Name: Ashraf Laidi

Web Site: http://www.ashraflaidi.com/

Twitter: alaidi

Bio: Ashraf Laidi is Chief Market Strategist of CMC Markets, author of "Currency Trading & Intermarket Analysis" and founder of AshrafLaidi.com. At CMC Markets, Laidi he oversees the analysis and strategy functions of key currency pairs as well as decisions and trends of the major global central banks. He is also responsible for educating and informing clients on the essential dynamics underpinning FX, Commodity and Credit markets. Prior to joining CMC Markets, Mr. Laidi was an analyst at a United Nations-specialized agency, monitoring global fixed income and equity portfolios. He also served as chief FX strategist at MG Financial Group where he pioneered online FX analysis for retail investors via the creation of the first 24-hour currency portal. His other experience included emerging market fixed income at Reuters and assessing sovereign and project investment risk consulting with the World Bank. His insights can be found on www.AshrafLaidi.com. Mr. Laidi provides expert commentary on CNBC, Bloomberg TV, and his insights can be found regularly on the Financial Times and the Wall Street Journal.

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Gold Catching Down with Euro

Written by Ashraf Laidi
February 28th, 2010 at 2:56 am

Readers of the last 4 articles (since Jan 4) were given several technical and fundamental argumenst calling for more declines in EURUSD. Here’s another one, with a touch of gold. Last week, gold hit a new record high in euro terms, highlighting the latest weakness in the single currency rather than gold’s improved lustre. Analysing gold’s movements against various currencies is not only crucial in weighing the true performance in the precious metal, but also important in valuing a currency’s secular movement (rather than comparing it to other currencies). Thus, figuring out whether a falling EURUSD is a result of broadening euro weakness rather than a strengthening USD can be addressed via golds multi-FX analysis.

The first chart shows weekly gold in USD terms suffering from classic bearish case of lower highs i.e. failed rebounds. The $1,225 record high from December 2nd coincided with the same month of the higher than expected US November jobs report and the triple downgrade of Greece credit rating from Fitch, Moodys and S&P. As long as gold fails to regain $1,133 (50% retracement of the decline from 1225 high to 1043 low), it remains vulnerable to $1,020 (target by Mar 6^th), followed by $980. Our long-term bullish stance in gold would only be reconsidered in the event of a break below $880.

The second chart shows weekly gold in EUR terms reaching a new record high of EUR 831.00 Since this occurrence is primarily EUR-driven move, it merits more attention regarding its implications for EUR rather than gold. We would only start to focus on golds strengthening trend when it nears its highs vs. the stronger JPY and AUD as was the case in early December.

The third chart shows eroding interest in gold net longs (positioning of futures contracts in NY Mercantile Exchange). Last week, net longs rose for the first time in 5 weeks after having fallen to 181,519 contracts, the lowest since September. Since December, falling net longs were more a case of a decline in new longs rather than an escalation in fresh shorts, which is unlike in Q3 2008, when golds decline was prompted by surging shorts as a result of the great unwinding trade. Reconciling golds robust performance against EUR and the fading interest in gold net longs (vs. USD) justifies our bearishness in EURUSD as well as anticipation of further losses in Gold/USD. Technical analysis of golds net longs suggests the decline will retest the 130K level from the current 188K.

Fed Chairman Bernanke will likely use this weeks semiannual monetary policy testimony to tone down any overshoot in short term yields by reiterating exceptionally low levels of the federal funds rate for an extended period, but that will likely fail in dissuading USD bulls, especially as bond traders anticipate payment of interest on reserves as the Feds next step of exiting its liquidity strategy.

Dead Cross on Gold

And those who became familiar with the meaining of DEAD CROSS formations, Daily gold sees its 50-day MA falls below its 100-day MA. Readers of this site were warned on Jan 19 about the dead cross in EURUSD (50-day MA falling below 100-day) 23 hours before it occured. 18 hous later, EURUSD lost 210 pips. 3-year Anniversary of the Pre-Crash Correction February 27 (marks the 3-year anniversary of the 1st correction in global bourses, which wiped out nearly $600 billion in market value, triggered by fears of higher transaction taxes in China, an expected plunge in US durable orders and preliminary fears of US subprime debt. The Shanghai Composite plunged 10%, NASDAQ fell 4% and DJIA dropped 3%. While the global patient has shown marked signs of improvement, it remains highly vulnerable to multiple sources of contagion (Eurozone fiscal woes, Chinese tightening, rating concerns in Gulf & pace of liquidity reduction by Fed). Pay attention to recurring cycles and repeat events.

Canadian dollar falls across the board as markets unwind gains in commodity currencies ahead of potential event-risk from Bernanke’s testimony. CADJPY bearishness was highlighted by negative crossover in the stochastics, losing 270 pips since Monday’s tweets and IMTs. Subscribers to our IMTs and Twitter.com/alaidi were initially warned on ensuing CADJPY bearishness on Monday when it stood at 87.70.

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More Euro Losses Ahead

Written by Ashraf Laidi
January 8th, 2010 at 10:24 am

The retreat in the inverse correlation between oil prices and the US dollar is set to continue into the quarter, with the US currency seen adding on to its gains despite robust energy prices ahead. Dollar strength is set to specifically emerge against the euro and the British pound. Since the euro accounts for 58% of the weighing in the US dollar index and EURUSD pair makes up over 25% of the average daily turnover in the foreign exchange market, we focus on the EURUSD pair in detailing the relationship between the USD and oil.

Fundamentally, the euros 5% decline in December against the dollar may have been accelerated by year-end squaring of positions, but the dollar and euro sides of the equation also played a role. Sovereign credit rating deterioration in Greece and Spain as well as lack of fiscal progress in France and Italy (as demanded by the Maastricht criteria) are set to hamper any exit strategy from the fiscal side.

Meanwhile, the recent pace of improvement in US jobs market has forced a repricing of fed funds expectations to the extent that US 10 year yields have broken away from their German counterpart, pushing the US-GE yield differential to +40 bps (in favour of the US), the highest since July 2007. The resulting withdrawal of liquidity from the Fed, as it modest as it may be, will likely maintain the yield differential in favour of the USD, thereby, offsetting steady energy prices in Q1.

Oil-Euro Break: Deja Vue

Integrating oil into the equation, the weakening of the once highly positive correlation between EURUSD and crude continues, but this time reflecting higher oil & lacklustre euro (instead of rising euro & falling oil during Nov-Dec). The December rally in oil despite the euros selloff has continued into this week and is expected to persist for most of Q1. Such pattern has already occurred in June 2003, January 2004, January 2005 and April 2008. Although oil has yet to break above its $82 high, we expect prolonged advances towards $89.90 by February.

Technically, euro bulls cannot ignore the time-tested fact that monthly downward reversals greater than 4% have led to multi-month declines of at least 15% since the inception of the currency in 1999. The December decline of 5% (biggest since Jan 2008) is likely to reinforce our forecast for $1.37 before quarter end.

USDJPY and GBPUSD remain on course to hit the targets projected in last month’s article. 93 yen is likely to pave the way for 95 but not without interim retreat to as low as 90.20s as the yen regains some short-lived lustre from an upcoming market pullback of no more than 7%. As USD picks up the mantle of next risk aversion from JPY, GBPUSD is likely to accelerate losses towards the $1.57 figure. But broader USD strength will be needed to achieve $1.55.

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Dollar Sobers Up Despite Fed Punch Bowl

Written by Ashraf Laidi
December 19th, 2009 at 12:17 pm

The US dollar builds on its newly acquired robustness amid the FOMCs modest economic upgrade with regards to labour markets and the reiteration of the Feb 1st 2010 deadline as the expiry for the various liquidity operations. Although the FOMC statement maintained the phrase exceptionally low levels of the federal funds rate for an extended period, the overall tone was more than sufficient for the greenback to extend its upward trajectory, especially amid the rapid concentration of Eurozone-centric credit and banking problems cast a pall on the non-USD block.

Considering that the balance of recent US data has tipped in favour of the US (employment, retail sales and CPI), dollar bulls will content themselves with the slightest of modest of hawkish/ commentary from the Fed. Wednesdays FOMC statement was a simple step in the Feds challenging task of normalizing liquidity and credit markets amid an environment of rising yields and consolidating equities.

The combination of negative event flow in the Eurozone, year-end window dressing operations reducing USD shorts and a USD-favourable yield gap will prolong USD gains into mid Q1 2010, especially amid no prospects of a fast resolution in the Eurozone sovereign problems. Consequently, EURUSD hit the $1.4280 target issued at the Dec 10 HotChart after the pair exceeded the magnitude of its 2 prior down cycles. $1.41 should likely emerge as the next support level, but $1.38 appears to be a sturdier foundation.

USDJPY Eyes 93

It is time for JPY to take a temporary a break and allow the USD to draw most of the risk aversion plays at the next round of risk pullback. Two weeks after the Bank of Japan was pressured by the MoF to inject extra liquidity aimed at stabilizing yen strength, the central bank today altered its definition of price stability to include only positive price growth, instead of the previous definition of zero-2% annual growth. By announcing its intolerance for flat consumer price prices, the BoJ is set push against a resurgence in yen strength.

Accordingly, we would expect USDJPY to regain 92.50 until it encounters the next resistance at the 2 year trend line on the monthly chart below. Subsequent pressure point emerges at 95 before we could see a gradual turn in the pair near February. Were not yet abandoning our 5-year approach on the cyclical lows in USDJPY and so it is too early to call the bottom of USDJPY.

Sterling to Regain Whipping Boy Status in 2010

Just as liquidity withdrawal may become the buzzword of 2010, the UK economy and its currency could fall victim to an excessive reduction in stimulus. The Bank of England has already signalled its intentions to not add any more quantitative easing, the UK Treasury plans spending cuts, the VAT hike is levied in January, the scrappage incentives for used cars expires in February and the May General Elections promise to be a close race.

None of these developments are set to favour GBP or the UK economy which has yet to recover from recession. Sterling risks regaining its status as the whipping boy of FX in 2010 as these vital dosages of oxygen are removed from a still tepid economy. The 200-day MA of $1.60 is the next target for the bears over the short term, while $1.55 is seen as the next medium term average for GBPUSD after the $1.70 figure continues to hold above the monthly closes since October 2008.

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Oil Weakness May Intensify

Written by Ashraf Laidi
November 21st, 2009 at 3:20 pm

FTSE at 3-month highs). Could relative strength of US equity indices be the product of currency weakness and not much more? We have already raised the S&P500s recurring failure to recover 50% of the decline from the 2007 record high to the 2006 low (1,120). The equivalent 50% retracement for the Dow stands at 10,335, which was broken on Mon, Tues, Wed but has yet to do so for the week (on Friday).

A weekly close below the 10,335 in the Dow, below 1,120 in S&P500 and a confirmed downtrend in oil (close blow $79 and 5^th straight weekly lower high), would establish markets fading dynamic for risk appetite. This was already established on the currency side, amid the protracted yen strength. We warned last that yen strength would continue outperforming the much-talked-about-USD strength by pundits. Deepening weakness in oil and equities would help stabilize USD (instead of propping any major rally beyond 7%), but JPY will continue to show the greater rebound, Subscribers to our Intraday Market Thoughts are kept informed of the periodic shifts in risk appetite and the interpaly between the USD dollar and Japanese yen in drawing risk aversion flows

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FX, Oil Eye Equity Inflection
Written by Ashraf Laidi
November 3rd, 2009 at 4:51 pm

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. EURUSDstill 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 3^rd paragraph of statement) would prove positive for USD, JPY at the expense of equities, bonds and oil.

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 21^st, 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.

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.

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Parameters in Equities, Oil
Written by Ashraf Laidi
October 28th, 2009 at 7:32 am

Last week’s oil price break above $75 was an essential catalyst in accelerating the pace of USD selling beyond $1.50 in EURUSD, 0.93 in AUDUSD, and 1.03 in USDCAD. Technically, the next oil barrier emerges at $82.00 (100-week MA), a break of which would extend the rally towards $89.90. Coincidently, US equity indices also face their next resistance at the 100-week MA (1,100 for S&P and 10,209 for the Dow). But a more important landmark for the S&P500 stands at 1,121, which marks the 50% retracement of the decline from the October 2007 high to the March 2009 low.

Recall how oil prices repetitively failed to break its 200-week MA of $75.70s in August and September until recurring dollar weakness (hawkish central bank outside US) empowered oil traders to breach the key level. The simultaneous technical resistance in both of these high profile instruments (US crude and S&P500) may well dissuade the accumulation of fresh risk appetite. And Wednesdays downgrade of Wells Fargo may have been instrumental in stepping up trading volumes in a down day. But the only viable means for dollar bulls to see hope again is the implementation of the exit strategy. Short of such implementation, earnings disappointments and/or negative guidance, FX traders will see little resistance to selling the dollar.

Fed Ought to Stop Talking About the Dollar

Federal Reserve officials should either get the same vigorous training when making statements about the US dollar or completely refrain from taking about it, and allowing the US Treasury exclusive authority to comment on the currency.

For the second time this week, a member of the FOMC causes more selling in the dollar after choosing to shed light on the US currency to the public. 30 minutes ago, Boston Feds Eric Rosengren (not a voting member in this years FOMC) said the decline of the dollar reflected investors improved confidence with the economy and their resulting appetite for risk. While such remarks are no more than a stating of the obvious as far the current FX market dynamics, they constitute an overt green light to sell the currency, especially when uttered by policymakers of the interest-rate setting body of the US.

On Monday, Chairman Bernanke may have intended to support the dollar when he raised the importance of timely exit strategy, but the way he went about it had the opposite effect. Bernanke said adopting a fiscal exit strategy “is critically important in order to maintain confidence in our economy and confidence in our currency”. So far, the Fed has made it clear it would not be exiting its monetary policy strategy any time soon (aside from talk about reverse repos). Bernanke’s speech placed the onus on the Treasury as far as fiscal policy is concerned.

And since fiscal tightening by the US Treasury is not expected any time soon, traders easily conclude that the lack of any exit strategy (fiscal or monetary) will empower them to retest last year’s all time lows in the greenback.

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Dollar Stabilization & Stock/Gold Ratio
Written by Ashraf Laidi
July 28th, 2009 at 4:21 pm

Dollar weakness has been excessive…at least for now..

The overnight wave of dollar selling was mostly led by a fresh wave of buying in commodity currencies (rather than only rising equities) courtesy of +$70 in crude prices and hawkish comments from the Reserve Bank of Australia raising the possibility of rate hikes before a peak in the unemployment rate. Markets were already expecting the RBA to raise rates by 25 bps by year-end. Todays comments further boost the long term viability of the currency. But current US dollar weakness shows to have grown unsustainable considering the related expansion in risk appetite and the lack of unjustifiable data developments in the Eurozone, UK, Canada and New Zealand–and not to mention recent rhetoric from central bankers and finance Ministry officials to jawbone the latest strength in their currencies. Accordingly, we cannot ignore the flattening momentum in G-5 equities over the last 3 sessions, which is beginning to appear similar to the period prevailing in the first week of June.

The Dollar Index (basket against 6 currencies with EUR accounting for 57% of the basket) has tested the June lows at 78.31, a break of which would be the lowest since December. We should once again expect to hold at 78.25 — the 61.8% retracement of the rise from the 71.29 low to the 89.50 high. The fact that dollar weakness occurred despite a flat Tuesday close in the Nikkei underlines the prevalence of the sell-USD status quo, which was magnified earlier by hawkish comments from the RBA. But its time for a corrective bounce again.

Current price action suggesting unsustainability of further USD weakness reflected in the lack of follow-through in EURUSD, and GBPUSD, as market remains unwilling to close at its intraday highs (trend of past 7 sessions). Throughout last week, we addressed the failure by these currencies to close at or near their intraday highs, a recurring trend that began to suggest unsustainability in these rallies.

Thus, the equivalent of the 77.90 support in the dollar index translates roughly to $1.4320 in EURUSD resistance, $1.6570 in GBPUSD resistance, 0.8360-70 in AUDUSD and 0.6650 in NZDUSD, all of which are expected to hold into first week of August. Prior to this morning’s US data release we asked in our Intraday Market Thoughts (08:30 ET) “If equities hardly managed a rebound despite a sharp increase in US new home sales, then what would they do in case of renewed decline in S&P/Case Shiller home price index and US July consumer confidence”. Indeed, consumer confidence slumped to 46.6 in July, even at a time of rallying equities. We remind that the June 30th release of the June consumer confidence coincided with the intermediate peak in equity indices before a 6% decline occurred in the ensuing 2 weeks.

How Much Beyond Parity in S&P500/Gold Ratio?

One week after the S&P500/Gold ratio rose to parity, the equity index has garnered further ground to hit 1.03, its highest level since January. The daily chart below shows the rising S&P/Gold ratio to be a result of the superiority of equities vs metals in March. But as the Fed began purchasing US treasuries in April, inflationary concerns stemming from a potential debasement of the US currency prompted capital into metals. The broadening advances in global risk appetite of the past 4 months have prompted gains in both gold and equities, leading to a consolidation in the equity/gold ratio.

The only viable means for the equity/gold ratio to regain its 2008 highs (S&P/Gold regains 1.10), would be for the Fef to begin withdrawing liquidity (exit strategy via selling back treasuries) without upsetting equity markets. At the present macro juncture, this is highly unlikely for at least the next 2 months. Only when unemployment has shown clear signs of peak and GDP growth emerges from slowing decline to positive growth, would a rally in equities be sufficiently strong to overcome a tighter monetary policy.

For now, with equities being overstretched in terms of valuations and nonsupportive macro climate (excessive emphasis on cost-cutting rather than revenue growth), a gradual retreat in stocks and metals is the more likely course into end of Q3. But the ensuing retreat in gold may not breach below the 880 level considering the escalating fiscal imbalances in the US Federal Govt as well as the individual States. Thus, we expect the recent ascent in equities relative to gold to be nearing its peak, without exceeding 1.05 in S&P500 / Gold, 9.5 in Dow30 / Gold, 1.7 in NASDAQ100 / Gold and 4.8 in FTSE 100 / Gold.

For a multi-year study on the 40-year cycles in Equities/Gold ratio, see our Forex & Intermarket Dynamics Workbook

[tags]2008, AUDUSD, Australian Dollar, British Pound, Commodities, Euro, EURUSD, Federal Reserve, GBPUSD, GDP, Gold, Inflation, Monetary policy, Moving Average, New Zealand Dollar, NZDUSD, Rate hike, Risk appetite, S&P500, Stocks, U.S. Dollar, Unemployment[/tags]

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Gauging the Bounce in Appetite
Written by Ashraf Laidi
July 17th, 2009 at 2:51 pm

The explosive surge in risk appetite following the earnings blowout from Goldman and Intel is posing serious threat to the validity of the Head-&-shoulder formations in the S&P500 and the Dow30 at the 8.600 and 930 levels, supporting the case for protracted rebound in equities and overall risk appetite. But Thursday’s bigger than expected decline (first sub-500K reading in 4-week moving average in 5 months) failed to prolong the rise in stocks and bond yields. Unexpected deterioration in the July Philly Fed index to -7.5 from Junes -2.2 and news of an imminent [tag]CIT bankruptcy[/tag] are preventing the positive impact from [tag]Jobless[/tag] claims and JP Morgan earnings.

As spectacular as Wednesday’s US rally appeared to be, equally notable was the lack of follow-through in the Thursday Asian session (+0.8% in Tokyo, flat in Bombay, -0.3% in Moscow and +0.6% in HK). The CIT news was the culprit. But also bear in mind that the [tag]VIX[/tag] did close higher (first rise in 4 days) despite the S&P500s highest daily increase in 2 months. This may have been partially explained by the fact that the VIX had hit its lowest since September 10 and as equities neared key resistance levels, call buyers stayed on the defensive.

EURUSD did break above 1.4120 to 1.4165, now eyeing $1.4198 high– 76% retracement of the $1.4338-$1.3744 decline. While the data are negative for both USD and JPY, USDJPY remains below 93.80s from earlier session high of 94.44.

GBPUSD follows on the back of overall [tag]USD-weakness[/tag], looking to test the $1.6520s, but its relative weakness to [tag]EURUSD[/tag] cements EURGBP support at 0.8550 and renews prospects for regaining the 0.8630 resistance. USDJPYs rebound extended its post-91.70 predicted last week, but topped out at the 94.40s, which is the 50% retracement of the 96.97-91.78 decline.

[tag]Risk Appetite[/tag] Probes Trend Line The charts below illustrate the risk-driven gains in [tag]AUDJPY[/tag] and [tag]NZDJPY[/tag], currency pairs with consistently the highest positive correlation with equities (+0.7 year-to-date). Accordingly, these currency pairs, along with emerging market indices such as the Morgan Stanleys Emerging Markets index, are leading gauges of global risk appetite. Despite their falling trend lines, AUDJPY, NZDJPY and EM have yet to breaching above their resistance levels, signalled at 77.00, 62.00 and 770 respectively. Other pairs, such as [tag]AUDUSD[/tag], [tag]NZDUSD[/tag] and [tag]GBPJPY[/tag] remain capped at 0.81, 0.6520 and 155.70s respectively.

[tags]AUDJPY, AUDUSD, Australian Dollar, British Pound, EURGBP, Euro, EURUSD, GBPJPY, GBPUSD, Gold, Moving Average, New Zealand Dollar, NZDUSD, S&P500, Stocks, U.S. Dollar, Unemployment, USDJPY, Yen[/tags]

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Dollar Stability Choppy & Temporary
Written by Ashraf Laidi
July 7th, 2009 at 12:22 pm

July 6, 2009 by Ashraf Laidi

Sterling leads the list of currencies losing against the dollar and yen amid widespread expectations the Bank of England will exercise its quantitative easing expansion option by purchasing an additional 25 bln in assets without seeking govt approval. Concerted selling in emerging market bourses further elevates the risk-aversion lustre of USD and JPY. Oils $10 decline from last weeks $73.30 highs is partly provoked by the discovery of inappropriate trades being behind the buying. Reduced risk appetite & latest forecasts reports of falling global oil demand are further enforcing the positive correlation between equities and oil, thereby, weighing on commodity currencies. Chief among them is the CAD and NOK, with USDCAD firmly in its 4-week up-trend, targeting 1.1770, followed by 1.1810. USDNOK faces more substantial obstacles at 6.7.

But any dollar advances could intensify in the event that a deleveraging ensues on the commodities front as well as in commodities currencies (via renewed cenbank dovishness and currency jawboning). We cautioned 4-weeks ago that eroding risk aversion was key for any recovery in the greenback. In charting medium term for the risk appetite, the dollar and its most popular government bond, the chart below shows the 2-year progression of the interaction between US crude and US10-year yields. The latest upleg for both yields and oil is expected to sustain a retreat amid a lack of follow-through in recent data improvement as well as the pullback in equities. We could see oil to reach as low as $51-52 before end of summer, while 10-year yields could test the 3.15-20% territory before a gradual consolidation and renewed rebound emerges in Q4. Concerns with escalating Treasury borrowing will remain, but these will be temporarily outweighed by falling equities and weak data, which (temporarily) will play to the favour of bond prices at the expense of yields.

We stick with our bearish stance on USDJPY, reiterating the call for a break of 94.90 and onto 93.80. The lose-lose scenario for the pair has been especially highlighted by the yens broad strength during risk aversion and the dollars vulnerability at each bout of neutral-positive risk positioning. EURJPY faces relatively higher level of support at 133 yen, backed by 132, while GBPJPY clears the way for a break towards 150.20.

Vocal reminders by Chinese officials are expected to broaden (ranging from bureaucrats, central bankers and academics), which will limit any concerted dollar buying. Such remarks go beyond just political posturing. China has started the building blocks of boosting its currency via improving its invoice currency status, after which it will move towards garnering world liquidity for its currency and eventually liberalizing capital flows. China may not have the economic bargaining power to pullout of US treasuries, but it is increasingly accumulating short-term term maturities–already a vocal sign of aversion to the currency. Just as some Washington insiders shrugged my warnings from 3 years ago about Japan reducing its holdings of US treasuries, these are now well below those of China’s. The same voices are now stating that China has nowhere to go. Let’s pay attention to maturities and not just quantity.

Euro fares more robustly amid the ECB’s reluctance to expand its credit easing operations and its renewed calls for commercial banks to pass on lower rates. Any break below $1.3730s requires further escalation in risk aversion and greater sell-off in oil prices. Euros relative strength has propped EURGBP past the 0.8630 resistance, calling for 0.88 as the next focal point. GBPUSD is now vulnerable to the $1.5940, below which emerges support at $1.5770.

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Green Shoots Fatigue & Intermarket Setup
Written by Ashraf Laidi
June 29th, 2009 at 2:59 pm

June 29, 2009 by Ashraf Laidi

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:

(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

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