Aside from Apple (AAPL) shareholders, this has been a good week for most equities, the Japanese yen (FXY) British pound (FXB), and Canadian dollar (FXC) shorts, and euro (FXE) longs. As we move toward the end of this week's trading, we wonder if there will be follow through next week.
The euro got a boost today from several sources. At Davos, George Soros said he sees the euro strengthening. Possibly, but the opinion of a cagy veteran is a poor trading tool. Since he is regarded as a currency guru, though, people do listen, however, old George is not going to announce to the world when the move is over. And how do you know that he is not trying to talk the market higher so he can short it?
More importance can be credited to a report showing the amount of repayment by European Banks of funds they had borrowed from the ECB. There had been almost a €1T euros loaned by the ECB beginning in December 2011, and again in February of 2012. The market had anticipated initial repayments would be €84B, but it was announced that €137.2B would be repaid.
Some analysts are saying the sizable early return of the money is a sign the bank and liquidity crisis has been resolved, but as the U.S. ESPN sports announcer says, "Not so Fast." This can be looked at two ways. The banks may be returning the money, which costs them the ECB bank rate of .75%, because there are currently no opportunities to lend the money at a premium to that rate, and their capital requirements are satisfactory. We also need to review where the money is being returned from. Should repayments all be from the creditor nations in the north, and none from the peripheral countries, this seems to suggest the bank debt problems have not been resolved.
There will also be some meaningful reports toward the end of next week. We do get, on Wednesday, the U.S. Quarterly GDP estimate. The last quarter was a 3.1% increase, but the estimate for the 4th quarter is a positive 1.2%. I am inclined to think the number will be larger than 1.2%, as business activity may have been enhanced ahead of the widely anticipated tax hikes in 2013.
The Friday U.S. Non-Farm Payroll report, always a market mover, is anticipated to be 155K new hires. On Friday, we also get both the EU unemployment number, anticipated to be 11.9%, and the U.S. number, anticipated to be 7.8%. The 4% difference in the employment rates may dampen some of the euro bulls' enthusiasm. It should be a lively trading week.
The sell-off on Tuesday and Wednesday turned out to be a bear trap. Various comments from Japanese officials seemed to provide some market guidance for the "proper level" of the yen. Officials claim they would be pleased if the level the yen was trading was around 100 to the USD.
Angela Merkel joined the chorus of complainers about the depreciating yen, which included the Russians and the South Koreans. Other Asian exporters, especially, will be harmed by the yen weakness.
Looking at the longer-term weekly chart, (USDJPY FXY) in June of 2007, the USD was worth 1.24 yen and then depreciated to .75 when the specs wrongly decided the earthquake tsunami disaster would be bullish on the Japanese economy. (See "So Now Earthquakes are Bullish on a Country and its Currency".) Currently the weekly RSI, over 82, is up in the sky, however, there seems little resistance. The 91 handle has been conquered, so the next resistance may be around 94. You would think the market is due to consolidate, but this is a powerful move. It is always best to ride a horse in the direction he is going.
The bear news in the pound continues. This morning's latest quarterly GDP number was announced, -0.3% worse than the expected -0.1%, and down from the + 0.9% in the previous quarter. This makes the year to year comparison unchanged at 0%.
Commenting on this report, Bloomberg said:
"The U.K. has recovered only half of the economic output lost during the 2008-2009 recession as inflation outpaces incomes, government spending cuts bite and the euro-region crisis saps demand in the biggest market for British goods.
While the U.S., German and Canadian economies are back above their pre-recession levels, U.K. GDP was 3.3 percent below in the fourth quarter -- only Italy is further behind among Group of Seven nations. It means Britain remains mired in its longest peacetime slump of any since 1920, according to the National Institute of Economic and Social Research.
The lack of growth is making it harder for Chancellor of the Exchequer George Osborne to cut the budget deficit as corporate profits and the taxes they generate come under pressure. The economy has grown just 0.5 percent since Prime Minister David Cameron's coalition took office in May 2010."
With the heavy snow fall in much of Britain hindering business activity, analysts fear the current quarter will show negative growth. If so, this would result in the third recession in five years in Britain. Most of next week's report in the pound are of lesser importance though the UK. Manufacturing PMI comes on Friday, and it is expected to remain barely above the 50 level.
Looking at the weekly chart for the GBPUSD, (FXB) this week's action has taken out the apex of the M formation at 1.5825. This should set up a move to the 1.55 handle. In the COT reports, we have noticed the specs have been consistent pound longs. This has been perplexing, as the market has been punishing them.
Something changed yesterday. The open interest in the futures went up in a down market. Usually, this is a bearish sign. We doubt the pound will be a rocket shot down like the yen, but we will be looking for a sell spot next week.