Yeah I watched the video, I understand why. I actaully got in before the spike and sold it high.
Thanks Bruce!
Thanks Bruce!
Knowledge is Power 5 replies
more knowledge more problems 25 replies
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The Markets
Last week, treasury yields hit their highest levels of the year. This can mean one of two things. Either the economy is recovering, and the bond market is predicting an up-tick in demand-pull inflation. That’s bullish. Alternatively, the economy is not recovering and the bond market is predicting an up-tick in cost-push inflation – the bearish stagflation scenario.
Watch this carefully – along with the chess match currently underway between the U.S. Federal Reserve and the European Central Bank. At stake is the relative value of the dollar to the euro together with the fate of oil and commodity prices, which are tied to the dollar.
At this point, the Federal Reserve is likely done with cutting rates and the only question is when (and if) it will raise them. The currency markets understand this and have been bidding up the dollar relatively to the euro. As for the Fed, perhaps it has finally figured out that cutting rates is merely debasing the dollar, driving up the “oil tax” on American consumers and businesses, and having a net contractionary rather than expansionary effect.
Across the pond, the ECB goes back and forth between wanting to cut rates (to rescue Italy and Spain) or to raise rates (to cater to the German obsession with inflation). However, with the dollar firming because the U.S. Fed is done cutting, a falling euro puts into play an ECB rate hike. This is because a falling euro will contribute to inflation concerns and raising rates will prevent the euro from falling.
Of course, this all seems like a “damned if you cut, damned if you don’t cut” for both the Fed and the ECB,. This is why I think we are closer to a world of stagflation in which interest rate policy is ineffective than a Keynesian world where central bankers can solve one problem such as recession without exacerbating the other problem of inflation.
And by the way, the relevance of this seemingly arcane discussion to your trading should be obvious. The trends for the bond, currency, and stock markets will all ultimately be determined by monetary policy and its effect on interest rates and the dollar and euro and oil prices.
The Hollow Men
We are the hollow men
We are the stuffed men
Leaning together
Headpiece filled with straw. Alas!
Our dried voices, when
We whisper together
Are quiet and meaningless
As wind in dry grass
Or rats' feet over broken glass
In our dry cellar
Shape without form, shade without colour,
Paralysed force, gesture without motion;
Those who have crossed
With direct eyes, to death's other Kingdom
Remember us - if at all - not as lost
Violent souls, but only
As the hollow men
The stuffed men.
T.S. Eliot (1925)
THEMES TO WATCH – UPCOMING SESSION
Key Risk Events (All times in GMT)
Market Comments
Risk aversion bit deeper yesterday with a very strong recovery in world bond markets and a sharp sell-off in equities to start the week, the higher than expected ISM and ISM prices paid notwithstanding. The FX market responded with an impressive performance from the JPY and CHF, with the former finally strengthening sharply across the board after weakening against most currencies for the last 3 weeks or so. It appears we may finally have our pivot point on the risk appetite front - stay tuned. The trigger for this move to risk aversion was the UK's Bradford and Bingley's woes that surfaced yesterday, and this news was followed with news that S&P was slashing its ratings for three of the major US investment banks on fears of further write-offs. Still, it seems the market was ripe for a catalyst anyway, as news of this nature has failed previously to trigger the kinds of moves we saw yesterday.
The USD managed to survive the shift to a risk averse market quite well so far and that remains the key: as worries about global growth become manifest, we would prefer to see USD and especially JPY strength and for the growth/commodity currencies and the EUR to suffer the most. That scenario fits best with the overall view that we will see a continued unwinding in risk appetite and a recoupling of the major economies. To support this view in the short term, we'd like to see EURUSD remain below its 21-day and 55-day moving averages, and to see a follow up move lower through 1.5460.
USDCAD managed to pull all the way back above parity yesterday and the 200-day moving average. A follow up move higher will put it firmly back in the old range. If we see this development, we may soon finally be able to talk up the prospects of a real uptrend starting if the pair is able to keep the momentum up and work its way through the next layers of resistance (see chart below). Also, have a look at CADJPY as a potential downside play if risk aversion deepens.
Australia's RBA left rates unchanged at 7.25% as expected, and gave little reason to increase the belief that they may raise rates later this year, as has recently been priced into the forward expectations, though 2-year rates have fallen rather sharply over the last 3 days in Australia. The RBA said that it thought growth would moderate, that household credit is weakening significantly, and that inflation will decline over time if demand slows even if inflation is "relatively high" in the short term. It's more than a bit surprising to see AUD remaining as strong as it has been with increasing signs of risk aversion in the market. The better than expected current account balance and building approvals data overnight offered some support.
Chart - USDCAD
USDCAD managed to claw its way back to parity yesterday, which also coincides with the 200-day moving average. If the pair is able to rally above this key resistance level, then we may soon be able to talk about a real up-trend underway after months of range bound torpor for the pair. The next big levels are the descending line of consolidation coming in around 1.0280 at present, followed by the ultimate resistance at the 1.0380 high from January.