index to be able to post new lows). The BoJ is out on Friday, but there is little excitement there, with virtually nothing left to cut from the 0.30% overnight rate.

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Market Updates

Friday, November 14, 2008

Stocks stepped away from the brink in the US once again, triggering a desperate short squeeze on long JPY and USD positions

Move may mostly reflect nervousness ahead of weekend's G20 meeting. US Retail Sales for October could etch new historical low.


• US Oct. Monthly Budget Statement out at -$237.2 vs. -$200B expected
• New Zealand Oct. Non-resident Bond Holdings out at 74.7% vs. 74.3% in Sep.


Forex Market News

Thursday, November 13, 2008

GBP collapses on dour BoE report and prospect for lower rates. Will EURUSD break to new lows after ugly German GDP number?

Risk aversion back on the front burner again as US equity indices eye the lows for the cycle. JPY crosses seem a bit less panicky this time around.


  • New Zealand Oct. Business PMI out at 43.5 vs. 46.7 in Sep.
  • New Zealand Sep. Retail Sales out at +0.1% vs. +0.4% expected and ex Autos at -0.5% vs. +0.4% expected.
  • Japan Oct. Domestic CGPI out at -1.6% vs. -0.9% expected
  • New Zealand Oct. REINZ House Sales fell -34.8% YoY vs. -23.7% in Sep.
  • China Oct. Industrial Production out at 8.2% vs. 11.1% expected
  • Germany Q3 GDP out at -% QoQ vs. -0.2% expected

Market Comment:

The BoE was out yesterday with its quarterly inflation report, and Mr. King's turned in an ultra-bearish performance, forecasting that national income would drop by almost 2% on year on year comparisons by Q2 of next year and that the overall economy would shrink as much as 1.3% in 2009. This would mean that BOE rates are likely to eventually fall below 2.00%, meaning a multi-century lows. Yesterday also saw the release of unemployment data that shows the employment situation reaching its worst levels in 11 years. The combination of a very low interest rate outlook on accelerating negative economic indications and renewed trouble in the financial sector has the pound experiencing the most pain in this environment. GBP is now scraping along at a 12-year low on a trade-weighted basis. EURGBP blasted through 0.8200 and posted new highs above 0.8400 before finding resistance. There may have been barrier options involved in some of that action.

US Treasury Secretary Paulson announced yesterday that the US government is abandoning the plan to lift toxic assets off bank balance sheets by buying them in the open market, and will instead focus more on bank recapitalization, propping up debt markets related to consumer credit and trying to prevent mortgage foreclosures. This announcement added to the uncertainty already plaguing the market as it is increasingly clear that the fiscal response to the ongoing crisis just balloons larger and large with no end in sight. Financials were especially hard hit by the news and some of the risk indices are widening again (credit, emerging market and mortgage spreads).

Still, there are a few divergences in this cycle of risk aversion relative to the last big liquidation move that ran for the balance of the month of October. Namely, while US equity indices are close to their lows, the JPY crosses still have a way to go before they reach the lowest levels in late October, and EURCHF is one of the more glaring divergences, as it is still well north of the 1.4300 low. For the latter cross, this may have something to do with the market factoring in financial/banking troubles as a CHF negative that wasn't added to the calculation in earlier cycles when the market simply sold EURCHF as a knee-jerk trade on any sign of risk aversion. (Specifically, UBS is in the spotlight due to the US indictment of one of its top executives)

There are three ways to read the divergences more broadly: first, that previous moves were simply overdone and that nibbling at some of the risk appetite trades (AUD crosses and perhaps EURCHF) on dips is one trade tactic worth pursuing. Second, the action may simply be suggesting that risk aversion could continue, just in a choppier and slower fashion as momentum comes out of the market. We may get an answer to this question in the coming few trading days before and after the G20 meeting this weekend as the market decides how it wants to play the riskiest end of the market: the emerging market currencies. Third, the divergences could be a sign of CB intervention (at least for JPY and AUD pairs), as Japan explicitly sought a G7 statement that gave it a green light to intervene, and it is heavily rumored that the RBA has been intervening - more on this below. The intervention may be looking to avoid huge volatility rather than targeting specific levels over a sustained period of time.

It appears that EURUSD and the S&P500 are the two major instruments tracking each other most closely at the moment and at this inflection point (close to recent lows), we are likely either faced with a sizeable new leg down or support that leads to a more rangebound outlook in the coming weeks. EUR was perhaps artificially propped up by all of the EURGBP flow going through yesterday and would seem vulnerable to further downside this morning for at least a retest of the 1.2330 lows after the ugly German GDP announcement this morning as this was going to press.


Chart: EUR/JPY Analysis

Wednesday, November 12, 2008

EURJPY finally posted a new 10-day low yesterday after a long period of trading in a range, and yet that low was rejected in the late Asian and early European session. Moves across markets seem to be having a hard time showing any follow through lately. Still, some short term resistance is still in place in EURJPY at around 123.80, and a new low below 121.20 would reinvigorate the bearish argument and lead to a test of 120.00 and beyond if risk aversion heats up again. To the upside, the bigger resistance comes in at the 21-day SMA (blue line), which has been an obvious focus over the last several trading days.



Monday, November 10, 2008

Market updates by Finexo

China gets serious on stimulation China announced a massive CNY 4 trillion stimulus package over the weekend as the global economic growth deceleration is finally hitting the Chinese growth miracle with full force. This enormous package represents some 20% of Chinese GDP, making the puny 1-2% stimulus package ideas being bandied about by US lawmakers look puny in comparison. Some have suggested that growth rates of 5-6% would represent a truly hard landing for the China due to its historic shift to an industrial economy that creates massive pressures to increase the numbers of jobs as the population migrates from the countryside to the city. China will be sorely pressed to avoid this hard landing due to the imbalances in its economy that focus so heavily on production rather than consumption. For now, markets have decided that this is good news, but the rally in risk it has brought on is unlikely to last beyond the shortest term.

G-20 meeting

The G20 meeting over the weekend talked up coordinated action of various stripes and heavier involvement from the developing nations in stimulating its way out of weakening economic conditions. The UK's Gordon Brown is calling for coordinated action and is showing off to the world how willing he and Chancellor Darling are to pump up the UK budget deficit to an estimated 7% next year and in 2010. Things are not looking well for the pound, which is teetering on the precipice of new lows vs. the EUR (or DEM, really, since we are closing in on the weakest level since the mid-1990's here). We are a bit doubtful going forward of the developed world's commitment to developing countries as long as economic woes are keeping domestic pressures. Politicians are acutely aware that the voting public becomes very selfish in hard times.

US employment report

The US employment report was even worse than expected, with not only the nonfarm payrolls number coming in 40k worse than expected, but with the previous month's number also adjusted down a huge -125k. This sent the unemployment rate 0.4% higher to 6.5%, the highest level since 1994. We fear that the crunch in US consumption, which is such a large part of the US economy at over 70% and which hasn't seen a recession since a brief dip in the early 1990's, could send the unemployment rate far higher for the cycle as droves of service sector jobs are eliminated.

Heavy supply in new US treasuries this week

This week will be an interesting one for measuring the demand for US Treasuries, as the US treasury will auction some $55 billion of securities this week, the most in one week since 2004. The amount of issuance arriving in the coming year is mind-boggling and one wonders where the buyers will come from. If yields begin to rise due to insufficient treasury demand while economic data remains weak, this could add to pressure on the markets. Keep an eye on the US 10-year note futures, therefore. Signs of strong demand would be USD bullish.

CAD: still on borrowed time

The Canadian employment data for October released on Friday was far better than expected, but as we discussed, the Canadian economy has historically been closely coupled with the US economy and will not escape its growing negative drag. USDCAD should eventually try back toward the 1.3000 area and we would expect the pair to find support in the 1.1500-1.1800 area.

Key data on the way

This week's economic calendar is relatively quiet, with focus likely on the German GDP data out on Thursday and the US Retail Sales report for October, released on Friday and could show the weakest retail sales environment in the 16-year history of the survey.

Trading stance

We see the rally in risk appetite as an eventual opportunity to look for new entry levels to play the predominant trend/theme of global deleveraging. Keep an eye out for reversal patterns that suggest new entry points for going long the USD, JPY and CHF against the EUR and virtually any other currency.


Forex Recommendations for the next week

Saturday, November 8, 2008


As we all expected, the EURUSD range continues to tighten. A break (likely lower) from the range (triangle) is expected next week. The upper end of the triangle line is in the 1.29-12950 zone today and Monday and is resistance in the event of an advance.


The larger USDJPY trend is down so strength should be sold. Evidence that favors a new low is the momentum extreme (RSI) at 90.86. As I've mentioned many times before, price extremes (highs and lows) rarely correlate with momentum extremes. Instead, price extremes occur with momentum divergence. Support begins at 96.


"The GBPUSD is supported by a long term trendline that dates to 1985. I expect a larger bounce off of this line; regardless of the larger trend…the result would be a volatile range over the next several weeks before a break to a new low." The range to this point looks like the first two legs of a triangle with price now at the lower end of the triangle. A rally is expected to exceed 1.62 by next week.


The USDCHF is testing a resistance line from late 2005 as well as a shorter term upward sloping resistance line. These lines combined with overbought and divergent RSI on the weekly and daily should lead to a drop that lasts at least a number of weeks.


A wave 4 low may be in place for the USDCAD. A line drawn off of highs from late 2007 / early 2008 has probided support ahead of 1.13, which is the 4th wave of one less degree as well as the 50% retracement of the rally from .9817 (low of wave 2). If a low is in place, then price should remain above 1.16.


Adoption of a bullish bias is warranted on a rally above .7022 or a drop below .6544. Until then, the AUDUSD is in no-man's land." The AUDUSD dropped below .6544 today, triggering the bullish bias. Price is expected to exceed .7022 next week.


Kiwi is in a similar position (when compared to the AUDUSD). The rally to .6037 is either wave a or i within a larger rally sequence. Wave b or ii may be complete at .5742 but there is risk that the pair drops below .5742 before a solid base is in place that will lead to a larger rally.


Finexo Forex headlines

Friday, November 7, 2008

BOE cuts massive 150 bps and sends GBP on a roller coaster ride. US employment report out today likely an ugly one.

Risk aversion rose yesterday in the late US session, but no big follow through in Asia so far. JPY crosses bounce back a bit.


US Oct. ICSC Chain Store Sales out at -0.9% YoY vs. +0.7% expected
• Australia Oct. AiG Performance of Construction Index out at 36.4 vs. 31.8 in Sep.
• Switzerland Oct. Unemployment Rate rose to 2.5% as expected and vs. 2.4% in Sep.
• Germany Sep. Trade Balance out at 15.0B vs. 13.5B expected


Events Today:
Norway Sep. Industrial Production (0900)
Germany Sep. Industrial Production (1100)
Canada Oct. Unemployment Rate and Net Change in Employment (1200)
• US Oct. Change in Nonfarm Payrolls (1330)
• US Oct. Unemployment Rate (1330)
US Sep. Pending Home Sales (1630)
• US Sep. Consumer Credit (2000)

Today a pivot day

Despite the foreboding ahead of the US employment report, our "sixth sense" feels a bit uncomfortable in the shortest term looking for big further moves in risk aversion right here. The JPY crosses showed a lot of stability overnight considering the ugly close in the US and the AUDUSD consolidation has been very shallow, suggesting a background bid in risk. Still, let's see how the US employment report comes in and the market's reaction to it for a better read on where we may be headed next week. Today could be an important pivot day for risk.


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