Green Shoots Fatigue & Intermarket Setup

by Ashraf Laidi
Jun 29, 2009 18:15 | 71 Comments

There are more substantive fundamental and technical grounds that the recent pullback in equities and global bond yields will extend throughout Q3 to the benefit of the US dollar, which will likely stabilize, rather than wage a rally such as in H2 2008. Current explanations for a stronger dollar in H2 based on US recovery preceding rest-of-world are off the mark. The past 7 years have proven that each time US data emerged on the stronger side, global bourses pushed higher-at the expense of the greenback. While we back the notion for a stronger USD in Q3, our rationale is based on the following:

Green Shoots Fatigue & Intermarket Setup - USDXINTERRELATIONNJUNE 29 (Chart 1)

(i) Necessary pullback in commodities after excessive gains (oil +43%, copper +30% aluminium +22% since late April) started hampering fragile stabilization in business activity;

(ii)
Retreat in global risk appetite due to lack of follow-through from econ data and business surveys;
(iii)
Reminders from non-US central banks to continue their quantitative easing;

(iv) Cautious currency rhetoric reining in excessive appreciation (SNB, ECB, BoE, BoC and RBNZ);

(v) Rising US and global unemployment rates cannot be dismissed as lagging indicators when their increase (from trough to peak) was among highest in record. In the US, combination of rising unemployment and savings rate do not function well in a debt-laden economy.

(vi) Emerging uncertainty with European stress tests could be deemed as an
event-risk excuse for deeper consolidation in the euro.

FX markets have grown increasingly used to watching key parameters of risk appetite, whose upside has become limited at 8,600 in the Dow, 930 in S&500 and 4,350 in the FTSE-100. Key support stand at 8,200, 880 and at 4,100 respectively.

Bond Yields & the Dollar

While bond yields have had their biggest weekly retreat in 3 months, the uptrend since late December is expected to remain intact as long as 3.20% and 2.25% yields hold on the 10 and 5-year treasuries respectively. As the charts above show, we could expect a continuation of the inverse relation between yields and the dollar.

To understand the future, we must understand the past and present relation. Note that between August 08 and March 09, yield and the dollar moved largely in tandem, only for the relationship to turn inverted thereafter as the Feds treasury purchases weighed on the dollar but failed to reverse the yield rally.

Hence, dollar downtrend intensified in March as the Fed's announcement to buy Treasuries implied monetization of the US debt via and increase in and out of the of US dollars. The other reason to the dollar decline was the protracted rally in emerging markets (especially the BRICS), which eroded global fund managers cash, which were largely-denominated in USD.

Meanwhile, bond yields continued to maintain their climb amid the US Treasury's record borrowing and deficit-financing overwhelmed the asset-purchasing efforts of the Fed, hence, caused a drag on treasuries and lifted their yields. Incipent signs of green shoots also boosted yields. In late Q4, we expect to yields resume their upward course as the Treasury's deficit financing combines with improved economic dynamics in and out of the US. And any environment portraying improved global dynamics has consistently proven to be challenging for the dollar.


In response to our reader's requests, the following chart shows gold's year-to-date percentage change in USD, EUR, GBP and JPY terms. Reflecting the yen's broad underperformance, gold has shown the greatest advances against the yen; rising 12% YTD. In contrast, sterling's broad outperformance explains gold's 6% decline YTD against the curency. Improved risk appetite has largely benefited sterling especially as the govt owned UK banks left a void in the bad news medium, allowing sterling to maintain its strong correlation with equity market performance. Fore more historical analysis on gold's muti-currency performance, please review my year-by-year illustrations and rationale from 1999 to 2007 in Chapter 1 of my book Currency Trading & Intermarket Analysis

Green Shoots Fatigue & Intermarket Setup - GOLD FXJUNE 29 (Chart 2)
Comments (Showing latest 10 of 71) View All Comments
speculator
Posted Anonymously
10 years ago
Jul 4, 2009 12:30
ashraf,

i'd say we will have a poor run in equities in short term with increased risk aversion due to poor economic numbers, containment of liqudiity expansion by fed (SHORT TERM) and bearishness/cautious attitude on recent risk rally among fund managers. shorting commodity based currencies and higher yielders will be profitable with CAD one of them. we are also likely to see dollar/yen carry trades unwound with flows back to these currencies in the short term.

also, based on our debate about us dollar debasement, it is my belief that the dollar will depreciate against BRICS on a great scale rather than G8/G10. therefore, the USDx will not suffer as many believe in the longer term. jim rogers is highly pro BRICS and not G10 for obvious reasons and i would agree.

as it will take many years for the world economies to recover and for the US to reduce their recently increased savings rate (for consumption trends pre2007), large gains for oil and downside on USDX will be limited.

have a good weekend
Ashraf Laidi
London, UK
Posts: 0
10 years ago
Jul 4, 2009 1:49
redstsone, we'd have to wait next week's down leg in equities. signal from oil looks quite ominous.

rob, not bad suggestions. And as i said in my tweet last night, EURAUD also looks to be stabilizing as stocks peak and fall. eurcad can be very volatile but that's not bad idea. but the way oil is going to fall more still presents shortterm opportunity for USDvsCAD

Ashraf
Rob
New York, United States
Posts: 305
10 years ago
Jul 3, 2009 20:18
Hi Ashraf,

With USD strength being compromised by US debt and economy, BRIC moves out of USD, and China and Russia opening their mouths about different reserves - how do you feel about going long GBP/CAD (or EUR/CAD) instead of USD/CAD? Both pairs seem to have quite a strong upward channel in daily and weekly charts. Thanks
redstone
UK
Posts: 25
10 years ago
Jul 3, 2009 18:44
Hi Ashraf. still holding JPY am waiting for stocks to head lower to cash in on risk aversion but would ultimately like to shift holdings to AUD. As to when, your advice would be greatly appreciated.
Ashraf Laidi
London, UK
Posts: 0
10 years ago
Jul 3, 2009 1:03
Rob, i overlooked your Qstn. but i guess cable is finally giving as NY was bad and Tokyo will mirror it

Ashraf
Ashraf Laidi
London, UK
Posts: 0
10 years ago
Jul 3, 2009 1:01
redstone, have your JPY holdings now turned to green? you said you were going to get rid of them in middle of Friday trading.

Ashraf
Ashraf Laidi
London, UK
Posts: 0
10 years ago
Jul 2, 2009 22:36
EUR$ eyes 1.3880 (target 1st mentioned this morning). NZDUSD looks to test 0.6240 then it's 0.6170 from there. USDCAD likes the way US session closed at session lows and testing 1.1630s & EUR hits 1.3950. THIS NITE IS SO NOT OVER. Over and out to twitter.

Ashraf
Rob
New York, United States
Posts: 305
10 years ago
Jul 2, 2009 20:36
Guess it took another 25 points down in the dow to get it moving down
speculator
Posted Anonymously
10 years ago
Jul 2, 2009 20:07
could be large buy orders for the pound on a non-trading basis. can move markets if volumes thin
Rob
New York, United States
Posts: 305
10 years ago
Jul 2, 2009 20:04
speculator - I agree, especially given the weak UK construction PMI - Also, China apparently has added another comment saying that the dollar as reserve was STABLE.