Currency Currents - July 31, 2009
Key News
• Japan’s unemployment rate hit a six-year high in June. (AP)
• Euro zone unemployment rose to a 10-year high of 9.4 percent in June. (Reuters)
• European consumer prices fell by the most in at least 13 years in July. (Bloomberg)
• China may cut growth in new loans by half in the last six months of this year to deflate a bubble in the world’s second-best performing stock market, according to former Morgan Stanley chief Asian economist Andy Xie. (Bloomberg)
Quotable
“Success is relative
It is what we can make of the mess we have made of things.”T.S. Eliot
FX Trading – Oil Demagoguery Delayed
It’s a sad week for the usual demagogues in the US congress (sorry for the redundancy), as global oil companies are reporting lousy earnings. I’m sure oil execs were on the docket for demonizing—all sorts of anti-capitalist screeds planned—as our stalwart leaders mugged for the camera and showed compassion and outrage for the “little guy.”
Here’s an example of what we likely will miss on our telly next week: Cut to close up of typical lawyer congress person who has never held a real job in the private sector or met a payroll: “How dare you nasty global oil companies employ hundreds of thousands of people and risk billions of dollars in private capital in the most inhospitable places across the globe, then turn around and power our economies with your product and then profit from it—it is an outrage. It is downright obscene.” And I’m sure all types of diatribes utilizing the new PC-word of the year “green,” would have ensued.
The fact we will miss this charade proves there must be a higher power watching over us. But sadly, it’s likely sometime in the future oil profit demagoguery will be back on the docket, that’s of course assumes global demand ever recovers.
And lack of global demand was the message consistently shared by the oil daemons (conspiracy?). It was an equal opportunity profit tumble this week for BP, Royal Dutch Shell, and Exxon. Each company relayed similar sentiment: there is little demand for oil out there in the real world, and lots of supply. You wouldn’t think that was the case looking at the run up in oil prices, and other markets based on the rationale of the “end of the recession.” But markets discount. And even better, profitable trends are created by players who often don’t want the facts to get in the way of exploitable price momentum; the Zen of markets.
Those juicy multi-asset class trends just keep on giving. The standard formula: strong oil prices, strong stock prices, and a weak dollar. Speculative capital flow is trend following, engendered initially by some perception of fundamentals, which was likely “green shoots” and led by a big boost in Chinese GDP (whether force-fed or not); but the longer the trend endures, the more detached from fundamentals it becomes. Unfortunately, no one knows when or where these things end until they are given the illusive gift of hindsight.
Oil vs. Emerging Market Stocks vs. US$ Index Daily:
Mr. Market is bashing the buck a bit again this fine Friday morning. Many currencies are testing key breakout levels. And at 8:30 a.m. we get a look at US GDP for the second quarter. A better than expected number suggests the trend is your friend. But then again, that’s why they call them markets.
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
Currency Currents - July 30, 2009
Key News
• Confidence in European Economic Outlook Climbed More Than Forecast in July (Bloomberg)
• South African Producer Prices Drop by Record, Fueling Hopes of Rate Cuts (Bloomberg)
• China Central Bank Pledges to Control Lending Growth With `Market Tools’ (Bloomberg)
• Washington risks taking China too seriously (Financial Times)
Quotable
“The mere attempt to examine my own confusion would consume volumes.”
James Agee
FX Trading – Down; Up; Now Which Way From Here?
This week in Currency Currents we’ve discussed some details surrounding China and their ultimate influence on the global economy and investor sentiment. For good reason, everyone seems to pay close attention to China – they’re an economic leader. The goal, however, is to be right about to where China will be leading.
It has been our contention that China is set to majorly disappoint; that their recent “recovery” has been artificial rather than healthy. So far, we can slice away several items that prove our analysis accurate, but we have not been in sync with conventional analysis (at least in the last couple months). Big money flow, however, has been in sync with conventional analysis. That moves markets.
Below is a story taken from Bloomberg yesterday:
July 30 (Bloomberg) — Chinese stocks will recover from their steepest drop since November and end the year higher as speculation that the government will limit bank loans is unfounded, billionaire investor Kenneth Fisher said.
The nation’s economy is “gangbusters compared to the rest of the world, why would they try to kick that?” said Fisher, who has about $900 million invested in Chinese shares among the $28 billion he manages as chief executive officer of Fisher Investments Inc. in Woodside, California. “They have zero incentive” to curb lending, he said.
To us it seems Mr. Fisher here is ignoring the serious risks that could wreak havoc on the “gangbuster” economy. But when the gargantuan rally in Chinese shares is padding his managed accounts, affirming his view, then why fight it, right?
Big investment money has flown to China in the last couple months. But over that period of time it seems the outlook has not grown exceptionally clearer, nor become far more optimistic. But is there a potential for money flows to change direction?
Indeed, Jack mentioned yesterday a potential sentiment shift shaping up as far as China is concerned. Potential curbing of bank lending in China may have been the catalyst. Investors who were so giddy to jump on loan- and stimulus-based growth may start second-guessing their bets.
But that was yesterday; that was when Chinese shares finished the day down 5%; that was before the S&P 500 reversed nearly all its rather large intraday declines yesterday. Today China has tried to allay concerns over potential restrictions placed on bank lending. Not surprisingly, the market is clinging to this story because excessive loans have fueled the rise of China’s stock market.
To put it simply: yesterday offered great potential for an overall risk-averse mood to take grip of the markets. The news offered little optimism; negativity was starting to set in; the technical picture for so many asset classes looked ominous.
Today Chinese stocks have bounced back slightly; today US stocks are testing their highs; today the economic outlook in Europe is better; today everything all of a sudden appears rosy again … when yesterday things did not.
I’d like to think the uncertainty stems from highly-sensitive, news-driven, short-term reaction by the markets; I’d like to think that’s the reason for so much back and forth price action. When you watch this stuff all day every day, this is the type of feeling you tend to get when markets have been somewhat range bound.
But honestly, despite the consistent shifts in sentiment and subsequent reaction in prices, the bias seems to be towards risk taking. Stocks continue to gain ground overall; the currencies continue to drift mostly higher versus the US dollar overall. Now, I’m not talking about big moves here, yet, but considering the welcomed reception towards optimism as compared to the somewhat confined reaction towards negativity, it seems clear what the market wants.
Either the market eventually gets what it wants, or it doesn’t. For the time being, it makes financial sense to play like the market will get what it wants; or don’t play at all. But it would be foolish to overlook the risk that the market comes up empty-handed.
Any move (soon) back in the direction of yesterday’s risk aversion could unleash heavy declines on stocks and currencies. But if the steady drift higher continues, that could be quite enough to keep risk appetite support and drive asset prices higher. So far it seems the latter will win out, again.
US Dollar Index Weekly: Testing a key retracement level at 61.8% Fib.
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
Currency Currents - July 28, 2009
Key News
• China’s stocks plunged 5%, driving the Shanghai Composite Index down the most in eight months. (Bloomberg)
Quotable
“The purpose of models is not to fit the data but to sharpen the questions.”
S. Karlin
FX Trading – The Sentiment Switch and Chinese stock market crash!
I noticed the Chinese stock market fell 5% last night—at least that’s what’s been reported by Bloomberg and others; I actually didn’t notice it really. Was it JR’s Currency Currents of yesterday talking of China coming “unhinged” that did the trick? Doubtful, but his views are part of that interconnected and complex hierarchical web we call sentiment.
We’ve been talking about China for a while now, as you know. We see China through a skeptical lens. And though we’d love to say—yes, we called it right on the button (assuming China does come unhinged; still a big assumption), we can’t. But the reality is that we have been worried about China for a while—and missed most of the big rally Chinese optimism generated. But a change of view is in the air.
I make that point to make this point: Sentiment in markets seems to change with a flip of a switch. Last week very few were talking about China, this week a whole bunch of people (high level types) are noticing and talking at the same time about the dangers of force feeding an economy that is hermetically sealed by capital controls and a fixed currency—it creates bubbles!
The market is created by real people moving real money; all based on their flawed view of the future. Some people have a much greater impact than others i.e. those moving the most money have a greater impact; let’s call these people the higher level players—those on the top of the market food chain. They run pension, private equity, and mutual funds. But, there is always a feedback loop between these higher-level players and lower-level players in the market food chain. It is a complex hierarchical relationship with fractal and power law dimensions.
These higher-level people, or “agents,” are waking to the idea China is bubble-icious. Of course when these people notice, it becomes an original idea and noticed by the financial press, despite the fact that some lower level “agents” have been warning of the same dangers for a while. The higher-level “agents” rarely dispel the notion their idea was original; which is why some are credited with calling market tops and bottoms when many around them have done the same. Put another way: The rich get richer.
The higher level “agents” by virtue of their status, are leaders to the lower level “agents” which then move their money accordingly. And sometimes it’s not hard to lead when a portion of the lower level “agents” have already been cognizant of the growing dangers.
Thus, we get what appears to be a shift of sentiment on a dime as if someone just woke up one morning and flipped a switch.
“The stock market is made of actors that differ in size by many orders of magnitudes, ranging from individuals to gigantic professional investors such as pension funds. Structures at higher levels, such as currency influence spheres (US$, Euro, Yen,…), exist and with the current globalization and deregulation of the market one may argue that structures on the largest possible scale—that of the world economy—are beginning to form. This means that the structure of the financial markets has features that resemble that of hierarchical systems with ‘agents’ on all levels of the market. Of course, this does not imply that any strict hierarchical structure of the stock market exists. However, critical phenomena induced by imitation forces in these conditions may often exhibit a rather nonintuitive phenomenon, called ‘log periodicity,” in which, for instance, the probability or the hazard rate are not monotonously accelerating but are decorated by oscillators with frequencies accelerating as the critical time is approached.”
Didier Sornette, Why Stock Markets Crash (Published 2003)
Sornette wrote his densely mathematical packed and fascinating book back in 2003. I have referenced it before in the pages of Currency Currents, long time readers may remember. But fast forwarded to today; Sornette and team recently made a very interesting prediction on the Chinese stock market, maybe off by only 2-days!
On July 10th 2009, Sorrnette and team wrote an article titled, “The Chinese Equity Bubble: Ready to Burst.” They predicted a Chinese market crash would occur somewhere between July 17-27! We have printed the first two paragraphs of the piece below, along with their chart, and linked the article so you can read it all for yourself:
“In the light of a global downturn a wide range of stimuli packages and fiscal gifts have been launched by many governments of which China makes no exception. However, in China these actions might have lead to an unsustainable rise in asset prices, a so-called “bubble”. The Shanghai Composite is the best performing large stock market in 2009 and is up 65 per cent for the year, and rising. To reach a targeted GDP growth of 8%, Chinese policy has turned to a bank model of massive lending, which has provided China with sufficient liquidity to fuel this bubble. Talk of a China bubble is heard in the market, but when or even if it will collapse is unknown, as usual. Macroeconomic and other qualitative factors have been used as arguments for or against the hypothesis of a China asset bubble.
“We take a different approach here by closely examining the price changes of the index. This work is based on Didier Sornette’s group (in particular with Anders Johansen from 1995 to 2002, with Wei-Xing Zhou since 2002 and, since 2008, with the FCO group at ETH Zurich: www.er.ethz.ch/fco/) who pioneered studies to identify bubbles and obtain estimates on likely “crash dates”, when rapid acceleration in asset prices becomes unsustainable, leading to a crash. Sornette’s group applied their theories to correctly identify bubbles and ranges of crash dates for the US Housing boom1 and the oil bubble in 20082, amongst others.”
Sentiment about China seems to be changing fast. Stay tuned.
Jack Crooks, Black Swan Capital LLC
www.blackswantrading.com
Currency Currents - July 28, 2009
Key News
• Deutsche Bank Profit Rises 68%; Shares Drop as Loan-Loss Provisions Surge (Bloomberg)
• BP Profit Drops 53% as Company Sees Little Evidence of Recovery in Demand (Bloomberg)
• South Africa’s Unemployment Rate Increases to 23.6% as Zuma Faces Protests (Bloomberg)
• Mark Hulbert: Insiders have quickened the pace of their selling (MarketWatch)
Quotable
“It is the mark of an educated mind to be able to entertain a thought without accepting it.”
Aristotle
FX Trading – When China Comes “Unhinged” …
Global rebalancing is happening, like it or not.
The question is: how will the global economy react when China becomes unhinged? That’s exactly what Jeremy Grantham is calling for; and he expects it could really take market players by surprise. Sound familiar. [This was the key topic of Jack’s recent speech in Vancouver at the Agora Financial Symposium.]
The policy of China’s government is bordering on ‘grow at any cost’; and it could really end up costing a lot. Officially they’ve said monetary policy will remain loose … and it seems the [mostly state-owned] banks are more than willing to keep the juices flowing as long as Daddy Government keeps flashing the green light.
China was shooting for loan growth of around $5 trillion in all of 2009. Well, they achieved that … and then some, seeing loan growth hit levels more than 47% higher than full-year expectations in just the first half! The $7.3 trillion worth of new loans in the first half of 2009 actually amounted to triple what was done in the same period last year.
And did I mention that global rebalancing is happening?
That throws a big heaping, albeit it largely ignored, pile of risk onto this surging loan growth in China. This flow of credit is doing a heck of a job at boosting stock prices and global recovery sentiment, but is it boosting legitimate recovery potential?
Beating a dead horse, I know, China’s export market is still struggling as buyers in the US and Europe have taken an extended break from their old consumption habits. China’s imports are still struggling as a direct result of slumping demand for its goods. Domestic demand isn’t exactly where it needs to be and China won’t be able to throw another 25% of GDP worth of stimulus at the issue – it’s just not feasible.
Yes, stocks in China have roughly doubled since bottoming out in 2008. Bets are high that stock market wealth will buffer the financial position of the Chinese. But that can come unglued rather quickly as we’ve all come to know.
If positive signs – real, healthy economic progress – don’t surface anytime soon, then China’s going to be a prime candidate for major disappointment. There’s a lot riding on their stimulus efforts – fiscally and monetarily, assuming there is a difference when it comes to China. They’re running the risk of a major ugly combination forming to down them at a time when global recovery is still teetering on the edge. Asset bubbles and bad loans are a nasty duo, if I remember correctly.
As a side note, a radio news anchor reported that it’s expected to be determined speculation was a large driver of sharp swings in oil prices … and not supply/demand fundamentals. Prices of commodities moving based on unsubstantiated expectations? You don’t say?
Maybe it’s time to wonder how the world might handle a China disappointment. One would think risk appetite would fade as it’s become a major belief that China is the leader to pull the rest of the world out of recession. It seems emerging markets, commodities and commodity currencies would feel some immediate pain. And then the other major currencies may be scrutinized if the US dollar catches a risk bid — it’s a nasty, relative game we play.
Optimism is building again around US recovery potential. Wouldn’t that be funny if the US stabilizes and China becomes unhinged? Technically speaking, the US dollar is on the edge again; can it bounce back and find a legitimate reason to strengthen? Can China?
John Ross Crooks III
Black Swan Capital, LLC
www.blackswantrading.com
Currency Currents - July 27, 2009
Key News
The highest inflation-adjusted yields in 15 years are helping provide the Treasury with record demand at auctions as the U.S. prepares to sell $115 billion of notes this week. (Bloomberg)
Quotable
“What if everything is an illusion and nothing exists? In that case, I definitely overpaid for my carpet.”
Woody Allen
FX Trading – Emerging markets soaring…overshoot?
Emerging markets continue to fly. Many for good reason I suspect. The iShares MSCI Emerging Stock Index has rebounded 50% from its low back in November last year.
However, emerging markets tend to move in unison, driven together by the key global macro rationales of liquidity, risk appetite, and commodities demand. But not all emerging markets are alike.
Russia and South Africa coming rushing to mind as areas that have a seemingly decent probability of imploding as economic risks feed growing political risk. But you wouldn’t know it by looking at their respective currencies in relation to the US dollar.
The Russian Ruble – US$ is up about 18% since bottoming in February…
….while the South African Rand – US dollar has jumped a whopping 49% since last October.
Both Russia and South Africa are being hit hard by the plunge in global demand.
Russian GDP plunged 10% in the first half of 2009. Its companies and once might oligarchs are laden with debt. Reserves are dwindling as the government tries to prop up the economy. Non-performing loans on bank books continue to rise, thus bank lending is still falling despite Putin’s edict to open the loan flood gates. If a big rebound in the demand for “stuff”—which is the only thing that sustains the Russian economy—doesn’t come soon, the probability of implosion rises accordingly.
South Africa is mired in recession and their current account gap is widening fast—it reached 7% of GDP in the first quarter of 2009, up from 5.8% in the Q4 ’08 as demand for real “stuff” has fallen. But even more dangerous is the rising political tension, as President Zuma’s ANC supporters are increasingly unhappy. Mr. Zuma buoyed expectations dramatically for poor South Africans during his recent Presidential campaign—but he hasn’t delivered the goodies. “There is an ugly, unpredictable mood among South African’s poor. Karen Heese, an analyst with Municipal IQ, a Johannesburg-based research company, said that, while protests during the recent years have tended to focus on specific problems such as housing or water, the recent series of actions has been ‘more generalized and more violent.’”
Maybe the market is discounting that things will improve for both countries. Or maybe what we see in the currencies of Russia and South Africa is simply a self-reinforcing trend in price driven by rationales lacking validity—the raw material of classic overshoot in currency markets.
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
Live Event
We will be exhibiting and speaking at the Forex & Options Expo in Las Vegas from August 2-4th. Please stop by and say hello if you are able to attend. For information on the event, please follow this link: http://www.moneyshow.com/lvfx/?scode=014964
Currency Currents - July 22, 2009
Key News
• Bernanke Is Ranked World’s Best at Handling Financial Crisis, Survey Shows (Bloomberg)
• Pubs closing at rate of 52 a week as hard-up drinkers shun their local (Times)
• Iceland applies for EU membership, the outcome is uncertain (Vox)
• Swiss Franc Strength May Be Returning to Central Bank’s `Radar,’ RBC Says (Bloomberg)
Quotable
“He speaketh not; and yet there lies
A conversation in his eyes.”Henry Wadsworth Longfellow
“The most important things to say are those which often I did not think necessary for me to say — because they were too obvious.”
Andre Gide
FX Trading – A Technical Stopping Point for Risk-Takers
There’s one important chart I wanted to show you today. I’ll get to that in a minute.
News wise, though, there’s nothing too exciting to talk about this morning; prices are little changed from where they finished yesterday … and the day before that.
There is little on the data front – Canada reports retail sales numbers this morning. They’re expected to come in positive. It would seem that in-line or better-than-expected numbers would be USDCAD negative … driving the Canadian dollar higher versus the buck. But how much of an impact could this have if risk isn’t cooperating?
Risk appetite seems to be taking a breather so far today. Stocks have run up rather sharply in the last week and a half, and the S&P 500 is testing key overhead resistance – the high mark from early June around 957.
Obviously, this level is critical. A break higher breeds more confidence that the investment environment is improving perhaps because the economic environment is stabilizing; market players are willing to take on risk.
Fading from this resistance level, not unlikely, could mean the S&P is capped at this level barring some major improvement in market sentiment; or it could mean there’s just a bit of profit-taking as stocks build up fuel for a push above these levels.
Today will likely be the same story of corporate earnings driving markets. It may take some big positive surprises, though, to get the S&P through resistance today, as this spot marks an obvious near-term stopping point. I would expect to see a bit of downside before any legitimate test at breaking through resistance.
But with the ease at which optimism permeates the stock market these days, it may not take much to get the risk-hungry to the table. The US dollar remains vulnerable.
John Ross Crooks III
Black Swan Capital LLC, www.blackswantrading.com
Currency Currents - July 21, 2009
Key News
• Total outstanding government debt in the UK has risen to a record £799bn, or 56.6% of UK GDP - the highest since records began in 1974. (BBC)
• Australian Treasurer Wayne Swan Tuesday said the worst of the global recession may be over as he welcomed a new report which predicted a rebound in the country’s growth next year. (AFP)
Key Reports (WSJ):
ICSC-Goldman Store Sales 7:45 AM ET
Redbook 8:55 AM ET
4-Week Bill Auction 1:00 PM ET
Fed Chairman Bernanke speaking today
Quotable
“Early in life I had noticed that no event is ever correctly reported in a newspaper.”
George Orwell
FX Trading – Questions and few answers…
If we have learned one thing over the many years following markets it is this: If you are paying attention, there are always many more questions than answers. And if you are highly confident about future price action, you have either never traded real money or you haven’t a clue. The best it seems one can do is build a scenario based on some form of analysis that has worked in the past, and then pull the trigger on a trade.
I was graciously invited to speak at the Agora Financial conference in Vancouver this week (my invite is a mystery to me too). It is a very good conference, no doubt. And there are is a very interesting mix of speakers: it contains seasoned vets who have fallen on their swords a time or two, and the usual newsletter gurus who pretend to trade. The gurus are usually quite easy to spot—they are highly confident about their ability to predict the future down to the most precise detail. Either way, there is much to be learned.
In the world of investing, I think it’s healthy to believe questions trump answers. But unfortunately in the end we must boil the trading decision down to a yes or no…in or out, long or short, hedged or one-way bet. It just seems unusually hard to boil it down now, as questions not only trump, but seem to overwhelm answers that provide trigger pulling confidence one is seeking…
News about the debt backdrop facing the US seems to be lurching from bad to worse, thanks primarily to a government that seems to think its job is to replace private deleveraging (the activity usually associated with market cleansing and preparation for fresh new strong economic growth) with public debt in its role as “global stimulator of last resort.” Dollar demise on this alone makes sense.
But, how is it stocks can rally into such dire news? Why are commodities rallying while demand from the world’s biggest economy still seems in the tank and on a course for Armageddon?
Two points:
1) Markets discount and it doesn’t matter what we think about the fundamentals now or what our forecast may be, the price is the price and that’s it. This is why Bill Dunn, one of the most successful commodities trading advisors alive has always followed a trend trading model. As smart as Mr. Dunn is, he admits he can’t forecast the future so why try. All he does is “ride the bucking bronco” he says. And it’s why we have developed our own trend following model for our managed money side of the fence, and said model will be integrated more into everything we do for our Members at Black Swan Capital.
2) Markets can exhibit degrees of rationality and irrationality, and these periods can last longer than we think. To paraphrase Keynes, markets can remain irrational longer than we can remain solvent.
In short, the fundamentals, or various interpretations of the fundamentals, don’t matter till they matter. I agree with Soros that markets at the core are simply boom-bust cycles that move in self-reinforcing trends based on the flawed expectations of people who move money that move markets. In short, market prices are always irrational or flawed to some degree all the time. Which goes to the heart of economics that says markets are cleared by equilibrium, the price; but the reality is markets may tend toward equilibrium but never get there; otherwise there would be no exchange. As a buyer, I value something slightly more than the seller, therefore the exchange is made.
But what is interesting about the dollar perma bear camp (and granted interesting in another way for those of us who dare say good things about the buck on occasion), much of their premise is rooted in US economic demise. But if the US is taken out of the picture, the price of those things now driving the market lower will likely be demanded less, market price clearing will take place at a much lower price on those fundamentals alone, not to mention the potential self-feeding aspect.
So the next questions: Doesn’t US demise denude the doom story and lead back to risk aversion story i.e. falling stocks and falling commodities, leading to a dollar risk bid at the expense of other currencies? The dollar cannot be bought and sold in isolation, it must be paired with something.
Can dollar perma bears have it both ways? Maybe, but it’s a lot to ask for. And if the US is recovering, and corporate earnings are rebounding, then isn’t it then a race between who rebounds first? China and other emerging markets are in the lead, no doubt. And it seems Australia by proximity and demand composition with commodities may be too; but what about our friends across the pond?
Even here there is “rational” justification to suggest the euro can continue to rally based on the fact the ECB has it under control, and will remove the punch bowl first? This rational expectation is of course predicted on the belief the ECB is not woefully behind the stimulus curve in the first place. But if they are behind the curve (evidenced rising unemployment in still rigid labor markets, falling productivity and increasing unhappiness among the core European Monetary Union countries—Greece, Spain, and Italy) then it is likely the US economy may arise from the recessionary ashes first. After all, the US went in first.
After the dollar beating yesterday, the market is flat this morning. The pound is down a bit on the debt news, but not much. Crystal balls are unusually cloudy now, but it seems a lot of bets have been placed nonetheless. Bets validated in any way can trigger powerful self-reinforcing trends; but those same bets can also set the stage for a big surprise.
Big Ben speaks today—will answers follow?
Jack Crooks
Black Swan Capital
Currency Currents - July 20, 2009
SPECIAL BONUS:
Thursday afternoon I had the opportunity to spend about 90 minutes speaking to a large group of attendees via webinar sponsored by the International Stock Exchange (ISE) on a subject I feel is a great place for all currency traders to begin.
“Using Intermarket Analysis to Find High Probability Currency Trades.”
For those of you that are already currency traders or for those of you that don’t know where to get started I believe this will be very helpful.
Near the end you’ll hear my co-host Steve Meizinger, the Director of Education for The International Securities Exchange (ISE) spend about 10 minutes walking you through a few currency options trade examples. Steve does a great job of explaining how currency options work and why you may want to consider trading ISE currency options.
“>Click here to Watch the Webinar
During the Q & A section you’ll hear Steve and I talking about a 20 page “Euro Report”. Many of our subscribers to Currency Currents already have this report but for any of you that don’t, I’ve include the link to download it below.
Preparing for a Breakup in the European Monetary System
Thank you for your subscription to Currency Currents and I hope you enjoy both the webinar and this special report.
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
Currency Currents - July 17, 2009
Key News
• The euro zone recorded a trade surplus in May because imports contracted at a faster pace than exports, data showed on Friday, pointing to continued weakness in internal demand. (Reuters)
• China’s government failed to sell as much debt as it planned for the third time in two weeks on speculation the central bank will push up money-market rates. (Bloomberg)
Key Reports Due (WSJ):
8:30 a.m. ET- Housing Starts
Quotable
“All is not hopeless. Markets are turbulent, deceptive, prone to bubbles, infested with false trends. It may well be that you cannot forecast prices. But evaluating risk is another matter entirely.”
Benoit Mandelbrot
FX Trading – Aussie angst and some feedback loops!
Given that Australia has effectively become a satellite country of China—a country we are told is “booming” with growth–does the news item from Bloomberg this morning strike anyone else as a bit odd? [Our emphasis]
July 17 (Bloomberg) — The value of Australian exports plunged in the second quarter by the most in almost 25 years as coal prices tumbled 36.8 percent and the nation’s currency rose.
The export price index slumped 20.6 percent from the first quarter, the biggest decline since the index began in 1974, the Bureau of Statistics said in Sydney today. Imports fell a record 6.4 percent. Economists forecast declines of 6 percent and 16 percent for import prices and export prices respectively.
Lower prices for exports threaten to erode Australia’s economy, which was one of the few including China and India to expand in the first quarter. Australia’s terms of trade, a measure of income from exports, tumbled 15 percent in the second quarter, said Helen Kevans, an economist at JPMorgan Chase & Co. in Sydney.
“The terms of trade will fall at least 30 percent from peak to trough, draining national income, although it now appears the squeeze will be worse than we currently forecast,” Kevans said.
Australia’s trade deficit widened in May as a drop in coal shipments pushed exports to the lowest level in 14 months, a report showed on July 2.
Yikes! Outside of the beloved BRICs, Australia was supposed to be everyone’s hero economy being pulled kicking and screaming along the path of Chinese growth. It goes back to a point I mused over earlier in the week: maybe 8% quarterly GDP growth in China isn’t all it’s cracked up to be. If China isn’t importing much, possibly evidenced by Australia’s trouble (and angst rising among other Asia-block nations), then how can it carry the rest of the globe out of recession?
Another question: Given the big run in commodities prices this year, why is Australia not benefiting? Maybe the chart below of the Commodities Index compared to the same index in Australian dollar-USD terms can help explain:
As you can see, from the Australian’s perspective, thanks to the big run up in the Australian dollar (or big fall in the US dollar since Jan ’09), the price of commodities to them has fallen!
So how might the Australians help alleviate this situation? Possibly through the pressure valve of the currency, which goes hand and glove with economic prescription when growth is slowing and there is no fear of rising prices—cut interest rates. This is a prime example of the powerful feedback loop between currencies and the real economy.
Fundamentals influence currency prices and currency prices influence the fundamentals.
In a free-floating currency world the currency can be the pressure valve. But in a hermetically sealed financial world (cap controls and pegged currency), that is China, domestic asset market speculation can become a pressure valve. Thus, you get major pricing dislocations and non-market allocations—a 75% increase in the stock market year to date might be an example.
Back to the Aussie in attempt to close the loop of this missive…It’s likely the Reserve Bank of Australia will cut interest rates given the change of fortunes in the Australian economy. The 3%+ Australian short-term rate already seems low, but it towers over other major currency competitors that seem to be seeking ZIRP (zero interest rate policy). We know that growth and yield are, and have been, a powerful driver for the Australian dollar’s rapid run up in price.
Here’s the point (sorry for these very long sentence): If investors start lurching to the conclusion that a five-fold increase in bank lending from China is part and parcel to the 75% increase in the stock market (a pressure value since there is no currency pressure valve), what may follow is the thought valuations of mostly state owned (or state controlled) companies there listed, whose shares are held mostly by the government, just might be artificially propped up given that the massive infrastructure build (fixed asset investment up 33.5% in the first half) in China in a world where demand is not rebounding will only lead to even more overcapacity and thinner profit margins for companies whose shares have been bid up 75% year to date. Thus, hot money may then flow back out of China, further dampening the prospects for more demand for Australian raw materials, thus further impacting expectations Australian interest rates will play catch up on the downside to its industrialized competitors and therefore pulling the prop of growth and yield viciously out from under what is now the much loved Australian dollar.
Australian $ - USD vs. Shanghai Stock Index Daily:
Are they in nosebleed territory yet?
Have a great weekend.
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
Currency Currents - July 16, 2009
Key News
• Verleger Says Oil to Collapse to $20 This Year on `Devastating’ Crude Glut (Bloomberg) [Editor note: Perhaps this is simply a search for a sound-bite or headline-maker, but we wouldn’t be completely surprised if crude falls to $20 a barrel. Demand is not there and neither is peak oil.]
• China’s Economic Growth Quickens to 7.9% on Record Loan Growth, Investment (Bloomberg)
• China’s $2 Trillion Reserves Help Sustain Obama Borrowing, Shore Up Dollar (Bloomberg)
• Geithner promises to defend dollar (Financial Times) Tim Geithner, US treasury secretary, sought to assure Gulf nations on Tuesday about their holdings of treasury bills when he told Saudi business leaders that his country “has a special responsibility to play” in defending the value of the dollar.
Key Reports Due (WSJ):
8:30 a.m. Initial Jobless Claims For July 11 Week: Expected: -60K. Previous: -52K.
9:00 a.m. May Tsy International Capital: Previous: -$53.2B.
10:00 a.m. DJ-BTMU Business Barometer For July 3: Previous: +0.8%.
10:30 a.m. Jul 3 EIA Natl Gas Inventories, in billion cubic feet
1:00 p.m. July NAHB Housing Index: Previous: 15.
Live Black Swan and ISE Event today
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Quotable
“This is a government of the people, by the people and for the people no longer. It is a government of corporations, by corporations, and for corporations.”
Rutherford B. Hayes
FX Trading – Reconcile This!
The word of the day is: reconcile.
Merriam-Webster is gracious enough to define it for us as:
rec•on•cile
1 a: to restore to friendship or harmony
2: to make consistent or congruous
3: to cause to submit to or accept something unpleasant
4 a: to check (a financial account) against another for accuracy b: to account for
Can we really reconcile the expectations flooding the market this week with key fundamental data we’ve got our hands on? I sure can’t. Can you?
It’s early in second-quarter earnings season – I mentioned that briefly on Tuesday. This week has so far been a testament to the fact that investors are more than willing to jump all over better (and less-bad) than expected earnings numbers; they’re loving on growth projections for the second half of 2009 too.
Sure, the quarterly earnings expose is far from over … and the mood can certainly change quickly … or not change at all. But as things stand now, I can’t seem to reconcile the nascent optimism – whether it is over earnings, China, or whatever — with the underlying economic developments.
The job market is in the tank. Many analysts are starting to feel unemployment’s ‘lagging indicator’ characteristic is a bunch of baloney at a time like this. And rightly so — estimates call for joblessness to surpass 10% in the US. The picture ain’t much prettier everywhere else you look either. (Yes, unemployment is an issue even in China!)
Past and future unemployment numbers alone should leave investors with a discomforting feeling. But if need be, reach for some other reason for caution and you’ll probably find it. Oh, let’s say … capacity utilization.
Yeah, capacity utilization – everyone’s favorite statistic. Ok, I admit – capacity utilization is not everyone’s favorite statistics. I think the US deficit is everyone’s favorite statistic – at least everyone in the currency market anyway. (By the way, TIC data for the month of May is scheduled to be released today in the New York session. This simply reveals investment capital flows into and out of the US. Expectations have it coming in much improved from the previous month’s read, meaning the US is demanding fewer foreign assets than foreigners are demanding of US assets.)
Ok, sorry – back to capacity utilization. Have a look at the following chart:
Like so many pieces of data recently, we’ve seen quite a sharp drop-off since financial crisis shook the economy. Capacity utilization tells us whether a country is meeting its output potential based on available productive capacity. Clearly we’re well below potential right now.
And the US isn’t alone in this area. Developed and emerging markets alike are seeing notable draw-downs in capacity utilization. A key factor here is the absence of demand. A return of demand does not appear to be anywhere in sight as global consumers continue to battle their own financial headwinds. Therefore, thus, it follows, that it will be unlikely we see a recovery in capacity utilizations rates anytime soon.
It is believe that at a certain rate of capacity usage – roughly 85% — an increase in the rate of inflation will occur. Does then the current excess capacity not mean that inflation is not currently a threat and that perhaps inflation fears are overblown?
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It appears the biggest threat remains deflation. And it’s tough to reconcile the prospects of deflation with the potential for a better-than-expect second quarter and second half.
Early this week and last week in our Currency Strategist newsletter we pointed out a price divergence in two highly correlated assets. The chart below shows crude oil (black) and the Australian dollar (green):
The breakdown in crude oil came on the realization that prices had become far detached from rather soft supply/demand fundamentals. The Australian dollar has remained resilient, however, on sustained risk appetite.
If you want another look at that point, check out crude oil (black) and the Shanghai stock index (red):
Is risk appetite being sustained because the globe is on the cusp of recovery? Or because so many out there think (and hope) the globe is on the cusp of recovery? It seems to me that critical pieces of economic data are not yet hinting at recovery, much less renewed prosperity. (Of course this excludes China – did you hear about their stimulus efforts?? Just checking!)
World leaders have their work cut out for them while they try to keep the confidence train rolling on fiscal and mental stimulus.
Fingers crossed.
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com