Weekly review.. Where is the cavalry coming from this time ?

With equity markets crashing again against the background of worse economic data and downward revisions for growth globally you wonder how an earth Governments can help this time around. In the last recession governments ploughed in more money (which they did not have) and central banks slashed borrowing costs with official rate cuts and then quantative easing in some cases.This time it seems almost the perfect storm as many countries are being forced into austerity drives at time when logically they should be splashing the cash. To me it seems inevitable that Mr bernanke will be forced into more quantative easing, yes QE3. Strangely its as if forex markets seem more convinced than equity markets. The US dollar made no ground up last week despite the sell off in shares. US treasuries may be a safe haven but the dollar is not,well not yet at any rate. While bond markets in Europe helped take some of the tension away ( well the ECB did) surely the next Euro headache is just a matter of time. A common Eurobond has been rejected thus far but I still believe it would be the only real fix it for the Euro and that might last only a few years. Indeed if they did announce a common bond you could expect a very much stronger Euro which would just add to the woes of Southern Europe. At the moment bubbling under the surface we have Finland demanding collateral for their Greek loan and apparently the Netherlands and Austria looking to do the same. As far as the right wing Finnish government are concerned they are against the bailouts and will only contribute on this basis. The real problems will follow if indeed some others do the same. Greece is depositing its loan from Finland back to them so effectively getting no funds.

So with all this uncertainty and forex markets just unsure which horse to back we finished not far from where we started EUR/USD 1.4400 USD/JPY 76.50 and EUR/SFR 1.13. Sterling in fact performed best which has been rare occurrence these last several years. What it does show about the UK, where government bonds have performed well is that by devaluing the currency you make investment more attractive. In the Euro zone for many years peripheral bond markets were treated as surrogate German bonds with a slightly better yields but no additional currency risk.That of course has ended in tears but merely emphasises that getting Eurozone countries converging their economies is still a pipe dream.

Despite all this EUR/USD has actually held up very well so far. It might well be right to play it from the long side at the moment especially if Mr Benanke does announce something at the Jackson Hole conference.However, in current circumstances you wont want to be married to it. In fact as far as currency positions go at the moment I am definitely a one night stand man or even a speed dater

Gold up again shows the current mind set of investors and speculators
 

Friday Update… Shares in meltdown again as Investor confidence slumps

If anyone thought it was safe to go back into the water they were wrong. Equities worldwide have crashed again and Europe is weaker again by 2% this morning.Bank and financial shares have been hammered as markets now begin to discount a recession.By comparison forex markets have been fairly quiet although the Euro has suffered across the board. EUR/USD is back close to its magnetic pole of 1.4250 with falls also against the Swiss franc 1.1270, sterling 86.60 and Japanese yen 109. USD/JPY has been spookily quiet a mere 20 pips lower at 76.45 just 20 pips away from the all time low as markets can almost smell the threat of intervention.
The usual beneficiaries are Gold with new highs against the $ at 1855 but also against the Euro. US 10 year treasuries surged under 2% yesterday before what is probably a temporary bounce. All in all we head into the weekend in crisis. In Europe and the US it seems politicians are just missing the point at the moment. High time they woke up and smelt the coffee while there still is some to smell . No currency predictions, equities will call the shots and hog much of the volatility

Weekly Review.. EUR/USD narrowly mixed amidst carnage elsewhere.

If you only traded EUR/USD last week would have been better spent on the beach earning some income selling volatility at EUR/USD 1.4250  strike.
Of course the same could not be said for politicians and bankers many of whom would have been summoned back for any number of political and economic problems.
I start in the US where no one just no one would have believed that US treasuries could have enjoyed such a spectacular week after the ratings cut from Standard & Poor’s. A new 10 year issue away at record low yields of 2.14% shows just what safe haven status means whatever rating its given. Of course they were helped by the Federal Reserve who indicated rates would stay low for a couple of years and a meltdown in equity markets early in the week.In fact equity markets made it back up pretty much to weekly opening levels and in some cases higher.The US dollar was a side show compared to the Swiss franc which mirrored equity markets surging then sold off sharply. EUR/SFR closed near 1.1100 nearly 8% up from the lows with even stronger losses against a resurgent Yen. Talk of Swiss franc peg against the Euro just added to the correction move.If you believe that the worst is over for risk markets then dump the Swiss currency but the likelihood of that seems highly remote .
In Europe Spanish and Italian bond yields receded as the ECB finally came to the rescue( behind the scenes kicking and screaming no doubt). However, worries switched to France and particularly French banks. Bank shares which had led the way down bounced sharply at the end of the week but by no one believes a happy ending in that saga yet.The ECB has bought some time which seems the usual story in Europe but in the days weeks or maybe months ahead there will be plenty of anxious moments to come.
The growth story or lack of it seems certain to dominate attention. Can we have austerity and enough growth to support it? No. If you are in the US as the politicians jockey for position ahead of next years Presidential election there seems little hope of a quick fix. In Europe too will the rich be persuaded to bail out the poor where many leaders also face a domestic vote in the months or year ahead.
I suspect forex markets will continue to focus on equity markets. Probably the best investors could hope for is at least a quiet week but I certainly wouldn’t rule out another sell off, justified or not. The US dollar failed to make much ground as a safe haven currency even as its bonds surged which shows a distinct lack of appetite to buy it.QE3 will be on everyone’s mind ahead of the Feds Jackson Hole meeting. That said where does one get an appetite for Euros in current conditions.
Oh for a friendly trend but alas I cant see one in forex markets so best advice remains to stay low on the risk front.

Weekly review…US Deficit reduction proving no tea party

So we are indeed going to the wire in the US as the Senate and Congress fail to get their acts together. Markets particularly equities have begun to wobble a little bit and there is of course potential for more next week.
Ironically US 10 and 30 year bond yields have fallen to best levels for some time dispelling any ideas of some meltdown there. So the value of super cash rich companies has fallen while the cash strapped US governments debt rises in value. Plain potty but such is the power of fear.
What got the markets rattled even more was the unbelievable US GDP data (Measure of goods and services produced) Not just the poor 2nd quarter annualised 1.2% but the downward revision of Qtr 1 to 0.4% from 1.9% ( 4th qtr also from 3.1 to 2.3 annualised). It makes one think that collating provisional figures is coming straight from the Greek school of data reporting as with there sudden appearance of correct deficit figures.
Through in some threats of Spanish downgrade and IMF concerns about the same country and no wonder markets reacted as they did.
In forex markets it was once again the Swiss franc which benefited scoring more records than Usain Bolt as it surged to record highs against the US Dollar, Sterling and Euro. EUR/USD moved higher to 1.4415 closing at 1.4375 but was still lacking any real confidence of markets.The Australian and New Zealand dollar together with the Yen also remained buoyant against other currencies.
I make no apology for sitting on the fence right now. It really is so unpredictable and while the Swiss Franc continues in its long term uptrend and will no doubt benefit from uncertainty there will come a time when there is a rush for the exit.
Any major equity sell off ( we are in danger of getting some bearish technical signs) could prompt a further safe haven rush. Gold continues to attract support but might one day suffer the same fait as the Swiss franc. Mind you where all the calm and good news is going to come from to spark that is difficult to see.
So get back in the shelter with your tin helmet on and hope that it will indeed be all right on the night or the day after the night.
Elsewhere Euro inflation data came in softer than expected beginning to show once again how the ECB just cant get it right at the moment. Here in Spain the wettest July for many years will do nothing to help the Economy and an election brought forward to November might prove pointless if its the EU,IMF, ECB troika running the show by then or soon after.

Did someone mention QE 3

Wednesday Update… Swiss franc and Gold tell the story

When the Swiss franc and gold are hitting new highs against the US Dollar then you know all is still not well in the world. USD/SFR has broken 80.00 and gold hit a new high at $ 1625. Most of it is to do with the continued impasse in the US as budget negotiations continue but get no closer to conclusion.
A survey of leading economists does not expect the US to lose its AAA rating but as we know a consensus of economists means nothing in terms of right or wrong views. US treasuries seem to think the same as do equities leaving one to believe that a default and downgrade in the US would indeed be a massive shock to markets despite all the chatter.
EUR/USD has found itself capped just above 1.4500 after a small dip yesterday down to 1.4450. On balance I still favor more upside but the pair could suffer on any knee jerk bounce in the US dollar following some good news.So I would stick to small buys on dips and see if we can make a little more progress on the upside.
Elsewhere the Ausie dollar is firing on all cylinders again following inflation data the currency has hit a near 30 year high against the US Dollar of 1.1060. Sterling got away with yesterdays GDP data of just 0.2% as perhaps worse was expected.Sterling remains vulnerable though and any real Euro strength will see it left behind .
German Finance Minister Schaeuble commented it would be wrong to think the Euro zone crisis could be permanently solved by a one-off summit. Its true but did he need to say it? It could be that very many German politicians are uncomfortable with events and fear a backlash from voters. The public after all are supposed to decide in the long run although Euro politicians would prefer people just accepted that they
know best. Lots of fun and games to come down the road at elections all over Europe.

Weekly Review…Will Olie Rehn in the Dollar Revival.

It turned out to be a recovery week for the US Currency as a number of events conspired to provoke shorts to capitulate.Firstly we had the press release from the ECB. While this said nothing different from the previous meeting, its lack of further hawkish comment was viewed as bearish for the Euro.

In truth the markets were wrong to have expected any more for the time being. However, the next few months inflation readings will be key. If by the end of March we have a comprehensive Euro package and inflation is worse then I believe the ECB will change tack. They will be anxious to reestablish their credibility and focus on their one true mandate,inflation control.
On the United States side of events Fridays employment data while disappointing on the Non Farm Payroll ( NFP) of just +36000 was overshadowed by the dramatic fall in the headline unemployment rate to 9% from 9.4%. US Treasury yields raced higher and this in contrast to German yields which declined added more ammunition to the US dollar rally. However, I think any thoughts of the Fed changing tack are well premature.
Technically the US Dollar is still hanging on to the bearish trend However,if the the Dollar Index were to move above 79 ( currently 78 against a low of 76.88) then things might change. In EUR/USD terms below 1.3470 level would be damaging and 1.3300 probably capitulation.
I do believe though that the single most important factor over the coming weeks will be the emergence of details of the Euro area stability package. As Olie Rehn the President of the EU put it, ´No more phony-baloney economic union´. The German and French inspired package ( Although mainly Merkel) is intended to produce a comprehensive package to co- ordinate Wages Taxes and Pensions.
This for the peripheral EU members will if you like be their premium for a truly watertight Economic Insurance.
If this package does not materialize in such form then of course we could see a massive Euro fallout. It is for these reasons that the pressure to agree will be compelling.
There will be sticking points, most notably the Irish and their hallowed level of (12 1/2%) Corporation Tax. That will certainly be a tester for the new Government. The upshot maybe a fazed increase. If they refuse then it could give us some interesting times. Certainly the mood in Ireland is that taxpayers have bailed out their own banks to support the European banking sector.
Events in Egypt have cooled a whisker and hopefully a peaceful transition can worked out. Of course events will stay on the Forex markets radar but perhaps diminishing.
Equities hung on in again while Bonds did exactly what I think they will do.US Treasury yields have not affected the Yen thus far but may yet do so at some point.
Elsewhere,commodity currencies still looking bid and Sterling benefitting from data puts it back in the middle of its recent trading range vs. the Euro

Weekly review… Contagion Two and The Rockies Horror Show

Contagion Two
Finally on Friday afternoon the markets had a reality check as events in Egypt took their toll on markets.
Having spent almost all week on the back foot the US Dollar was finally able to claw some ground back against the Euro but in reality it was nothing dramatic.Having touched a high of 1.3745 The EUR/USD closed at 1.3608 having been a low of 1,3485. The Japanese Yen managed better performance as it rallied against the US dollar to 82.08 and more impressively to close at 111.70 against the Euro from lows of 113.85. The yen had suffered earlier from the Standard and Poor’s downgrade of Japan
So what to expect next week? Well undoubtedly the concerns over Egypt will be the focus of attention. So quickly following the events in Tunisia the public in Egypt have risen up to defy president Mubarak. For the time being he hangs on to power and regrettably if he continues to then it looks likely to become more violent. What must be of major concern to other Arab nations and to the West is who will take over eventually and which country might be next.
For anyone new to trading this might be their first taste of handing a real political crisis with regard to risk taking. I have been around long enough to know that you can throw away sentiment, technical forecasts and economic fundamentals when a crisis occurs. Thus far the flight to quality if you like has not been dramatic but frankly it is impossible to predict how events turn out in Egypt and therefore how markets might react. For sure volatility will increase and if things begin to look worse then The Yen, US Dollar, Swiss Franc Gold and Oil prices will reflect it. I am certainly no Gold guru but what an earth was the big sell off about on Thursday only to be followed by a late rally on Friday.
So in a nutshell I would advocate very small positions.While my views on the Euro strengthening have been correct who is to say where any rebound back might go. Of course there will be a technical picture that some will argue explains all this but in reality this is something very new and possibly market changing to assess before committing some chips to the table.I suspect that the big movers and shakers in Davos may be already thinking of taking some chips off the table and that might lead to a further sell off in Equities.

The Rockies Horror Show
The second part of my blog this week is about the US budget deficit and therefore US Treasuries and the US Dollar.
The details below were published on Wednesday and Congressional Budget director Doug Elmendorf said that his agency’s new fiscal report almost certainly understates the nations deficit outlook.The major points were these
.–Estimates Significantly Underestimate Deficits
–10-Year Deficits Could Reach $12T–Not $6 Trillion
–10-Year Debt Interest Costs Could Hit $5 Trillion
–Current Recovery ‘Anemic’ Compared To Others in US
–State Governments Face ‘Tremendous Financial Squeeze’
–’Gradual Implementation’ of Deficit Cuts Needed
They seemed to make barely a ripple in the markets and with Fridays events US government bonds were improved. To my mind any improvement there is an opportunity to sell US Treasuries. With Inflation also stirring how long can yields stay as low as they are even if they have risen in recent months. Surely at some point there could be a confidence issue with the US and then we really will see some fireworks
What could be the catalyst. Well maybe one of the rating agencies finally begins to threaten the US AAA status.In the meantime I suspect that any US Dollar strength will give opportunities for countries to continue to divest away from the US Currency and continue to create their more basket approach to reserves.

Concerns about China raising rates and the effect on growth may get overdone as with very low levels of Government debt the Chinese have the ammunition to boost growth if needed and subsidize a nation struggling with higher food prices.The West is not so lucky.

Monday Market Update

The dollar was up against the yen in Asia today following rumours that Japanese institutional investors may move into dollar assets at the start of April die to the rise in U.S. interest rates.

Rising yields on US Treasuries will likely move big Japanese investors, such as life insurance companies, to move into U.S. assets to benefit from higher returns. The U.S. dollar hardened to Y92.61. But the ICE Dollar Index, (which monitors the US dollar against a basket of currencies), fell to 81.547.

Investors will be watching key U.S. economic indicators this week, and if they look good, the dollar could break through Y94 this week.

Watch out for the US personal spending data for February (1230 GMT). Any sunny figures could strengthen the dollar as many people have built in for poor figures on the back of the bad weather which kept people out of the shops and wrapped up warm at home.

EUR/JPY stood at 124.39 compared with Y124.10 last week and EUR/USDF was 1.3430 versus 1.3417.

The euro went up thks to the deal on the Greece bail out, but it slipped back later. It continues to have the jitters.

The Euro may well be up and down a bit like the proverbial´s drawers- it will depend heavily on whether the up and coming Greek bond auctions find hungry investors.