Intraday Market Thoughts Archives

A new US DOLLAR INDEX CHART is added, detailing the 14-year history of the major moves throughout the last 5 cycles.

http://www.ashraflaidi.com/charts/us-dollar-index.asp

US equities seen extending selling on further evidence of softening US inflation and bleak consumer/manufacturing data. Sep personal spending fell 0.3% while Oct Chicago PMI hit a 7-year low of 38. Next week's employment payrolls could show a decline of as much as 250K and the unemployment rate may jump to 6.5% fro, 6.1%. EURUSD attempts recovering towards $1.2780, facing Interim resistance at $1.2830. Downside seen providing foundation at $1.2670. GBPUSDs brief recovery to $1.6230 in last 4 hours is seen tapering off for fresh selling towards $1.61, followed by $1.6030. Fed Chairman Bernanke to speak at 2 pm on "Mortgage Finance".

Eurozone Oct CPI drops to 3.2% y/y (lowest since Jan) from 3.6%, further supporting expectations of a 50-bp ECB cut to 3.25% next Thursday. ECBs Bini Smaghi was unusually forthcoming earlier today about signaling further ECB rate cuts. The CPI drop does a great a deal in allaying fears of the ECB inflation bogeyman, especially after CPI being as high as 4.00% in June.

Bank of Japan cuts interest rates by 20-bps, surprising as well as disappointing markets, with the surprise being the actual cut and disappointment being less than expectations of a 25-bps cut. JPY briefly rose across the board as a knee-jerk reaction--dragging USDJPY from 98.50 to 97, but we could see renewed rise in risk appetite and flows in favor of high yielding currencies (GBP, AUD, NZD and CAD) at the expense of the lower yielders (JPY, USD and CHF). The rate cut avoids the BoJ from being the lone G7 central bank from cutting rates and instills confidence as far as global decision making is concerned. From the perspective of actual economic boost, the measure will be largely symbolic. Nonetheless, the BoJ is reluctant from provoking prolonged carry trades by easing substantially. The rate cut may lift USDJPY above the key resistance of 99.00, but is unlikely to exceed 99.70. Interim support stands at 96.50.

Back to those Japanese rate cut expectations. Odds of a Friday cut from the Bank of Japan are dwindling given the tone of the latest press reports from Japan. A Friday cut is now unlikely due to the prolonged gains in US equities. Japan is better to hold rates steady considering their already low levels and the prospects for renewed carry trades in the event of renewed easing. A DISAPPOINTMENT FROM NO RATE CUT may be reflected in Friday's European and US stocks, hence for fresh risk aversion. SEPARATELY, SAN FRANCISCO FED's YELLEN shed light on the possibility that US rates could drop below 1.00%. Stay tuned for morning's EUROZONE OCTOBER FLASH CPI (6 am EST), expected to drop to as low as 3.1% from 3.6%, thus bolstering the story of falling inflation and escalating odds of an ECB cut next week. Negative bias for EUR and GBP.

US Q3 GDP fell by an annualized 0.3% from +2.8% in Q2, posting the second negative quarterly decline since Q1 2007 and the biggest since Q3 2001.

MOST STRIKNG in todays report is the 3.1% decline in personal consumption expenditure, which is the biggest drop since the 8.6% plunge in Q2 1980, which was the longest post war recession. The contribution from next exports fell to 1.13% from 2.93%, which is the biggest decline since Q1 2007. Despite the slowing export component captured in todays Q3 GDP release, further export slowdown is yet to come due to the dollars additional 8% appreciation against the European currencies since the beginning of Q4.

The Fed cut its fed funds rate by 50 bps to 1.00%, adding to the 50-bps made less than a month ago. The central bank is now in full pursuit of its full employment objective, while extending its policy U-turn from its inflation bias.

For the first time in the current easing cycle the Fed makes no mention of labor markets in the 6-paragraph policy statement, thereby, reflecting the evident fact that the economy is in recession. The emphasis on slowing consumer expenditure in the same paragraph underscores the fluidity of the transmission mechanism from falling asset markets and dried up credit to households. Carry trades are curtailed once again as equities move to the downside. MORE ANALYSIS TO FOLLOW SHORTLY.

The high yielding AUD, NZD and GBP are seen as the biggest losers in the event that markets sell-off (due to disappointment on a smaller easing or lack if 75-bp cut) from today's FOMC decision. In contrast, the Canadian dollar is seen emerging as a big winner in the event of protracted market gains as has been proven to be the case in the last 24-hours due to prospects of a widening in the reflationary trade (boosting oil and gold on Fed easing). USDCAD has dropped by more than 4 cents, to 1.2420 and is expected to extend losses to as low as 1.21 before weeks end. USDJPYs chances of regaining yesterdays 98 yen highs may only come to fruition in the event of extended market gains and prolonged expectations of a BoJ easing later this week.

Aussie and Canadian dollar future flows are now added to the speculators futures positions charts. Note how futures positions in the Aussie remain in net positive territory, showing the long AUD positions vs the USD continue to exceed the shorts, despite the 40% plunge in AUDUSD of the past 3 months and the 60% decline in Aussie net longs. This suggests that the speculative element to this years Aussie ascent was not as considerable as that behind EUR and GBP. In contrast, CAD futures positions have turned net short against the USD since July, despite lofty oil prices prevailing at the time. The swift drop in CAD longs reflected the sharp sentiment downturn in USDCAD exchange rate and surging equity market volatility. More analysis to follow on FX spec futures. SUBSCRIBERS RECEIVE INSTANT ALERTS on Intraday Thoughts and Articles.

Yen tanks on rumors of Bank of Japan rate cut as early as this Friday. I have long argued this week that the main reason yen-selling intervention would not be successful as long as japan does not cut interest rates. Recall, Japan did not take part in the global rate cuts from Fed, ECB, BoC, BoE and SNB. The BoJ story aas well as today's stock rally are contributing to the yen's woes, as well as the to sharp gains in GBP, EUR, AUD, NZD, and the overall USD decline. A 50-bp rate cut by the Fed combined with BoJ easing will help address the rising cost of global capital. These developments are taking part despite the 38-point drop in US consumer confidence reaching an all time low of 38. GBPUSD resistance extends to $1.5850, but prospects of 50-bp BoE easing next month maintains any GBP gains as selling opportunity. USDJPY resistance pushes up towards 97.90 yen-- 61.8% retracement from last week's high.

A rare positive linkage across world markets drags USD and JPY lower as markets anticipate a 50-bp rate cut in the Fed funds rate to 1.00% tomorrow. The Fed also began purchasing commercial paper, helping to ease strains on corporate liquidity. Pre-FOMC market consolidations are common as players reposition ahead of any sharp shifts in risk appetite. Yen-selling intervention is not ruled out after the FOMC decision as authorities aim to magnify the desired effect of easing the global cost of capital presented by the rising Japanese currency. GBPUSD is shored up by rising equities but struggles to regain $1.5750, now drifting near $1.5690. Interim support stands at $1.5620, followed by $1.5540. Trend line resistance stands at $1.5780.

Ashraf's interview explaining the gold sell-off despite the crisis-with Henry Blodget & Aaron Task of Yahoo's Tech-Ticker ** http://finance.yahoo.com/tech-ticker **

Also, catch Ashraf's appearance today at 5.30 pm EST on Bloomberg TV with Pimm Fox.

Resistance and support levels mentioned in the previous Intraday Thought continue to hold in the face of the recovery in stocks and risk appetite and European currencies. Stay alert from change in sentiment after 3 pm EST. Chances of a successful yen-selling intervention are weak at best as long as the currency remains boosted by i) capital fleeing back to the yen from all major currencies and ii) a break in Japanese investors' purchases of foreign equities as the 26-year low in the Nikkei erases their wealth and risk appetite and keeps capital at home. As the world's biggest provider of capital maintains a home bias, the world will remain deprived of Japan's liquidity. As household and corporate investors suffer massive capital losses to their holdings, the effect of capital repatriation and lack of fresh foreign outflows reinforces the upward spiral in the yen, drags down Japanese exporters, Japanese stocks, thereby, further undermining global market confidence.

USDJPY seen capped at trend line resistance of 93.75-80 yen, followed by considerable selling at 94.20, while downside target stands at 92.30 and 91.80. GBPUSD unlikely to extend gains beyond $1.5640s, where selling pressure seen driving renewed downside towards $1.5380s, followed by $1.5310. EURUSD recovers off its 31-month low of $1.2332 but to sruggleat $1.2520 as but neither latest IFO survey nor prolonged volatility likely to allow EUR above $1.2587 (38% retracement from $1.3000 high).

Reserve Bank of Australia is first central bank in G10 to make overt forex intervention to support its currency but impact proves only temporary as Aussie drops back near 5-yr lows of 60.5 cents. G7's success in talking down the yen also proved short-lived as the currency gradually rebounds off Asian session lows. Tuesday's FOMC decision may deliver a 75-bp rate cut, which is likely to trigger a short-term boost to markets, while Thursday's advanced US Q3 GDP figure will provide passing interest on how bad the estimated figure will be. Expectations are for a 0.3% annualized decline following 0.7% increase in Q2. The barrage of US Q3 corporate earnings and guidance from CEOs will also set the direction. With markets having become desensitized by the multitude of actions (concerted rate cuts, Treasury purchases), effectiveness of fresh Fed cuts and cenbank Forex interventions remains doubtful. TUNE IN TO UPDATED CHARTS ON SPECULATIVE FUTURES POSITIONS.