FX Market Overview – June 16, 2010
Foreign exchange trading and the use of leverage involve a high degree of risk. That’s why we trade our portfolios generally unleveraged, which will be discussed in some of our posts.
I'm a registered CTA and manage fx portfolios for private and institutional clients worldwide.
Be sure to read my document: “Face the Trader Within”
http://www.forexfactory.com/misc.php...hments&t=59329
General Overview
At present, our primary focus is trading AUDJPY and AUDUSD. We work with a range of clients taking advantage of low interest rates in JPY and USD to employ strategies in AUD’s, including real estate development and other projects. In FX, money seeks yield in the longer term, as fx flows have proven over time. We also trade the other majors, but we have excellent trading and risk models for the AUD crosses in the current environment that are working well.
Our current view (June 16) on “risk” (when equities and risk currencies rally) is that we anticipate another round of “risk aversion” (Equities, AUD spot ref .8650 and other risk currencies will fall) in the coming months. We have trimmed down our AUD long positions against both USD and JPY and hope to see lower levels to trade and accumulate positions. We may see AUDUSD as high as .8800. A breach of AUDUSD .8800 would slow our short term trading while re-evaluating the environment. In the event of a double dip contraction, which we view as highly possible, and RBA interest rate cut is not out of the question, but rates will remain in AUD favor over the long haul. We will keep you informed of our general medium and longer term views as the environment changes and discuss our position adjustments. Our methods are quite simply rooted on the back-drop of interest rates and interest rate spreads as we follow monetary policy changes closely.
Near term… risk news is likely to be fueled by Spanish Banks stress tests. There has been some argument over the transparency of the results, but we know what that means. The negative elements of the stress test will be non transparent, while the positive will be ingeniously scripted to elicit a positive view of the downtrodden region of the Eurozone, thus sparking a feel good rally in EUR and equities, on the heels of which, will cause further upside potential for AUD and other risk currencies, although we hope this is not the case.
Market Review in Detail
The Eurozone crisis continues to play out in a similar way to the Asian Crisis of 1997/1998 when Asian currencies were beaten down. We have been bearish Euro since the 2008 crisis suggesting Eastern European bank risk and other structural deficiencies could take it down, only to see it rally to 1.50 before our views played out. During the Asian crisis, global markets were sharply affected by the events as we have seen investor sentiment hit by Europe's developments in Q2'10. It’s about time. I travel frequently to both Asia and Europe and witnessed Italy experience 100% inflation in four years at the onset of the Euro. We could see where this was going. We remain bearish the Euro. In relative terms and Purchasing Power Parity levels are still overweight Euro. We will continue sell the EUR/USD and EUR/CAD on rallies and watch closely the pace of monetary tightening in Canada, which will likely be slower than the market currently is pricing in.
There is no saying how long these curves can last before they correct, like in the late 1990s, and leading into the well overdue 2008 crisis, which was years in the making. As we have been saying for months, the Fed will not begin raising rates until 2011. Fed rhetoric and analysts expectations for mid 2010 was a just the Fed using verbiage to buy time in developing a firm market expectation on policy. We believe this remains inconclusive as another bout of risk aversion is threatening.
Traders should operate within their trading and risk models and look to sell rallies in the euro against the dollar and franc. The structural euro downtrend remains intact as Eurozone members tighten fiscal policy to the detriment of growth, and the ECB is forced to keep buying government bonds. We ultimately expect the commodity and Nordic currencies to recover lost ground in the long run, but not before another heat seeking fall in equities and risk aversion in the coming months.
Federal Reserve Chairman Bernanke has asked Vice Chairman Kohn to delay his departure until September to allow San Franciso Fed President Yellen to be confirmed in time as Kohn's replacement. This will keep the dovish Kohn on the FOMC until the equally dovish Yellen takes his place on the Fed Board of Governors. With turmoil continuing in the Eurozone, UBS US economics team have pushed back the start of their first Fed hike forecast to January 2011 now.
Why Euro is Fragile
The Fed reported that no central banks including the European Central Bank used its dollar swap line facility last week. This was good news for the euro. The euro was also helped by President Trichet helping to calm nerves at his monthly press conference after the ECB board kept interest rates unchanged. Trichet confirmed the ECB would continue to buy government bonds. He also said the ECB 3mth liquidity auctions would be extended, reducing fears that Eurozone banks wouldn't be able to borrow at the ECB if they were shut out of inter-bank markets.
But UBS Fixed Income Strategists expect near term bond spread tightening within the Eurozone will only continue if the ECB keeps buying paper. Last week the European Union finance ministers formally approved the European Financial Stability Facility. This EUR440bn fund was set up as part of the EUR750bn package of support announced in May. The EFSF will issue bonds to support distressed Eurozone member countries that find they can't borrow in the financial markets. This is separate to the EUR110bn package of support agreed for Greece earlier. The good news is parliamentary approval is not required for EFSF to disburse funds to countries in distress. But the bad news is that using the EFSF will be conditional on IMF intervention. According to Stephane Deo, UBS Chief European Economist, that means countries like Spain or Portugal will only seek to use the facility as a very last resort.
This is one of the reasons why the Eurozone bond market remains fragile despite ECB purchases. In addition the EU still has not agreed to make public the result of Europe's stress tests for banks as America did last year. (Of course, authorities are likely taking the necessary time out to jiggle the statistics and generate masterful verbiage that would ultimately elicit a positive market view, and response, concerning the EMU, which would be EUR positive short term). Coupled with fiscal tightening demanded by Germany, Eurozone growth prospects remain weak. That keeps us bearish on the euro. As an alternative position, we’re holding 6mth EURUSD 1.10/1.00 put spreads, in the event of extreme move.
At his press conference, Trichet was asked if euro moves had been 'brutal'. This is the code phrase he used in 2004 to stop the sharp rise of the euro against the dollar. Trichet sidestepped the question, reinforcing our view that the prospect of intervention to stop the slide of the euro remains slim for now. At 1.21 EURUSD is too close to its long term fair value of 1.20 to justify currency market action.
Be sure to read my document: “Face the Trader Within”
http://www.forexfactory.com/misc.php...hments&t=59329
We’re Selling JPY against High Yielders on Bouts of Risk Aversion.
Next week, the Bank of Japan meets. But there is unlikely to be any surprises for the market. Instead investors should focus on new Prime Minister Kan's plans for Japan's public finances. Kan claimed that Japan risks a default if it continues to neglect its fiscal situation. As such his new administration will agree a fiscal consolidation plan on June 22 and present it at the next G20 meeting on the weekend of June 25-27. A credible plan here would help risk sentiment globally by reducing the threat of another downgrade to Japan's ratings. We are bearish JPY long term and will be buying AUDJPY, USDJPY, CADJPY and NZDJPY while welcoming a sharp risk averse rise in JPY to set up Intraday, Swing and Position trades.
NZD and CAD
The Reserve Bank of New Zealand became the fourth G10 central bank to resume tightening when it hiked its official cash rate by 25bps to 2.75%. UBS economists expect the central bank will continue to gradually raise interest rates further depending on how developments in the Eurozone play out. The RBNZ statement pointed out that the increase needed in the cash rate would be less than previous cycles because of higher bank funding costs, long term interest rates being higher than short term rates and the increased use of floating rate mortgages.
In the commodity bloc we continue to favour the Canadian dollar. Bank of Canada Governor Carney welcomed the recent strong jobs numbers and argued that spillovers into Canada from Europe had been modest so far. In contrast Reserve Bank of Australia Governor Stevens warned the Europe crisis may affect business and consumer confidence. He also stressed again the RBA cash rate at 4.5% was at normal levels now. Australia's May labor report did come out again better than expected. And China's raft of monthly data showed strong exports, housing starts, bank lending, industrial production and retail sales. But near term the Australian dollar remains most at risk amongst the commodity bloc if risk-aversion rises again globally. We welcome a fall in confidence accompanied by a sustained pullback in equities to set up long term carry positions.
SDR to Include AUD and CAD?
Longer term, though the picture for both the Australian and Canadian dollars is likely to be supported by continuing central bank reserve diversification into commodity currencies. The IMF will release its five year review of the composition of its Special Drawing Rights basket. The next review takes place at the end of 2010. It is likely that the currency basket of 44% dollar, 34% euro, 11% yen, 11% sterling is revised to include the two largest commodity currencies. This would boost the Australian and Canadian dollars as central banks globally over time shift to using the SDR basket as a benchmark for the composition of their foreign exchange reserves.
Be sure to read my document: “Face the Trader Within”
http://www.forexfactory.com/misc.php...hments&t=59329
Foreign exchange trading and the use of leverage involve a high degree of risk. That’s why we trade our portfolios generally unleveraged, which will be discussed in some of our posts.
I'm a registered CTA and manage fx portfolios for private and institutional clients worldwide.
Be sure to read my document: “Face the Trader Within”
http://www.forexfactory.com/misc.php...hments&t=59329
General Overview
At present, our primary focus is trading AUDJPY and AUDUSD. We work with a range of clients taking advantage of low interest rates in JPY and USD to employ strategies in AUD’s, including real estate development and other projects. In FX, money seeks yield in the longer term, as fx flows have proven over time. We also trade the other majors, but we have excellent trading and risk models for the AUD crosses in the current environment that are working well.
Our current view (June 16) on “risk” (when equities and risk currencies rally) is that we anticipate another round of “risk aversion” (Equities, AUD spot ref .8650 and other risk currencies will fall) in the coming months. We have trimmed down our AUD long positions against both USD and JPY and hope to see lower levels to trade and accumulate positions. We may see AUDUSD as high as .8800. A breach of AUDUSD .8800 would slow our short term trading while re-evaluating the environment. In the event of a double dip contraction, which we view as highly possible, and RBA interest rate cut is not out of the question, but rates will remain in AUD favor over the long haul. We will keep you informed of our general medium and longer term views as the environment changes and discuss our position adjustments. Our methods are quite simply rooted on the back-drop of interest rates and interest rate spreads as we follow monetary policy changes closely.
Near term… risk news is likely to be fueled by Spanish Banks stress tests. There has been some argument over the transparency of the results, but we know what that means. The negative elements of the stress test will be non transparent, while the positive will be ingeniously scripted to elicit a positive view of the downtrodden region of the Eurozone, thus sparking a feel good rally in EUR and equities, on the heels of which, will cause further upside potential for AUD and other risk currencies, although we hope this is not the case.
Market Review in Detail
The Eurozone crisis continues to play out in a similar way to the Asian Crisis of 1997/1998 when Asian currencies were beaten down. We have been bearish Euro since the 2008 crisis suggesting Eastern European bank risk and other structural deficiencies could take it down, only to see it rally to 1.50 before our views played out. During the Asian crisis, global markets were sharply affected by the events as we have seen investor sentiment hit by Europe's developments in Q2'10. It’s about time. I travel frequently to both Asia and Europe and witnessed Italy experience 100% inflation in four years at the onset of the Euro. We could see where this was going. We remain bearish the Euro. In relative terms and Purchasing Power Parity levels are still overweight Euro. We will continue sell the EUR/USD and EUR/CAD on rallies and watch closely the pace of monetary tightening in Canada, which will likely be slower than the market currently is pricing in.
There is no saying how long these curves can last before they correct, like in the late 1990s, and leading into the well overdue 2008 crisis, which was years in the making. As we have been saying for months, the Fed will not begin raising rates until 2011. Fed rhetoric and analysts expectations for mid 2010 was a just the Fed using verbiage to buy time in developing a firm market expectation on policy. We believe this remains inconclusive as another bout of risk aversion is threatening.
Traders should operate within their trading and risk models and look to sell rallies in the euro against the dollar and franc. The structural euro downtrend remains intact as Eurozone members tighten fiscal policy to the detriment of growth, and the ECB is forced to keep buying government bonds. We ultimately expect the commodity and Nordic currencies to recover lost ground in the long run, but not before another heat seeking fall in equities and risk aversion in the coming months.
Federal Reserve Chairman Bernanke has asked Vice Chairman Kohn to delay his departure until September to allow San Franciso Fed President Yellen to be confirmed in time as Kohn's replacement. This will keep the dovish Kohn on the FOMC until the equally dovish Yellen takes his place on the Fed Board of Governors. With turmoil continuing in the Eurozone, UBS US economics team have pushed back the start of their first Fed hike forecast to January 2011 now.
Why Euro is Fragile
The Fed reported that no central banks including the European Central Bank used its dollar swap line facility last week. This was good news for the euro. The euro was also helped by President Trichet helping to calm nerves at his monthly press conference after the ECB board kept interest rates unchanged. Trichet confirmed the ECB would continue to buy government bonds. He also said the ECB 3mth liquidity auctions would be extended, reducing fears that Eurozone banks wouldn't be able to borrow at the ECB if they were shut out of inter-bank markets.
But UBS Fixed Income Strategists expect near term bond spread tightening within the Eurozone will only continue if the ECB keeps buying paper. Last week the European Union finance ministers formally approved the European Financial Stability Facility. This EUR440bn fund was set up as part of the EUR750bn package of support announced in May. The EFSF will issue bonds to support distressed Eurozone member countries that find they can't borrow in the financial markets. This is separate to the EUR110bn package of support agreed for Greece earlier. The good news is parliamentary approval is not required for EFSF to disburse funds to countries in distress. But the bad news is that using the EFSF will be conditional on IMF intervention. According to Stephane Deo, UBS Chief European Economist, that means countries like Spain or Portugal will only seek to use the facility as a very last resort.
This is one of the reasons why the Eurozone bond market remains fragile despite ECB purchases. In addition the EU still has not agreed to make public the result of Europe's stress tests for banks as America did last year. (Of course, authorities are likely taking the necessary time out to jiggle the statistics and generate masterful verbiage that would ultimately elicit a positive market view, and response, concerning the EMU, which would be EUR positive short term). Coupled with fiscal tightening demanded by Germany, Eurozone growth prospects remain weak. That keeps us bearish on the euro. As an alternative position, we’re holding 6mth EURUSD 1.10/1.00 put spreads, in the event of extreme move.
At his press conference, Trichet was asked if euro moves had been 'brutal'. This is the code phrase he used in 2004 to stop the sharp rise of the euro against the dollar. Trichet sidestepped the question, reinforcing our view that the prospect of intervention to stop the slide of the euro remains slim for now. At 1.21 EURUSD is too close to its long term fair value of 1.20 to justify currency market action.
Be sure to read my document: “Face the Trader Within”
http://www.forexfactory.com/misc.php...hments&t=59329
We’re Selling JPY against High Yielders on Bouts of Risk Aversion.
Next week, the Bank of Japan meets. But there is unlikely to be any surprises for the market. Instead investors should focus on new Prime Minister Kan's plans for Japan's public finances. Kan claimed that Japan risks a default if it continues to neglect its fiscal situation. As such his new administration will agree a fiscal consolidation plan on June 22 and present it at the next G20 meeting on the weekend of June 25-27. A credible plan here would help risk sentiment globally by reducing the threat of another downgrade to Japan's ratings. We are bearish JPY long term and will be buying AUDJPY, USDJPY, CADJPY and NZDJPY while welcoming a sharp risk averse rise in JPY to set up Intraday, Swing and Position trades.
NZD and CAD
The Reserve Bank of New Zealand became the fourth G10 central bank to resume tightening when it hiked its official cash rate by 25bps to 2.75%. UBS economists expect the central bank will continue to gradually raise interest rates further depending on how developments in the Eurozone play out. The RBNZ statement pointed out that the increase needed in the cash rate would be less than previous cycles because of higher bank funding costs, long term interest rates being higher than short term rates and the increased use of floating rate mortgages.
In the commodity bloc we continue to favour the Canadian dollar. Bank of Canada Governor Carney welcomed the recent strong jobs numbers and argued that spillovers into Canada from Europe had been modest so far. In contrast Reserve Bank of Australia Governor Stevens warned the Europe crisis may affect business and consumer confidence. He also stressed again the RBA cash rate at 4.5% was at normal levels now. Australia's May labor report did come out again better than expected. And China's raft of monthly data showed strong exports, housing starts, bank lending, industrial production and retail sales. But near term the Australian dollar remains most at risk amongst the commodity bloc if risk-aversion rises again globally. We welcome a fall in confidence accompanied by a sustained pullback in equities to set up long term carry positions.
SDR to Include AUD and CAD?
Longer term, though the picture for both the Australian and Canadian dollars is likely to be supported by continuing central bank reserve diversification into commodity currencies. The IMF will release its five year review of the composition of its Special Drawing Rights basket. The next review takes place at the end of 2010. It is likely that the currency basket of 44% dollar, 34% euro, 11% yen, 11% sterling is revised to include the two largest commodity currencies. This would boost the Australian and Canadian dollars as central banks globally over time shift to using the SDR basket as a benchmark for the composition of their foreign exchange reserves.
Be sure to read my document: “Face the Trader Within”
http://www.forexfactory.com/misc.php...hments&t=59329
You are what you do, trade with discipline. Chris Lori, CTA