FX, Oil Eye Equity Inflection

by Ashraf Laidi
Nov 3, 2009 15:33 | 25 Comments

Nearly 3 weeks after we highlighted the global risk parameters at $82 oil and 1,100 S$P500 (both 100-week MAs), global risk aversion has deepened across the board, triggering a 6% drop in G7 equity indices, a 7% decline in oil and broad gains in the safer haven currencies of USD and JPY. The more aggressive equity indices of Brazil's Bovespa & India's Sensex gave us an invaluable sell signal on equities and a more constructive position in the greenback.

Breaking 1047-1.47

On Oct 24th, we alerted readers of the equity-FX interplay between the S&P500 and EURUSD. The fact that the S&P500 ended Nov 2nd below the crucial support of 1,047 (55-day MA and 8-month trend line) despite a positive data trifecta from the US (ISM 55.7, pending home sales +6.1%, construction spending +0.8%) underlines markets' broadening defensiveness ahead of the FOMC/BoE and US jobs data. The 1047-1.47 twin support levels (S&P500 and EURUSD) were prominently broken last Friday, translating into a weekly and monthly close. EURUSD still struggling at the $1.4830 resistance as it joins the risk currencies lower against USD and JPY, eyeing the next target at $1.4550, followed by $1.4480. Any hawkish signs from FOMC statement signalling earlier accommodation withdrawal (such as removing for an extended period in 3rd paragraph of statement) would prove positive for USD, JPY at the expense of equities, bonds and oil.

FX, Oil Eye Equity Inflection - Spx EUR Nov 3 (Chart 1)

Aussie Hit by Dovish Rate Hike

The Aussie fared as the biggest loser over the last 24 hours after the RBAs 25-bp rate hike was accompanied by a less hawkish policy statement. Not only the central bank noted the dampening effect of the strengthening currency, but also used the term gradually in describing the pace at which it intends to withdraw liquidity, thereby, signalling the likelihood that it could stand pat in December. Aside from the dovish RBA hike, Aussies sell-off is being particularly driven by the ensuing reduction in risk appetite (UBS loss, BMW profit drop), which remains punishing for higher yielding currencies. The chart below highlights the negative pattern of lower highs since Oct 21st, suggesting a looming break of the 2-month trend line support at 0.8930, after which emerges 0.8850 and 0.8680. A break above 0.9130 is required for the bulls to re-emerge in command.

FX, Oil Eye Equity Inflection - Audnov3 (Chart 2)

GBP Drops on Bank Sales, Pre-BoE

Sterling is the second biggest loser of the day (behind AUD) after RBS confirmed its assets sales and the UK govt increased its stake by 84% in the Bank. As the UK treasury injects 25.5 bln in RBS, markets expect the BoE to inject at least an additional 25 bln in guilt purchases. The reason we expect the BoE bank to opt for the smaller option of 25 bln in fresh QE is partly related to GBP weakness. With the major central banks seeking to adopt gradual steps towards policy normalization, the BoE will likely chose for the less generous aggressive stimulus option. GBPUSD eyes next support at $1.6270, followed by $1.6150, while upside remains capped at $1.6490-00.

FX, Oil Eye Equity Inflection - Crudenov3 (Chart 3)

Comments (Showing latest 10 of 25) View All Comments
Ashraf Laidi
London, UK
Posts: 0
10 years ago
Nov 9, 2009 9:26
NewMan, you're right. This IMF story is the MAIN reason why dollar is down across the board. Asian equitiies didnt do that great. Nikkei rose only 19 pts.

Ashraf
14raj
Kolkata, India
Posts: 210
10 years ago
Nov 9, 2009 5:57
Thanks Spec and NewMan for valuable advice.
regards,
rajib.
NewMan
Minnesota, United States
Posted Anonymously
10 years ago
Nov 9, 2009 5:09
Ashraf: I know you're a very busy man. And I realize this newest article of yours is only 6 days old. But please write another one (with a Big Picture focus or implications) soon. We "Little Fish," who almost never get the high-quality advice that only the rich can afford, rely on you to help us survive. :^) THANKS for all your help. --NewMan P.S. I and my family and friends and their families and friends DON'T want to end up in a sardine can! (Just as you share your expertise with us, I try to pass my imperfect understanding on to as many people as I can help. Ultimately, WE'RE ALL IN THIS TOGETHER.)
NewMan
Minnesota, United States
Posted Anonymously
10 years ago
Nov 9, 2009 0:52
14raj: Maybe I'm missing something here, but isn't the IMF saying that the dollar is OVERVALUED?http://www.bloomberg.com/apps/news?pid=20601110&sid=a5ritflpCi34 All the best. --NewMan
NewMan
Minnesota, United States
Posted Anonymously
10 years ago
Nov 8, 2009 20:50
14raj: I certainly can't answer for Ashraf, but wonder if you've seen this article that gives some indication of his thinking for the coming weeks. Please go to the "Intraday Market Thoughts" tab at the top of this page...and once on that page, click on the top post (Nov.6). In the article, "Ashraf Laidi Regains #1..." you'll see that "In the medium to long term, CMC expects some dollar strength..." Then go into the table below the article, entitled "Current Forecasts." There, in the first column, you'll see Ashraf's forecast (CMC Markets) for Euro/dollar. The Euro is now at 148.47. Ashraf forecasts that in one month (I assume from the beginning of November), it will be 1.46 -- so the dollar going up for roughly the next 3 weeks or more. Then: 3 months out: 1.49; 12 months: 1.56. Hope this helps. Good luck to you!
speculator
Posted Anonymously
10 years ago
Nov 8, 2009 2:32
14raj thats a very good question. i believe ashraf worked for the imf so should have a good idea. but they specifically mentioned weakness against the juan i believe.
14raj
Kolkata, India
Posts: 210
10 years ago
Nov 7, 2009 20:06
Ashraf,
IMF said US Dollar still undervalued.Whats your personal view on this remark?And do you think this word UNDERVALUED will have any effect on Dollar crosses and commodities in coming weeks?
Regards,
Rajib.
Ashraf Laidi
London, UK
Posts: 0
10 years ago
Nov 7, 2009 19:11
Ho, im bullish JPY again. look for 64.30 in kiwi/yen

thanks Newman

Ashraf
NewMan
United States
Posted Anonymously
10 years ago
Nov 7, 2009 1:48
Ashraf--Just wanted to say THANKS VERY MUCH for sharing your great insights and expertise. Very much appreciated. I just bought your book. Look forward to studying it. All the best -- NewMan.
Ho
New York, United States
Posts: 26
10 years ago
Nov 7, 2009 0:56
Hi Ashraf,

What is down target for nzd/jpy coming week, please advise. Tks.