Intraday Market Thoughts Archives

The last 3 weeks were a clear manifestation that the dollar rally of July-November was a result of: (i) covering of massive dollar short positions in futures and options markets; (ii) repatriation from EM and commodity funds; and (iii) 180-degree turns in the monetary policies of all major non-US central banks. I have persistently warned that the more these three primary factors played out in Q3 and Q4, the more spectacular would the next dollar decline become. Despite showing its biggest weekly drop against EUR last week (and potentially biggest monthly drop on record), the dollar has not yet fully entered the next phase of its multi-year bear market. The central banks of the Eurozone, England, Canada and Australia have yet to further ease monetary policies, albeit not to the same extent as in the US. And with prolonged risk aversion in global equities in H2 2009, the greenback has not concluded its risk-driven gains against GBP and NZD.

The latest figures on US weekly jobless claims and personal consumption illustrate the accelerating path of unemployment and appreciating rate of decline in inflation, both of which highlight the need for the Federal Reserves latest push on the reflationary pedal. The 30K increase in jobless claims to 586K pushed up the 4-week moving average to 558Kanother high since the 1980 recession, making a 9% unemployment rate for 2009 a more potent possibility.

Speculators remain net short EURUSD contracts but these positions have gradually diminished as the euro staged a broad rally on the back of negative US fundamentals. With ECB interest rates seen closer to their low than the Fed funds rate, currency markets will be incentivized to drive net EUR shorts into long territory as the yield differential dictates flow activity. Sterling's sell-off has given futures traders little reason to pare down their net shorts, as these remain at 30,400, close to September's record high of 49,359 contracts. Speculators and position traders will continue to pay close attention the broadening rhetoric inside the Bank of England about interest rates nearing zero%.

Speculators remain net short the single currency against the dollar but these positions have gradually diminished (rising blue graph) as the euro staged a broad rally on the back of negative US fundamentals. With ECB interest rates seen closer to their low than the Fed funds rate, currency markets will be incentivized to drive net EUR shorts into long territory as the yield differential dictates flow activity. GBP's sell-off has given futures traders little reason to pare down their net shorts, as these remain at 30,400, close to September's record high of 49,359 contracts. Speculators and position traders will continue to pay close attention the broadening rhetoric inside the Bank of England about interest rates nearing zero%.

Open interest activity in the Chicago Mercantile Exchanges International Money Market of currency futures illustrates the notable rise in net long positions in the Japanese yen against the U.S. dollar over the past 3 months (red graph). But a closer look at the diversion between the yens price action and rise in net longs shows the currencys strengthening to have grown disproportionately faster than the rise in speculators contracts. This highlights the broadening interest in the Japanese currency from spot, options and futures markets against the US currency. Although 2008 has proven a tale of two halves for most currencies, the yen persisted in its role as the strongest currency in 2008, gaining over 24% against gold, versus the dollars 7% increase against the precious metal.

Ashraf on Yahoo Finance's Tech Tiicker says the Dollar-Gold Shift is temporary for now... http://tinyurl.com/3olylp . Market disappointment over the White House bridge loan to US Autos proves continues to prove the current bear market is increasingly secular.