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Re: THe Dollar is bottoming
What a wonderfully undersubscribed thesis to have discovered. A major find. :rolleyes:
What’s in Store for the Dollar?
OCTOBER 2009 - EXTRACTS - WORLD CURRENCY ALERT
The dollar continued its slide last month. And stock markets continued to surge. In general, we got a lot of the same activity we’ve been seeing since March. Investors are piling back into higher risk investments in search of returns in this near-zero, global interest rate environment.
The major drivers of currency values are relative interest rates and relative growth. When a country is experiencing robust economic growth and rising interest rates, capital tends to flow into it. As a result, upward pressure is exerted on its currency relative to those currencies with inferior growth prospects and lower interest rates.
But the current environment has created a level of uniformity in these two key value determinants ...
The recession was global, the response from countries has been coordinated, and the prospective recovery should also be global. This has made evaluating opportunities in currencies rather difficult. Especially when considering that recovery is fragile and, therefore, a dip back into recession is highly possible.
That makes all global economies vulnerable to another economic slowdown. So What’s Driving Currencies? Three themes: risk appetite, reserve diversification, and speculation on which central bank will move first on interest rates. These themes are causing a constant tug of war on the flow of capital into and out of currencies.
That’s why, although the recent currency trends have been strong, capitalizing on them has been difficult.
Let’s take a closer look at these three themes ...
Theme #1: An unwinding of the flight to safety
Germany, France, and Japan led the way in the second quarter, producing positive economic growth and technically ending their recessions. It’s widely expected that most economies will emerge from recession in the third quarter. And that data point of positive GDP growth has bolstered investor confidence even more.
As a result, financial markets have continued the aggressive retracement of the crisisled collapse in global asset values and the simultaneous collapse in foreign currencies (relative to the U.S. dollar). In other words, safe-haven investments in U.S. Treasuries and the U.S. dollar are being unwound as capital flows back into higher risk/higher return vehicles.
As the data and sentiment creates more confidence, allowing investors to take more risks, this trade of reversing from safety to higher risk investments keeps floating currencies, stocks, and commodities higher and higher.
In fact, as this risk-appetite trend strengthens, investors have been more willing to look past the negatives to uncover any possible positives in news and data. For instance, the International Monetary Fund (IMF) released its Global Financial Stability Report on Wednesday and reduced its estimates on the total losses associated with the financial crisis.
It now believes the number will be closer to $3.4 trillion, which is $600 billion less than its previous estimate.
Of course, it still means the losses are big ... and that banks are only halfway through their write-offs. But global investors liked the news anyway. Here’s a good example of the poor logic that has fueled the economic recovery. The IMF said the rosier outlook was attributed to “sharp increases in asset and equity prices around the world.”
It’s not because deposits have grown in the banking system or because
lending activity has picked up. Instead, because stocks and commodities moved higher, conditions at banks have therefore improved.
Sound logical? Not at all. But the surge in asset prices has firmed up confidence. And that has improved the valuations of the toxic assets held on the banks’ books. This is part of the circular feeding frenzy that started, and has accelerated, the sharp reversal in all financial markets over the past seven months.
First, it was a slight recovery in stocks ... then increased optimism because of the improvements in the stock market ... which fed into a further surge in stock markets and other asset prices.
And the circle continued over and over and over. This is a classic “feedback” loop as economists call it. And it’s the recognition of this human element in financial markets that George Soros, the iconic hedge fund manager and currency trader, has attributed his ability to identify major turning points in markets.
It’s when market prices drive perception ... perception then drives fundamentals ... and fundamentals, in turn, drive prices further. It’s when this vicious cycle moves markets beyond the fundamental equilibrium point that markets tend to snap back violently. It’s easy to see — just think back to the bleak news and outlook when the stock market was sitting on its lows.
When a market overshoots (in either direction), market prices tend to drive news. It’s no different today, where there’s an upward spiral of positive news supporting the prospects for recovery. And, likewise, every downtick in the U.S. dollar begets more negative sentiment and more negative news on the currency.
Theme #2: Reserve diversification
The second major theme in currency markets has been speculation about central bank reserve diversification.
There has been a mountain of negative sentiment levied against the U.S. dollar. Central banks holding significant dollar reserves have been vocal about their concern over the U.S. government’s policy decisions and the resulting impact on the value
of the U.S. dollar.
And speculators have jumped on board, hoping that these central banks will begin to shift around some of the $6 trillion in global foreign exchange reserves. This sentiment, to a large degree, has been behind gold’s jump. Gold rallied aggressively during September on speculation that central banks will limit sales of their gold reserves, keeping a tight grip on the metal as a hard currency.
The speculative long gold position is at record highs. That’s normally a recipe for a sharp reversal. With a global recovery, albeit weak, now expected to be underway, gold at $1,000 is purely a bet against the existence of the dollar. And that’s a very low probability bet.
For those who like such low probability bets, it’s important to put the dollar’s recent decline in perspective. Since March, the dollar has given up 19% against the British pound, 19% against the euro, and 12% against the Japanese yen — all on the reversal of the crisisdriven, risk-aversion trade.
But the U.S. dollar remains ...
22% stronger against the British pound than it was before the trappings of a
global financial crisis and near global depression,
18% stronger against the Canadian dollar,
10% stronger against the Australian dollar,
And 9% stronger against the euro.
Moreover, the Dollar Index remains 9% above its all-time lows reached last year. In fact, most of the drag on the trade-weighted Dollar Index can be attributed to the collapse of the yen carry trade. Since the implosion of the carry trade when the global credit bubble burst, the yen has surged 28% compared to the dollar.
Meanwhile, it’s plunged 30% against the euro and a stunning 43% against the British pound. So when you put everything into perspective, the doom-laden headlines about the dollar are far less exciting.
Theme #3: Which country will likely move first on interest rates?
We know the U.S., the U.K., the Eurozone, Japan, and Canada will not begin raising interest rates anytime in the near future. But there are a few nations that could be in position to raise rates. And soon!
Australia is one. At 3%, Australia’s short-term rates are already set higher than any other developed country. And its currency has had one of the sharpest ascents since March of this year, up 38% against the greenback. Moreover, the Australian economy has held up relatively well throughout the depths of the global recession.
Its commodity-rich resources have been boosted this year by China’s commodity-buying binge. Consequently, market expectations are that the Reserve Bank of Australia could possibly start moving interest rates away from “emergency levels” as early as next week’s meeting.
As global financial markets continue to climb, risk-taking investors are finding it comfortable to plow money into currencies like the Australian dollar — even after a 38% rise in seven months — for a small yield advantage.
Three Themes, Growing Threats:
These are three major themes that are driving currencies right now. And for the most part, they’re combining forces in moving financial markets and currencies back on a path toward pre-crisis levels.
However, there are also an increasing number of major threats to that path ...
Threat #1: Signs that recovery could be brief:
While the market’s laser-like focus on the U.S. economy and dollar has given respite to countries enduring a host of continued economic challenges in recent months, the U.K. hasn’t been able to hide. And the British pound has been punished. Indeed, despite all of the negative sentiment about the U.S. dollar, the British pound has been the weakest currency in the world over the past two months.
That’s because the depths of problems in the U.K. economy are now being exposed. And that’s why, while other central banks are planning exit strategies from ultra-easy monetary policies, the Bank of England is still trying to find ways to get money into people’s hands to stimulate economic activity.
In addition, the IMF warned that with the remaining write-offs and increased capital adequacy requirements, the supply of bank credit for major economies may not be enough to support economic recovery.
Threat #2: Rising protectionism
Recessions tend to bring about protectionism. And in today’s economic environment, protectionism is escalating. For example, the U.S. slapped a 35% tariff on tire imports from China last month.
Now, the G-20 has pledged to avoid protectionist measures. But their actions speak louder than words. Since that pledge last April, 91 new protectionist initiations have been reported against G-20 member countries!
Protectionism brings about retaliation, and that can bring global trade to a standstill. Indeed, that’s exactly why some argue the Great Depression was caused by protectionist actions taken by the United States. Still, with unemployment high and rising in major economies, political pressure to step up protectionist actions is only intensifying.
Threat #3: Strong currencies
Another pledge from G-20 member countries was to avoid competitive currency devaluations. Exports are typically a key driver in recovery. In last month’s issue, I focused on the problems that the recent surge in currencies (versus the U.S. dollar) are presenting for countries trying to preserve a fragile economic recovery.
Intervention activity is already heating up, and verbal threats against strong currencies will likely turn to action. I think we’ll see concerted intervention to stem the rising tide of these currencies against the dollar.
How Do We Play It?
Rising asset values, improved investor confidence, and government stabilizers have manufactured a positive GDP number. And that perception of improvement has manifested itself in reality via better fundamental data. For now, the U.S. dollar continues to be a victim of the reversal of the crisis-driven, risk-aversion trade. That’s a mouth full!
To put it succinctly, the dollar has been losing ground because of a movement out of safety. When will the cycle end? And when will this market overshoot snap back? That’s the tough part. We’ve already seen a number of convincing signs, yet the risk-loving ride in asset prices manages to grind its way higher.
All of my analysis continues to suggest that the disparity between the weak global economic conditions and the soaring financial market performance will correct. And that will bring about another bout of risk aversion, increased uncertainty, and volatility for currencies and other markets.
For now, we have to respect both the strength of this rising tide AND be positioned for the vulnerabilities of a snapback. That’s why I think it’s best to find the relative weak spots in this trend. The Canadian dollar is a case in point; and last month, we positioned ourselves for a fall in the loonie.
That position should be slightly positive as the Canadian dollar is underperforming most currencies, according to plan. The British pound is the other relative weak spot and I have a new recommendation to take advantage of that opportunity (details below).
INSIGHTS - U.S. Dollar:
As you can see in the chart below, the dollar has tested and held its last major support level. The next level of any significance would be the all-time lows made last year just prior to the massive risk-aversion movement that shot the dollar 27% higher.
Technically, a break of the green trend line would open a sharp rally in the dollar. Remember the threats I detailed in the main article? All are supportive scenarios of a bullish dollar move. And a key technical breakout could be the fuel that snaps the overshoot of this persistent dollar weakness back to realistic levels.
Global central banks and government officials around the world have become increasingly concerned about the strength of their currencies relative to the greenback.
The G-7 meets this weekend, and speculation about currency market intervention is making the rounds. It’s no secret that the strong rise in many currencies (relative to the dollar) over the past seven months are counteracting some of the aggressive stimulus actions taken by various nations.
Plus, the market is very short the U.S. dollar. When the market position is leaning too heavily in one direction, it tends to create sharp reversals as everyone runs for the exit. If the Dollar Index breaks out of this descending trend (green line), I’ll immediately send you a Flash Alert to enter a long position.
The risk is easily defined on a long dollar trade here: The upper red line is support #1, and the lower red line is support #2. Two perfect levels for protective stop-loss orders.
UK POUND:
Despite all of the focus on U.S. policy decisions and despite all of the negative sentiment toward the U.S. dollar, the weakest currency in the world for two months running has been the British pound. That’s because the U.K. government and the Bank of England have not been able to kick-start a floundering banking system.
Neither has been able to get money into the hands of consumers to stimulate spending again. As I explained in the main article, many major central banks are turning more optimistic on recovery prospects and, therefore, are beginning to lay some groundwork for an exit strategy from the ultra-easy emergency monetary policy measures.
The Bank of England, however, is going deeper in the opposite direction.
The U.S. Federal Reserve has already guided on ending its quantitative easing program, but the Bank of England is still well entrenched in theirs. This creates a divergence in World Currency Alert 7 monetary policy that is squarely negative for the pound. For that reason, the pound has been under heavy selling pressure in recent months.
The British pound is one of the relative few weak spots in the trend of strong currencies. In fact, the Bank of England has grown so concerned about the failed results of its quantitative easing strategy that it called an emergency meeting in London this week of top economists to strategize.
EURO:
The euro has been tightly correlated with the performance of the risk trade and is the second most widely held currency in the world.
So along with other soaring risk assets, the euro climbed higher last month, reaching one-year highs against the dollar. But the euro’s real move was against the British pound. With last month’s negative news out of the U.K., the euro broke out of a downtrend, making a strong surge toward parity with the pound.
Fundamentally, the Eurozone has been hampered with all of the same issues as other major economies. Confidence has ebbed and flowed, and that has produced signs of improvement in some areas of the economy. But global demand remains depressed, prices are falling, and the banking system has a lot more pain to left to survive.
That’s why the European Central Bank president has become vocal about the strength of the euro ...
At the G-20 meeting, ECB Chief Trichet said he appreciated the comments from U.S. officials on the importance of a strong dollar. And this week, going into the weekend G-7 meeting, Trichet noted that the euro has been a topic of discussion among Eurozone leaders and sharp currency moves have adverse effects.
The Eurozone outlook has improved, thanks to the more positive global growth outlook. But recovery in the Eurozone continues to be uneven and fragile. And the single currency, particularly a strong one, will be a major hurdle to overcome. I think the euro will come under intense pressure again. (recommends a short stance vs. EURO).
YEN:
Regrettably, your ProShares UltraShort Yen ETF (YCS) should have hit the stop-loss level last month. The Democratic Party of Japan (DPJ) took office in September, replacing the Liberal Democratic Party (LDP). This is Japan’s first shift in party leadership in 55 years. And the new administration has a host of problems to deal with. Not the least of which is the rising value of the yen.
The bearish head-and-shoulders pattern projects a move back to the 150 area for the pound. The next key level is the January lows. Although the Japanese economy has emerged from recession, there is speculation that country could return to negative growth as soon as the fourth quarter.
Here are a few reasons why:
Unemployment in Japan is at record highs
The Japanese have a massive debt load of 178% of GDP
Japan’s critical exports are still in a major retrenchment
In short, a strong yen is a killer for this export-driven, debt-laden economy. Y
et the yen has been climbing aggressively, up more than 8% against the dollar since August. There are no fundamental reasons to support the yen’s strength. Japan’s economy has suffered the sharpest decline among major developed countries; its interest rates are zero; and the export orientation that underpins the Japanese economy has collapsed.
Goldman Sachs agrees, calling the buying of yen “ridiculous.” But the incoming finance minister did nothing to command respect last month, saying a strong yen could actually be good for the economy. He back tracked days later. Nonetheless, the market appears to want to challenge the administration, and the yen has risen to sensitive levels for exporters.
CANADIAN DOLLAR:
Last month, I recommended you add a short position in the CurrencyShares Canadian Dollar Trust (FXC). This position should be slightly in the money. Canadian officials continue to express their discontent with the strength of the Canadian dollar. And they continue to warn that a strong currency could derail any economic recovery.
This week, these warnings looked well placed. While the U.S. reported another improved reading in its second quarter GDP, Canada’s GDP report disappointed. Instead of showing growth for July, the economy stalled, with a zero reading. With this disappointment,
I expect the intervention threats to escalate out of Canada. And you should be well positioned to benefit.
Meanwhile, because of this dynamic, the Canadian dollar is performing just as I expected. The loonie has been a relative underperformer among major currencies. Hold.
AUSSIE DOLLAR:
The strong surge in gold, coupled with a strong stock market in September, appealed to two significant influences on the Aussie economy: commodity strength and a strong global risk appetite. As a result, the Australian dollar soared to one-year highs last month. In the main article, I talked about the key themes moving currencies right now.
One of them was speculation on which central bank would move first on interest rates. And Australia is right at the center. The Reserve Bank of Australia (RBA) has been clear that, at 3%, the current rates are emergency levels. And the RBA has also been clear that it’s nearing the point where those emergency measures can be removed.
That indicates Australia is positioned to be the first economy with a major liquid currency set to move interest rates higher. And that is typically a boon for the currency.
The RBA meets next week; and some are betting that it may move rates at that time. But those coming late to the party on the relative interest rate appeal of the Australian dollar may be in for a rude awakening. The Australian dollar has outperformed nearly all global currencies over the past seven months because the country has been expected to be the first to move on rates.
The currency has climbed 41% in seven months, and even though the interest rate differential will grow with the rest of the world, the differential remains relatively small considering the risk taken. In today’s risk-sensitive global economic environment, the Australian currency is only as strong as investors’ perception about the global economy.
That’s why this week, as risk-aversion sentiment ticked up, the Aussie dollar fell sharply. And now the technical picture for the Australian dollar looks tenuous, as you can see in the chart.
WRAP:
I think the fourth quarter will bring some very significant market adjustments. As I indicated in my issue last month, pressure is building in the financial markets to validate the underlying economic situation across economies. That’s why I think this run-up over the last seven months is setting up for a “Buy the rumor, Sell the fact” type of market dynamic.
With little evidence that the technical ending of this recession can bring about a sustainable recovery, the prospects for a continuation of surging asset prices are slim. The G-20 has made a plea for rebalancing global economies. In this scenario, the U.S. economy would save more, consume less, and produce more ... and export-driven economies, like China, would spend more and export less.
This is a long and painful process, especially for export-centric economies. And that’s the kind of pain today’s financial markets are ignoring. Instead, markets are pricing in a perfect and sharp recovery — i.e., return to normalcy. I expect that thesis to end badly.
The Australian dollar (just now) generated a key reversal signal on Thursday, a bearish outside range. These signals can be great predictors of major turning points in markets. I recommend selling short the CurrencyShares British Pound Sterling Trust (FXB).
SENTIMENT SURVEY:
Sentiment View (Survey and Open Interest Data)
Japanese yen - Cautiously Bearish New regime has accelerated yen strength, something the economy can’t handle.
Euro - Cautiously Bearish ECB joining those uncomfortable with a strong currency.
Swiss Franc - Bearish Swiss National Bank wants a lower franc.
British Pound - Bearish Weakest currency in the world over the past two months.
Canadian $ - Bearish Latest growth expectations missed miserably. CAD strength would be a problem.
Australian $ - Cautiously Bearish The Aussie dollar is benefiting from a yield advantage but is vulnerable to the sharpest fall.
Mexican peso - Bearish A hiccup in China or US stock markets elevates risk.
New Zealand $ - Cautiously Bearish NZ has expressed discontent with kiwi strength.
Chinese yuan - Neutral China has been virtually pegged since the crisis began.
___________________Last edited by meechpod; October 11, 2009, 08:56 PM. -
Re: THe Dollar is bottoming
markets will flee safety for the security if risk.
hot selling items for the next yr...
- life rafts made of concrete & lined with lead.
- parachutes made of cheesecloth.
- & for home defense...
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Re: THe Dollar is bottoming
that's very good ...
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Re: THe Dollar is bottoming
As far as I can tell he's bearish all currencies as all of their central banks want weaker currencies but he seems to have missed the most important currency out, the one that has no central bank to print it. Yes you guessed it...the fourth currencySENTIMENT SURVEY:
Sentiment View (Survey and Open Interest Data)
Japanese yen - Cautiously Bearish New regime has accelerated yen strength, something the economy can’t handle.
Euro - Cautiously Bearish ECB joining those uncomfortable with a strong currency.
Swiss Franc - Bearish Swiss National Bank wants a lower franc.
British Pound - Bearish Weakest currency in the world over the past two months.
Canadian $ - Bearish Latest growth expectations missed miserably. CAD strength would be a problem.
Australian $ - Cautiously Bearish The Aussie dollar is benefiting from a yield advantage but is vulnerable to the sharpest fall.
Mexican peso - Bearish A hiccup in China or US stock markets elevates risk.
New Zealand $ - Cautiously Bearish NZ has expressed discontent with kiwi strength.
Chinese yuan - Neutral China has been virtually pegged since the crisis beganComment
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Re: THe Dollar is bottoming
He is commenting on what may develop on the currency indexes, not commenting on gold. Must all discussions of money today revolve inevitably around gold? That sort of unilateral thinking breeds discussions which can become circular or gold-recursive in their explorations. One might consider keeping an eye on the dollar index (what it's going to do vs. other fiat currencies) along with all of the rapt gold watching.Comment
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Re: THe Dollar is bottoming
Originally posted by meechpod View Post
Ching Ching!
Sing dollar?
Breed a discussion here about currencies that are falling/rising vs gold
AUD popping up often on other threads.Comment
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Re: THe Dollar is bottoming
The USDX just dipped below 76 again. Let the jawboning begin! Paging Ben Bernanke for a WSJ editorial.Comment
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Re: THe Dollar is bottoming
I am a kiwi as here is the latest bearish newsNew Zealand $ - Cautiously Bearish NZ has expressed discontent with kiwi strength.
1) Govt needs $6 B to cover leaky homes liability by councils
2) Govt needs $12 B to cover hidden liabilities from national health care (or ACC)
3) Govt is running $7 B deficits
Thats on or GDP of $120 B...
Current govt debt to GDP is 28% (I think), the above takes NZ upto 50% debt to GDP.
With tax revenue crashing by the day...
NOTE: Dont mention personal debt ratios..Comment
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Re: THe Dollar is bottoming
The implication being that NZD is overvalued? Those PGC rights arent worth much. Whats going on there?
Originally posted by icm63 View PostComment
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Re: THe Dollar is bottoming
Wait, you are in NZ? That explains some of your comments. It's like being on a weather board where we talk about a cold front based on charts but you don't look out the window.Originally posted by icm63 View PostComment
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