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.

Posts by Ashraf Laidi:

ECB Intervention is Inevitable

Written by Ashraf Laidi
May 19th, 2010 at 4:50 pm

The massive 200-pip jump in EURCHF in less than 10 minutes (13:00-13:10 BST) is the work of no other than the Swiss National Bank intervening to sell its own currency. But the 80-90 pip jump in EURUSD must also be the work of European banks intervening on behalf of the ECB to boost the ailing euro. The events of the last 2 weeks imply that coordinated central bank intervention is possible. If it took 2 days for the ECB’s to make an about turn on bond-purchases and for Berlin to institute a ban on naked shorts, then the prospects for intervention are very plausible. If neither the IMF/EU/ECB plan nor the Berlin announcement succeeded in alleviating selling on the single currency, coordinated central bank intervention must be utilized to at least slowdown the pace of the decline. While this is unlikely to reverse the slide in the euro, it will help resurrect a 2-way market in the currency and slow down the damage.

Euro Longs to Remain Naked

Unless the German ban on naked CDS shorts is instituted on a European or global level, its effectiveness will come up short. Unlike equity markets, credit default swaps are traded privately, and not on exchanges. And the fact that the bulk of these markets are in NY, the German ban will do little to prevent shorts from trading outside German shores. Also, according to the Deposit Trust & Clearing Corp (CDS clearing agency), outstanding CDS on most Eurozone sovereign debt does makes up less than 10% of the entire CDS market, estimated at $11 trillion. Chancellor Merkel’s unilateral ban is an ad-hoc measure that partly aims at containing her declining popularity following her Party’s defeat at last week’s regional election. Unless similar measures are adopted by the France, UK and US, these will prove to be no more than desperate politicians waging a losing war against speculators.

High Yielder, Highest Loser Down Under

It is NOT the euro that is the biggest loser since Tuesday’s close, but the Aussie, followed by the Kiwi and the Swedish Krone. The Aussie falls victim to its own success of higher yields, which are especially under scrutiny after the RBA hinted at a pause in its tightening cycle two weeks ago. We warned in our May 11th piece “Endangered Aussie Carry” that the latest sell-off in global equities has begun to unwind one of the few remaining carry trades in the non-emerging market FX space; AUDUSD and AUDJPY drop 3.8% and 5.4% respectively.

The technical significance of last night’s break below 0.8580 implies further selling of another 5% from current levels. The 0.8580 low was held in Sep-Oct 2009 as well as in Feb 2010. Last night’s failure implies a decline to as low as 0.80 and 0.78, especially if no close above 0.86 is attained this week.



Gold vs. other Commodities

Gold is finally responding to a broad sell-off in commodities. This was not the case on May 6 when the 9% intraday plunge in equities saw gold shrug off selling in copper, crude and natgas. The latest 24-hours are seeing less resiliency in gold, as the risk of deteriorating equities could force some managers into selling their winners (accumulated gold gains) to meet their widening gains. If the aforementioned suspicions of coordinated euro buying by the central banks are confirmed, traders could begin unwinding of their GOLD/EUR shorts, thereby, exacerbating the recent selling in GOLD against other currencies. Gold drops 3% against EUR from its €1,010 record high. Further pullback towards €960s could call up $1,165-70, followed by $1,120.





Charts, Commentary, Currency, Data-Based Indicators, Dollar, Economic Statistics, Foreign Markets, Market Indicators, Market Sentiment, Markets, Precious Metals | No Comments

1999 and 2010 Similarities in USD, Euro

Written by Ashraf Laidi
May 4th, 2010 at 3:13 pm

Starting the month on a high note, the US dollar index could be in for the 6th consecutive monthly gain, which was last seen in Jan-June 1999. Similar to today, 1999 was characterized by contrasting growth prospects between the US and Eurozone as well as escalating doubts with an overvalued euro, high ECB interest rates, and a Germany still reeling from the Asian crisis. (see chart below).

The other 2 striking similarities are the outperformance of US equities relative to their European counterparts as well as the anticipated Fed tightening to occur before that of the ECB. In 1999, the ECB was forced to cut rates in April, followed by a Fed rate hike 2 months later. Today, the Fed is signalling policy normalization (looking to sell assets, raise discount rate, concluded asset purchases), in contrast to the ECB, whose decision to suspend minimum credit rating requirements for Greek govt debt used in ECB liquidity operations comprises a de facto easing.



On the equity side, S&P500 and Dow-30 are +7.8% and +6.9% respectively, while the Dax-30, CAC-40, FTSE-100 and MSCI-Euro are all in the red at -5.2%, -1.11% and -4.8% respectively. These losses would be exacerbated by at least 4 percentage points if the USD returns were used instead of local currency returns.

USDX Focus Considering our expectations for $1.30 EURUSD before quarter-end (this has been our position since February and $1.27) before end of Q3, USDX carries momentum to make it past the 84 figue. That is especially given robust momentum in USDJPY, which is seen testing 97 along the same period. If the USD index sticks to its historical inability to rise for 7 straight months, it would mean that June could be a down month.

Super Thursday: ECB Decision/Press Conference & UK Elections

Neither the highest manufacturing UK PMI in 14 years, nor diminishing chances of a hung parliament to the favour of a Tory majority are sufficient to boost the pound against USD. Those planning to trade GBP around Thursdays elections are cautioned that Thursday will be driven by the much anticipated ECB press conference, where JC Trichet will have to explain the controversial decision to abolish minimum credit rating requirements for Greek govt. debt used in ECB operations. There is even talk of a surprise decision by the ECB to purchase bonds, in which case will magnify the contrasting policy directive between the US and ECB.

As the early exit polls will be released after 21:00 GMT Thursday, this means FX activity in GBP will escalate after NY Thursday close and into Friday Asian trade. The usual calm before the Friday Non-Farm Payrolls storm may not take place partly due to the volatility and recurring rumours on the election outcome. As it stands, chances of a hung parliament have fallen to 52% from the 62% reported 2 weeks ago by Betfair.com. Such an outcome is suggested by a Tory majority, which should be a definite positive for GBP. But the question remains: How early in the day will such an outcome be revealed? Thats what readers of this website and my followers on twitter will be getting on an continuous intra-day basis. http://twitter.com/alaidi GBPUSD bearishness must close below the $1.5120 support in order for any realistic chances to break into the $1.50 figure. Any election-driven upside surprise could see gains limited at $1.5380, but $1.55 remains a stubborn obstacle, drawing fresh offers back into $1.5070. In the event that neither major party succeeds in winning majority (hung parliament), fresh losses could drag GBPUSD towards $1.47 into the following week, especially if such an outcome proves to be a close call.

Click here for reminder of our warning on S&P500, Dow-30 and the signal from the Baltic Dry Index.



Bonds, Charts, Commentary, Dollar, Interest Rates, Markets | No Comments

Baltic Dry Index Peaking Impact

Written by Ashraf Laidi
April 20th, 2010 at 1:32 am

The 1-month lag between the Baltic Dry Index and selected commodities strikes again. The BDI, a daily index of shipping costs of dry bulk, is often seen as a leading indicator for raw material demand, hence a precursor for global production dynamics.

On March 15, the BDI hit a 3-month high at $3,574. 4 weeks later, US crude oil hit an 18-month high of $87.09/barrel, copper reached a 17-month high of $8,000/tonne and gold hit a 4-month high of $1,169 /oz. Both copper and oil peaked out on the same day (April 6th), while gold topped out 3 days later.



This was not the first time that BDI peaks preceded dry and liquid commodities by 4 weeks. The chart below shows the same pattern occurred in November 2009 and July 2008. There was no identifiable time lag in the BDI peak of June 2009.

The economic rationale for such time lag could be explained by the notion that production-targeted demand for commodities starts to turn prior to a retreat in the speculative element of these commodities. Thus, global factory demand starts to ease, so will shipping capacity for hauling raw materials and eventually their price in organized exchanges. I recognize that such analysis may be a little too simplistic in that it ignores the supply factors of these cargos, yet the general rational remains valid.

Integrating the China factor into the BDI equation, we recall that the April peak in copper coincided with reports that Chinas surging demand may have reflected stockpiling than actual integration into the building cycle. Looming measures of policy tightening from Beijing (curbing property prices, higher reserve requirements, upcoming rate hikes and loan restrictions) as well as the dampening effect of the anticipated currency revaluation on the economy will further dampen infrastructure spending and industrial capacity. And since Chinas March record imports were instrumental in producing the first monthly trade deficit since 2004, the pressure is on to cool down.

The 1-month lag has started to take effect after the recent sell-off in oil (-5%) and gold (-3%). If more commodities selling is on the way, then equities could surely follow.

S&P500 and Dows Failures.. So far

The charts below illustrate both the DJIA and S&P500 have failed to cross above their 200-week moving average as well as the 61.8% retracement of the decline from their 2007 record highs to their March 2009 lows. The importance of these two technical levels is underlined by their proximity; hence their confluence, which is an essential element in technical analysis.



The case of the S&P500: Last week, the index peaked at 1,213, which lies below 1,229, representing the 61.8% retracement (rebound) of the decline from the October 2007 high to the March 2009 low. The peak also failed to take out 1,224, which represents the 200-week MA, a popular measure of long term trend.

In the case of the Dow: Last week, the index peaked out at 11,154, failing to take out the 11,232, which represents the 61.8% retracement of the decline from its October 2007 high to its March 2009 low. It also failed to take out 11,133, which is the 200-week MA.

Considering that unusual development that some emerging market indices (Brazils Bovespa and Indias Sensex) have fallen by as much as 4% before the high in the aforementioned US indices, these are due for a correction of 3-5%, which could drag the S&P500 and the Dow towards 1,150 and 10,550 respectively.

The economic impact of the volcanic ash disruption on European airlines is estimated to cost $250 million per day. The European Airlines Association stated the disruption could be unsustainable for some airlines, but no airline has yet applied for any compensation for lost revenues. Setting aside the risk of an EU bailout for airlines, currency markets remain pre-occupied with the medium term (6-9 month horizon) visibility for Greeces ability to meet this years debt obligations and the likelihood of further austerity measures that required to be passed as a condition for any ultimate IMF aid. With $1.3280 having been printed less than 2 weeks ago, the obstacles facing renewed declines towards $1.33 are negligible.



Charts, Commentary, Data-Based Indicators, Economic Statistics, Market Indicators, Markets | Comment (1)

Signals from Commodities & LIBOR

Written by Ashraf Laidi
April 13th, 2010 at 10:52 pm

The impact of interest rate differentials on FX is highlighted by the fact that the correlation between EURUSD and GE-US 10-year yields is now at +0.90, the highest since June 2007. Global bond yields may be rising across the board but the 10-year yield differential between Germany and the US continues to deteriorate for Germany, hitting 3-year lows at 0.73%. These increasingly meaningful differentials will continue to influence FX markets especially after JC Trichet indicated the ECB will extend its emergency collateral rules beyond 2010, while the Fed will conclude its MBS purchases next week. The yield differential story continues to favour the US dollar from both a short and long-term perspective. Aside from the 10-year yield differentials, EUR 3-month LIBOR hits fresh record low at 0.58% while USD 3-month LIBOR advances to its highest since September 2009.

Thus, even if a net creation of +170K US jobs is priced in the market for Fridays March payrolls, the actual materialization would further extend the LIBOR and 10- yr yield trend in favour of USD.



The euro may have rebounded off its $1.3260 lows but all eyes are on whether it will demonstrate another failed rebound as was the case 2 weeks ago (March 17). Even fundamental-oriented traders & strategists are watching the 18-week long downtrend in EURUSD. The trend line helps traders gauge whether any euro rebound marks the beginning of a new uptrend or simply a corrective move. March 17^th was such a day when EURUSD posted an intraday break above the trend line (above $1.38) only to close the NY session well below ($1.3724).





Accordingly, only a Friday close above $1.3550 in EURUSD would represent technical requirement for upcoming stabilization in the single currency. Could the euro manage to break above the $1.3550 barrier on a day when US employment payrolls may show the first net increase since December 2007? The euros failure to meet key technical requirements against the US dollar is also revealed in gold (failed $1127), oil (failed $83) and even the solid Aussie (failed $0.9250), all of which continue to struggle against USD.

FX and commodity traders also take note of the emerging dead-cross formation developing in the CRB-index (index of 19 commodities), whereby the 50-day MA has fallen below the 100-day MA for the first time since May 2009. The last time such a crossover took place was in August 2008, before triggering a 53% collapse.



Charts, Commentary, Data-Based Indicators, Economic Statistics, Market Indicators, Markets | No Comments

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.



Charts, Commentary, Data-Based Indicators, Markets | No Comments

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.



Charts, Data-Based Indicators, Markets | No Comments

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.





Charts, Commentary, Data-Based Indicators, Markets | No Comments

Oil Weakness May Intensify

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

Earlier this week, Asian & European markets showed another failure to respond to Mondays 1.4% gains in US equity indices (Dow & S&P), further highlighting the unsustainability of the gains in indices, which had become increasingly dollar-driven (caused by prolonged USD weakness resulting from Fed officials failed attempts to support it) instead of improved economic figures. Indeed, the absence of further improvement in fundamentals (4-month lows in Oct industrial production, slowing core Oct retail sales and 6-month lows in Oct housing starts) underscores the role of USD weakness as the main driver to higher equities.Yet, while the dollar index hit fresh 15-month lows on Monday at $74.68, oil failed to regain its interim resistance of $80.50 (not even mentioning the year high of $82). Such failure was especially prominent following the higher than expected decline in oil inventory drawdown. Last weeks brief break below $76 underscores the emerging bearishness in the fuel, which suggests a swift renewal of fresh shorts to retest the 75.53, which is the 38% retracement of the rally from the 64.98 low to the 82.06 high. And should the pattern of previous down cycles repeat itself in oil, a steeper decline could be in the woks, likely calling up the 73 handle.

 

Oil’s inability to preserve rallies in the face of USD weakness reflects the lack of sustainability of speculative flows to elevate the fuel as real demand falters (shown by 2 consecutive weekly higher than expected builds in oil inventories). The chart below shows a downward drift in the Oil /EURUSD ratio, resulting from a more rapid appreciation in the euro (more rapid depreciation in USD) than an appreciation in the price of oil. Note how this pattern occurs after a rise in the ratio in October, which emerged as a result of a more rapid increase in oil relative to the rise in the euro. Said differently, oil is losing its ability to respond to USD weakness. Thus, any catalyst driving USD strength (stocks correction, Chinese remarks on commodities or less dovish rhetoric from Fed officials), would especially accelerate oil selling.



Oil’s relative weakness has also been highlighted against equities (S&P500 and Dow), as the equity/oil ratio surged to a 4-week high. Interestingly, US equities have outpaced those in Japan (Dow/Nikkei at highest since Dec 08), UK (Dow/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

 



Charts, Commentary, Markets | No Comments

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.






Markets | No Comments

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.



Charts, Commentary, Markets | No Comments

« Previous Entries