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Clive Corcoran
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Clive Corcoran has been an independent trader, on both sides of the Atlantic, for more than 20 years. In recent years he has been engaged as a course developer and tutor, providing international executive education workshops and individual mentoring. He is also an FSA registered adviser and... More
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  • Will The US Dollar And S&P 500 Remain Inversely Correlated?

    The chart below showing correlation between the US dollar index and the S&P 500 is cited as confirming evidence by Joe Wiesenthal to substantiate his claim in the modestly titled article (click to enlarge)"The Most Important Dollar Chart In The World Is Saying That The Economic Crisis Is Finally Over" (capital letter emphasis is in the original)

    Here's the reasoning for Wiesenthal's view that everything is now fixed:

    That's because during the crisis years, when people were in panic mode, they would rush to hold safe-haven dollars, dumping everything else. And then when they were panicking less, they would step out of dollars, and buy other stuff. But the chart above means the crisis is coming to an end, or has come to an end. There's no longer this phenomenon where the dollar represents something you hold when you're panicking about everything else. You can buy stocks, and also feel eager to hold dollars.

    Not wishing to be a party pooper for its own sake, but let's try out another scenario where the US dollar continues to strengthen and it is entirely in accordance with the inverse correlation between US equities (and other risk on assets) and the USDX. Since 2008 central bankers have added more than $10 trillion to their balance sheets and have been virtually giving money away. The largest single systemic threat ahead of us (not in the rear view mirror) is the cessation of such a super generous monetary policy - the so called exit strategy problem.

    The trigger for a new financial crisis might not even require an announcement by the Fed that they plan to begin a selling program of UST's - as suggested here but simply a recognition by the markets that the Fed will no longer be topping up the punchbowl. In the Alice Through the Looking Glass world where bad news has been good news for markets for so long, a strengthening US economy and a stronger US dollar could well lead to a sell off in risk assets as the Fed will be hard pressed to find new measures to prevent chaos in the Treasury market, even if that does require higher interest rates.

    It's even conceivable that the Fed could continue to buy UST's and ratchet up short term rates at the same time...not something that may have been already "discounted".

    Mar 08 11:42 AM | Link | Comment!
  • Reasons To Be A Long Term Dollar Bull

    Back on February 8th I suggested here that there was convincing technical evidence that the US dollar was emerging from a basing pattern and that I would expect a steady increase in the value of the US currency against a basket of currencies over coming months.

    The technical picture is improving although the dollar (and DX futures contract) may be temporarily over bought. The weekly chart for the futures contract shows that there is a clear triangular pattern from which an upside breakout would confirm that the basing pattern has been completed and again from which there could be an enduring (lasting perhaps years) and perhaps vigorous dollar rally.

    (click to enlarge)

    Several other factors would lend support to the technical pattern and point to a key turning point for the US currency and I shall list them with only minor comments

    <li> The US was the first in to QE in an aggressive fashion and the underlying economy in the US may be the least ugly sister of the major economies in the world. This would suggest that while the Fed will almost certainly maintain its very accomodative monetary policy the tide may be turning towards a more "normal" policy within the next 24 months.

    (1) The Europeans have not undertaken any meaningful structural changes to the Eurosystem's architecture despite the relatively calmer conditions for the single currency since Signor Draghi's "we'll do whatever it takes speech" of last July. Macro economic conditions within the EZ continue to weaken and there has been no real progress on the required structural and political changes which would ensure that a currency union has the necessary fiscal architecture to become irreversible as Draghi has claimed.

    (2) Japan seems committed to a policy of debasing its currency to protect its trade competitiveness - a program at which it may or may not be successful and where the yen will most likely drift downwards unless there is a new systemic crisis at which point its risk off status may re-asset itself.

    (3) The conditions under which the Federal Reserve will exit its QE policy are looking murkier and, along with others I am beginning to doubt whether there really is a properly conceived exit strategy to unwind the Fed's multi-trillion dollar balance sheet.

    (4) The Fed is now the largest single holder of US Treasuries, the duration of its portfolio is being extended and the hit to its balance sheet from even a one percent rise in long term rates would be considerable - let alone the havoc that could be created as the Fed tries to find buyers of all the bonds that it would need to sell. The likelihood is that at some point the Fed may taper its purchases of new UST's but refrain from trying to unload its existing holdings and allow these to slowly mature.

    (5) While this vital part of the capital markets would therefore continue to be "manipulated" by the US central bank (creating further distortions in price discovery in other asset markets) it would still be US dollar supportive as there would be a reduced risk of having to sell off legacy debt at distressed prices.

    For these reasons, and for the simple reason that in a more challenging financial environment for other developed markets which seems to be the most likely scenario in the medium term, the US dollar could be embarking on a sustained rally which might stretch out for some considerable period.

    Mar 07 3:35 AM | Link | Comment!
  • Japan And South Korea On The Front Line Of A Currency War

    Following the widespread adoption of "unorthodox monetary policies" it has been apparent for some time to many commentators that central banks have had as a stealth agenda the depreciation of their currencies in a battle for enhanced exports (among other objectives). A Morgan Stanley analyst has now issued a note that the rapid decline of the Japanese yen may have finally galvanized the attention of mainstream analysts to an outright currency war.

    The following comment from the analyst is cited here

    Japanese policy has changed the game: Japan's policy-makers now want to end deflation and reinvigorate investment. Given the export-orientation of Japan's economy, the role of the yen is likely to be much stronger for Japan than the dollar is for the US economy. This creates the risk of bringing into the fray the one, all-important element that was missing before - competitive depreciation. Any further monetary expansion by a major central bank may now prompt Japan's policy-makers to take retaliatory action to weaken the yen. If they do, EM currency appreciation would be collateral damage.

    The adjacent chart depicts one dimension to the consequences of competitive currency debasement. Illustrated is the relative performance of the Nikkei 225, the USD/JPY exchange rate, the EWJ fund which tracks the MSCI Japan Index but which trades in the US and thus includes the currency conversion from yen to dollars (unlike the Nikkei itself which is of course denominated in local currency terms), the KOSPI Composite Index - the benchmark for South Korean equities, and also the iShares sector fund EWY which tracks the MSCI South Korea index (again priced in US dollar terms).

    (click to enlarge)

    One of the most striking correlations in major financial markets is the inverse relationship between the yen and the Nikkei 225 with weakness in the former resulting in strength in the latter. The underlying variable which would explain the very high degree of negative correlation is the conviction that increased competitiveness of Japanese exports will follow as the yen weakens - even more pertinent at present since Japan has moved from a history of surpluses in its overseas trading account to a significant deficit in 2012.

    The Nikkei had a 250 point surge in overnight trading (Jan 30th) and is now above the 11,000 level for the first time since April 2010. Using November 1st of last year as the base date for the assessment of relative performance, the Nikkei has moved up almost 23% while the dollar has strengthened by more than 13% in the same time frame against the yen. Unsurprisingly the EWJ fund - after currency conversion and notwithstanding that the MSCI index composition is slightly different to that of the Nikkei - has registered an almost 10% upward move.

    The currency wars dimension which provides a sharp contrast to positive developments for Japanese stock market investors (both domestic and to a lesser degree non-yen based investors) can be seen in the very subdued performance of equities for South Korea, one of Japan's main trading competitors. In local currency terms the KOSPI has only managed a 2.4% increase since November 1st and for the US dollar adjusted sector fund, EWY, this is barely different with a 4% performance during the equivalent period.

    The EWJ weekly chart shows that the current price has surpassed cloud resistance and the arrows illustrated would provide feasible targets at $10.50 and $11 for more than 5% and 10% profit potentials from current levels. A more adventurous intermediate term strategy, perhaps with lower outright risk, would be to consider a long EWJ/short EWY strategy.

    (click to enlarge)

    Jan 30 10:20 AM | Link | 1 Comment
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