Currency Currents - October 30, 2009
Key News
• Retail sales in Germany, Europe’s largest economy, unexpectedly fell for a second month in September. (Bloomberg)
• China will sustain its economic rebound this quarter and growth is likely to top the government’s 8 percent target for 2009, the central bank said. (Bloomberg)
• Japan’s unemployment rate fell for the second straight month. (Reuters)
• South Africa’s government policy is not determined by the ruling African National Congress’ labour and communist allies, President Jacob Zuma said on Friday. (Reuters)
Quotable
1 WITCH. Thrice the brinded cat hath mew’d.
2 WITCH. Thrice and once, the hedge-pig whin’d.
3 WITCH. Harpier cries:—’tis time! ’tis time!
1 WITCH. Round about the caldron go;
In the poison’d entrails throw.—
Toad, that under cold stone,
Days and nights has thirty-one;
Swelter’d venom sleeping got,
Boil thou first i’ the charmed pot!
ALL. Double, double toil and trouble;
Fire burn, and caldron bubble.
2 WITCH. Fillet of a fenny snake,
In the caldron boil and bake;
Eye of newt, and toe of frog,
Wool of bat, and tongue of dog,
Adder’s fork, and blind-worm’s sting,
Lizard’s leg, and owlet’s wing,—
For a charm of powerful trouble,
Like a hell-broth boil and bubble.
ALL. Double, double toil and trouble;
Fire burn, and caldron bubble.
3 WITCH. Scale of dragon; tooth of wolf;
Witches’ mummy; maw and gulf
Of the ravin’d salt-sea shark;
Root of hemlock digg’d i the dark;
Liver of blaspheming Jew;
Gall of goat, and slips of yew
Sliver’d in the moon’s eclipse;
Nose of Turk, and Tartar’s lips;
Finger of birth-strangled babe
Ditch-deliver’d by a drab,—
Make the gruel thick and slab:
Add thereto a tiger’s chaudron,
For the ingrediants of our caldron.
ALL. Double, double toil and trouble;
Fire burn, and caldron bubble.
2 WITCH. Cool it with a baboon’s blood,
Then the charm is firm and good.William Shakespeare
FX Trading – Things that still frighten us on Halloween Eve
We are quite happy to see the IMF upgraded Asian growth. We were pleasantly surprised with the better than expected GDP report yesterday. We are looking forward to eating belling busting barrels of candy tomorrow. But there are still a few items that frighten us when we do our stream of consciousness thing:
• US consumer still groggy after US government dolling out massive amounts of candy
• Lending to non-bank private sector negative after $17 trillion global government stimulus
• Moody’s warning on Greece and Portugal finance
• Crude a bit sticky near $80, despite “blow out” US GDP
• US housing market still in the doldrums
• US commercial real estate shoe might be dropping
• 47% vacancy rates in Chinese commercial real estate
• Emerging stock markets looking topping and mutual fund flows subsiding
• Central banks collectively tightening at the margin
• Global cooling cycle now upon us at peak of tree-hugger climate change hysteria
• US government across-the-board
• Conditions of TSTBTBTF Banks (Too small to be too big to fail)
• Larry Summers and his stupid policies and ideas
• A belief a lower dollar cures US ills
• A replay of stock market action similar to the 1929-30 pattern
• Yankees still have a chance to win the World Series
• Latvia contagion
• Being asked to dig in the Victory Garden
• Gold prices over $1,000
• Russian oligarchs with FBI escorts
• Czars of any kind
• The Government of Goldman Sachs
In short, a whole bunch of things still out there which appear risk aversion like.
S&P 500 Index (black line) vs. US $ Index (red line) Daily:
No follow-through yet from the big gains yesterday…hmmmm…stay tuned.
Happy Halloween!
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
We continue to pull off some sweet trades in our Forex & Currency Futures Service….
Yesterday Jack and JR took profits in the New Zealand dollar and Euro…this morning they grabbed a small gain in the Euro-Pound cross and have some interesting trade setups working….
If you are interested in a spot forex and currency futures service that provides actionable recommendations for both short-term and position traders, plus provides trading rationales based on both technical and fundamental setups, you might want to consider giving our service a try. You can learn more about Black Swan’s Forex & Currency Futures service by clicking here.
Regards,
David Newman, Director of Sales and Marketing, Black Swan Capital dnewman@blackswantrading.com
Currency Currents - October 29, 2009
Key News
• China to investigate US car subsidies China is preparing to launch a trade investigation into whether US carmakers are being unfairly subsidised by the US government, according to people familiar with the matter. (Financial Times)
• Economy in U.S. Expands for First Time in More Than a Year Amid Stimulus (Bloomberg)
Quotable
“The credit data on both sides of the Atlantic are hard to square with market expectations of a “V-shaped” recovery. Experts at the ECB and the Federal Reserve view the loan contraction as a short-term anomaly caused by the distortions of the crisis, and some have begun to hint that emergency stimuli will be withdrawn soon.
“However, an ominous pattern is emerging where excess liquidity from low rates and quantitative easing is flooding into the equity (QE) and bond markets without gaining full traction on the underlying economy. This threatens to become a central banker’s nightmare. ”
Ambrose Evans-Pritchard
FX Trading – Will Stronger US GDP Put the Heat Back on the Dollar?
In Florida we have two seasons: summer and not-summer. And even though the leaves don’t really change colors, the ocean temperature hasn’t budged and we still need our central air conditioners as we inch toward November, we think we can still feel a change happening.
Granted, we’ve had a couple false alarms this month as we were able to enjoy being outside in the middle of the day; but we were quickly thrown back indoors when the summer heat returned. Still, it seems we’re on the edge of getting consistently milder weather. And we look forward to it.
I wonder if there’s a similar change shaping up in the markets. Yes, it could be a false alarm; several key economic thermometers have not shown much change. But the correction in risk appetite happening this week seems to give off the feeling that a major change is ahead.
I noted very briefly on Tuesday that “while this may turn out to be just another buying opportunity in the longer-term uptrend for EURUSD, I can tell you the market seems to feel as though the euro is getting tired. The general mood seems to feel there’s more downside potential to this correction, at least.”
And apparently it’s not just the euro. The key risk-taking currencies – those sucked up in carry trades – have felt the pain this week. Mostly this means the commodity currencies have taken some spills.
For most of this year, these dips have been jumped on rather quickly as buying opportunities; and they paid off as the uptrend in risk continued. The Australian dollar really is in a textbook uptrend. Using a daily chart going back to March 2009, I calculated the magnitude of the notable corrections in AUDUSD from intraday high to intraday low: 4.19%, 5.1%, 3.34%, 6.81%, 3.82%, 3.3%.
And this recent pullback, using today’s low, amounts to 4.14% and falls smack in the middle of the magnitude of those previous corrections.
Technically, this is a buying opportunity.
But be warned:
AMSTERDAM/SYDNEY, Oct 29 (Reuters) - Bad debt levels will remain high in Asia and could rise further in Europe next year while signs of a meaningful global recovery remain elusive, leading banks warned, overshadowing better underlying results.
Bank shares in both regions initially fell sharply on Thursday as debt provision concerns outweighed a generally positive turn in earnings, though in Europe the stocks had turned positive by midday, putting an end to three days of steep losses driven by unease over EU restructuring plans for the sector.
“This isn’t over yet,” said Mike Smith, chief executive of Australia and New Zealand Banking Group. “Often it’s the aftershocks that do the most damage. We still all need the U.S. economy to kick-start.”
—–
DUBAI, Oct 29 (Reuters) - World stocks hit a three-week low on Thursday, following a sharp fall on Wall Street, as disappointing European corporate results and weak U.S. data fanned concerns about the strength of the economic recovery.
Oil major Royal Dutch Shell fell more than 3 percent after its third quarter net profits fell 73 percent and Chief Executive Peter Voser warned of a slow recovery.
—–
WELLINGTON, Oct 29 (Reuters) - The Reserve Bank of New Zealand (RBNZ) left rates on hold at 2.50 percent and moved to a neutral bias, as expected. But it said it expected to keep rates at current levels until the second half of 2010, against market expectations of a tightening in the first half of next year.
—–
NEW YORK, Oct 28 (Reuters) - The dollar and yen gained on Wednesday as concerns about a global economic recovery and steep losses in Wall Street stocks boosted the safe-haven appeal of the U.S. and Japanese currencies.
The dollar rose for a fourth straight session against the euro after a report showed an unexpected fall in U.S. new home sales for September. The data offset solid durables goods numbers and stoked fear the rally in risky assets in recent months has run ahead of fundamentals.
A deterioration in risk appetite also sent higher-yielding, commodity currencies sharply lower. The Australian dollar fell 2 percent, pressured partly by Australian inflation data, which suggested the country’s central bank was unlikely to tighten interest rates sharply.
Yes, this is still just a correction; but the feeling that this could become a deeper correction exists. And should it become a deeper correction, well, then it’s a whole new ballgame. A major sentiment shift could quickly reinforce the risks, rather than the optimism, that make-up the entire recovery picture.
The Aussie has not yet tested trendline support (blue). But it has tested its 33-day moving average (green). Except for the brief dip below it in July, this has offered up fairly consistent support.
DATA ALERT: The much anticipated — and cause for recent market concern — US GDP report was just released and the number was stronger than expected.
Kneejerk reaction to the actual 3.5% versus the expected 3.3% has so far been dollar negative, but not overwhelmingly so. The one exception is the yen which is weaker on a hint of risk appetite that could emerge from this data point.
Crunch time!
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
HOW ARE YOU GOING TO PLAY IT?
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Currency Currents - October 28, 2009
Key News & Views
• Bill Gross tells CNBC the dollar index will make a new low. Editor Note: That’s a shock!
• Mark Faber tells Bloomberg the US dollar will eventually go to zero. Editor Note: Mark, by then your great, great, great, great, great, great, great, great, great, great, great, great, great, great, great, great, great grandchildren won’t remember your ponytail once the world is on a Turkish lira based monetary system.
Quotable
For Missing the Unmissable
Bernanke, the most passionate cheerleader of Greenspan’s follies, is picked as his replacement, partly, it seems, for his belief that U.S. house prices would never decline and that at their peak in late 2005 they largely just reflected the unusual strength of the U.S. economy. As well as missing on his very own this 3-sigma (100-year) event in housing, he was completely clueless as to the potential disastrous interactions among lower house prices, new opaque financial instruments, heroically increased mortgages, lower lending standards, and internationally networked distribution. For these accumulated benefits to society, he was reappointed! So, yes, after the fashion of his mentor, he was lavish with help as the bubble burst. And how can we so quickly forget the very painful consequences of the previous lavishing after the 2000 bubble? Rewarding Bernanke is like reappointing the Titanic’s captain for facilitating an orderly disembarkation of the sinking ship (let’s pretend that happened) while ignoring the fact that he had charged recklessly through dark and dangerous waters.
The Other Teflon Men
Larry Summers, with a Financial Times bully pulpit, had done little bullying and blown no warning whistles of impending doom back in 2006 and 2007. And, famously, in earlier years as Treasury Secretary he had encouraged (I hope inadvertently) wild and reckless financial behavior by helping to beat back attempts to regulate some of the new and most dangerous instruments. Timothy Geithner, in turn, sat in the very engine room of the USS Disaster and helped steer her onto the rocks. And there are several others (discussed in the 4Q 2008 Letter). You know who you are. All promoted!
Jeremy Grantham
FX Trading – Currencies and Straight Jackets
Finally some good flows from the crisis—lower beer prices:
McGee reduced the price for a beer this month to 3.50 euros ($5.18) at his hostelries after the pound’s 12 percent drop against the euro in the past year led customers from the U.K. province of Northern Ireland to stay home.
“’We can’t devalue, but our neighbor can and has, and left us high and dry,’ he said, adding sterling is a ‘huge’ problem. ‘You’ve got to try and keep the Northerners coming.’
“The pound’s plunge is a threat to Ireland as its economy shows signs of emerging from the worst recession in modern history. Consumers are heading north in search of cheaper food and televisions, U.K. tourist numbers are sinking, and exporters such as food company Kerry Group Plc and C&C Group Plc, the maker of Magners cider, are suffering in their largest European market.’
Bloomberg
You can see in the weekly chart comparing the Euro to the British pound below and understand exactly what Mr. McGee is talking about as it shows the sharp appreciation in the euro against the pound.
Euro – British pound Weekly
The relatively high euro is starting to bite hard into both core and peripheral countries that are tied to it. We wrote the following in our special report back in June, titled, “Preparing for a Breakup in the European Monetary Union,”…
As you can see, one size monetary policy does not fit all. Now, if each of the member states had their own currency, with the ability to adjust upward or downward to various economic conditions, there likely wouldn’t be so many concerns about ECB policy now that things are tight. But they don’t have that luxury as they are stuck in the straightjacket known as the euro currency.
Back to Milton Friedman; he long argued for the advantages of flexible exchange rates and pointed out that it was not available to members of the EMU.
Exchange rate fluctuations naturally offset inflation and productivity differentials with much less friction than adjustments in nominal wages and prices under fixed rates. The inflation and productivity differentials across the EMU vary widely. Thus a one-size fits all monetary policy, with the additional disadvantage of one inelastic currency to which all are anchored, means high-inflation and low-productivity countries bear a bigger brunt domestically when the business cycle turns down. As a result they have increasing incentives to leave the euro should an asymmetrical shock occur.
Below is a chart comparing the labor productivity among the southern tier states known as the PIGS — Portugal, Italy, Greece, and Spain. They have always lagged behind Germany in terms of productivity and have always been the weak fiscal underbelly of the euro (next section).
But one of the publicized advantages of the euro before adoption was its ability to equalize labor productivity among the member states by allowing for the free flow of both capital and labor across borders. In fact, labor markets have remained rigid throughout Europe, and, other than some migration from Eastern European workers to Western Europe, labor mobility hasn’t happened. This goes to the earlier point we made about culture, how people in Western Europe still maintain strong national identities and are mostly reluctant to move from their home countries.
Source: Absolute Return Partners
At some point, because there is no currency to adjust for these productivity disparities, the adjustment must come from a cut in nominal wages and significant austerity. This is politically dangerous with the rising social unrest across the Eurozone, as discussed earlier in this report. Of course the other means of escape from this problem is for the PIGS to grow themselves out of it. But, given the sharp decline in exports globally which we believe will be a long-term structural reality, growing out of this situation seems hardly an option. The GDP plunge is depicted in the chart below:
If the US dollar is Tweedle Dee, that makes the euro Tweedle Dumb.
Both are paper promises from countries with a lot of core fundamental problems. But, no one said this currency game was a thing of beauty; it’s just the opposite. It’s in fact like being on perpetually tour as a judge for the world’s ugly contest.
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
—————————
A nice gain bagged in the yen today…
Members of our Forex & Currency Futures service who followed the initial recommendation on the yen bagged some nice profits today, and are now sitting on open gains in the New Zealand dollar if they sold Kiwi on as recommended on Monday.
If you are interested in a spot forex and currency futures service that provides actionable recommendations for both short-term and position traders, plus provides trading rationales based on both technical and fundamental setups, you might want to consider giving our service a try. You can learn more about Black Swan’s Forex & Currency Futures service by clicking here.
Regards,
David Newman
Director of Sales and Marketing
Black Swan Capital
dnewman@blackswantrading.com
P.S. If you are interested in a copy of the Euro Report Jack referenced today, please drop me an email at dnewman@blackswantrading.com
Currency Currents - October 27, 2009
Key News
• Hungary to Emerge From Economic Crisis as Global Fiscal Leader, BofA Says Hungary is poised to emerge from the global recession as a leader in fiscal health as years of economic pain brought on by government austerity measures pay off, according to Bank of America Merrill Lynch. (Bloomberg)
[Editor’s Note: Yes, you read that right.]
Quotable
“This is how humans are: we question all our beliefs, except for the ones we really believe, and those we never think to question.”
Orson Scott Card
FX Trading – The Eurozone Economy is Going to Zero
Would you think I was crazy if I said I am 100% certain the value of the Eurozone economy would eventually fall to zero?
What about if you read my Currency Currents from last Friday, 23 October 2009? In it I laid out several pieces of information that most definitely point to an imminent flat-line for the EZ, no?
Okay, maybe there’s more to it than that; maybe Friday’s issue didn’t consider the full picture; maybe there are valid reasons the EZ might not go to zero. After all: it can’t be all gloom and doom – there has to be some boom (i.e. think ‘business cycle’ boom, not ‘suicide bomber’ boom.)
Ok, now I’m sounding a little more credible and rational, I would think.
But, for the sake of entertainment, in the headline of this article let’s replace ‘Eurozone’ with ‘US dollar’, as in …
The US Dollar is Going to Zero
Do I lack credibility by making this forecast?
The scary thing is most people would probably fly by this headline without thinking twice. That reflects the current mindset of investors and analysts: gloom in the US, boom in the rest of the world, and doom in the US dollar. There’s no other way around the fact that the world’s reserve currency is on the verge of going “poof”.
But I would want to know when it will go to zero, why it would go to zero and what will happen when it does go to zero. And dare I wonder if there’s anything actually keeping it from going to zero?
Seems kind of like a hype-driven, unsubstantiated headline … at best.
Ok, I’m done proving my point. Here’s a piece of news that will almost certainly tell you the Eurozone economy is soon going to zero:
As a follow-up to some of Friday’s piece, year-over-year growth in the M3 measure of money supply slipped in September. Same goes for M1. More importantly, though, was the annual contraction in credit to the private sector.
Apparently this is the first time the Eurozone economy has seen a contraction in loans to the private sector. Loans to households for consumer credit and home purchases each dropped from the previous month’s results. Even loans to non-financial corporation, which had shown welcomed growth in August, showed contraction this month.
And apparently the market is starting to price in a rate hike by the European Central Bank next month, after they’ve flooded the Eurozone with record liquidity.
Now, this news about loans to the private sector did not catch economists off guard; they seemed to be expecting the declines.
But was anyone else expecting the declines? Is anyone else even bothering to pay attention?
This absolutely did not move markets today when it was released. So the euro is not falling on the idea that the Eurozone’s recovery is going to be slow and tough. And it’s not falling on the potential that the ECB choke’s off the short-of-breath recovery in its infancy.
And it’s not falling on the idea that the Eurozone economy is going to zero.
I can tell you, though, that the euro fell sharply versus the US dollar yesterday. And while this may turn out to be just another buying opportunity in the longer-term uptrend for EURUSD, I can tell you the market seems to feel as though the euro is getting tired. The general mood seems to feel there’s more downside potential to this correction, at least.
A pull back to roughly $1.4750 will find some trendline support; major support comes in at $1.45 …
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com