Marc Chandler - Seeking Alpha 'Marc Chandler' Tag RSS Syndication from SeekingAlpha.com SeekingAlpha.com http://seekingalpha.com/author/marc-chandler The Potential Impacts of Dubai's Financial Crisis http://seekingalpha.com/article/175772-the-potential-impacts-of-dubai-s-financial-crisis?source=feed 175772 A storm broke out last week, emanating from the part of the world that is widely seen as a major beneficiary of the rise in oil prices. Yet Dubai’s story is not about oil. Indeed it is precisely the absence of oil and natural gas (less than 6% of GDP) that prompted this emirate go down the path of tourism, hospitality, and commercial real estate development, that lies at the heart of the matter now.
Perhaps it is another case of being tricked by randomness, but it does look the financial crisis in Dubai continues the Tower of Babel curse. Attempts to build the tallest building in the world require such investor euphoria and access to capital that they frequently mark a top of the cycle. Burj Dubai, which was topped earlier this year did not just edge out the former giant Taipei 101, but leapt above it (at 818 meters vs. 509 and 162 floors vs. 101).
Twice Told Tale
It has been clear for some time that Dubai’s opulent construction of an adult play ground in the Middle East was a bit over the top and that its projects were designed for radically different economic conditions. There have been reports of largely empty luxury hotels, unfinished projects, partially built buildings and more difficult credit conditions.
Construction companies, suppliers and foreign workers have reported that the commercial real estate bubble has popped. Earlier this year, Nakheel, the property company owned by Dubai World, which is the chief protagonist, received financial support.
Like the similar reasoning that the US Federal Deposit Insurance Corporation (FDIC) often uses in announcing bank closures after the markets have closed on a Friday, Dubai World’s request for a six month standstill on the servicing of its $59 billion of debt, including a $3.5 billion sukuk (Sharia compliant bond-like instrument) that was to mature in December, while it restructured took place on the eve of the Eidal-Adha religious holiday November 23rd.
The usual lack of transparency, coupled with the region religious holiday and the Thanksgiving Day holiday in the United States, made for extremely thin market conditions and encouraged risk-minimization and defensive actions.
Matters were further complicated by the postponement of a Dubai World press conference and a computer glitch at the UK’s London Stock Exchange, which incidentally but unrelatedly is reportedly a fifth owned by the Dubai.
Many believe that as goes Dubai World so goes Dubai, and expect its larger and richer cousin, Abu Dhabi to exact political concessions in exchange for providing support. Dubai World accounts for roughly three quarters of Dubai’s debt and about half of Dubai’s $25 billion remittances.
There are seven emirates in all that make up the United Arab Emirates (UAE). Dubai’s GDP of roughly $40 billion accounts for something on the magnitude of 2% of UAE’s GDP. Yet what ails Dubai appears to be affecting the UAE as whole. Some reports indicate that nearly half of the $582 billion construction projects are on hold or simply cancelled.
Implications
There are a number of channels by which the events in Dubai can have a material impact on the global capital markets even for those who are not directly exposed. However, we judge the immediate reaction excessive, while at the same time recognizing that the panicked reaction confirms our suspicion that despite (and perhaps partly because of) the rally in risk assets since late March, market sentiment remains fragile and jittery.
First, a review of data from the Bank for International Settlements suggests that outside of the UK, foreign bank exposure to the UAE itself is rather diversified, though as one might have suspected, they are concentrated in Europe. Of the roughly $123 billion UAE foreign obligations, UK banks are responsible for about $50 billion and Europe as a whole almost $90 billion. US banks account for about $10.6 billion, while Japanese banks have just shy of $9 billion exposure.
Trying to drill down to the emirate level and company level are a bit more difficult as the data is hard to find and what is available appears few years old at best. Nevertheless, while a default by Dubai, should it come to that, would be the largest sovereign default since Argentina in 2001, would do the beleaguered banks no favors, it probably will not undermine capital ratios in any material sense.
A second potential impact is on the monetary policy of the major central banks. Central banks in the developed countries for the most part, with the UK a notable exception, are unwinding some of the extraordinary measures associated with the crisis, though for the most part (Australia and Norway are the exceptions) stopping shy of actually raising interest rates. The new albeit mild shock for their troubled banks and, should the heightened volatility in the global capital markets be sustained, would seem to encourage policy makers, in anything, to move slower and more cautiously perhaps than before. We think this is of marginal significance at the moment.
A third potential impact is on the UAE’s peg to the dollar. While the Saudi’s stance toward the dollar peg has been unwavering, the UAE’s central banker has been all over the board. In mid-November, Kuwait’s basket approach was seen favorably as an alternative to the dollar-peg, but late in the month, desire to drop the dollar appeared to have cooled off significantly. The dollar’s peg among the Gulf Cooperation Council, except for Kuwait, is an element of stability and may be marginally less likely to be jettisoned now than before.
Butterfly Effect
Appreciating that butterflies flapping their wings in Rio can impact the monsoon in India, it is possible that Dubai’s financial crisis prompts larger market moves. There have been significant equity market rallies this year and risk assets in general have outperformed. This could be the spark to encourage investors to reduce risk and leverage by taking realizing some profits.
It may also prove to be a distraction. We have identified the vast liquidity that central banks have provided as the key mover of the markets. We have suggested that liquidity more than valuation has driven asset prices this year. And the central banks of the US, Europe, Japan and China do not appear poised to take away the punch bowl for the next several months at least. This driver remains in force.
ECB officials have underscored the importance of this week’s meeting. President Trichet is expected to provide details of what will likely prove to be the last of the 12-month repo operations and some indication of what to expect in the coming quarter. While there would be some benefits to a variable rate repo instead of the 1% fixed rate that government the last two 12-month operations, our contacts report the many ECB officials fear that it could be more disruptive that constructive. We suspect the most likely scenario is for the ECB to replace the 12-month repo operations with six-month repos in the early part of next year.
The euro has established a shelf over the past three weeks or so near $1.4800. A convincing break is required to signal a move to $1.46. Only a break of $1.46 would signal a more significant high may be in place. Just before the weekend, the dollar spiked down below the JPY85 level. Market participants are wary of official action, given the pace and magnitude of the move and unlikely to be particularly aggressive. A move back above JPY88 would help stabilize the tone.
The 5- and 20-day moving average cross over system we often use to help identify the near-term trends made a bearish crossing at the end of last week for the Australian dollar and the British pound. The Reserve Bank of Australia meets this week and it is clearly in a tightening mode having lifted rates at the previous two policy meetings. The most recent economic data has been stronger than expected and Australian dollar’s upside momentum has stalled over the last couple of weeks. We retain a constructive outlook for the Australian dollar, but see enough policy uncertainty over the RBA see it as a risky entry opportunity.
On the other hand, there is much less uncertainty over the outcome of the Bank of England’s MPC meeting. Yet sterling has already fallen five cents from its peak in mid-November and there is a strong band of support in the $1.60-$1.62 area. We do not think fundamentals are supportive for sterling, even though investors from Norway to South Korea may be attracted to some UK real estate investments and there continues to be talk of M&A activity. However, current prices do not look like attractive opportunities to establish fresh short positions.
Disclosure: No positions
]]> Mon, 30 Nov 2009 13:46:50 -0500 Marc Chandler Marc Chandler submits:
A storm broke out last week, emanating from the part of the world that is widely seen as a major beneficiary of the rise in oil prices. Yet Dubai’s story is not about oil. Indeed it is precisely the absence of oil and natural gas (less than 6% of GDP) that prompted this emirate go down the path of tourism, hospitality, and commercial real estate development, that lies at the heart of the matter now.
Perhaps it is another case of being tricked by randomness, but it does look the financial crisis in Dubai continues the Tower of Babel curse. Attempts to build the tallest building in the world require such investor euphoria and access to capital that they frequently mark a top of the cycle. Burj Dubai, which was topped earlier this year did not just edge out the former giant Taipei 101, but leapt above it (at 818 meters vs. 509 and 162 floors vs. 101).
Twice Told Tale
It has been clear for some time that Dubai’s opulent construction of an adult play ground in the Middle East was a bit over the top and that its projects were designed for radically different economic conditions. There have been reports of largely empty luxury hotels, unfinished projects, partially built buildings and more difficult credit conditions.
Construction companies, suppliers and foreign workers have reported that the commercial real estate bubble has popped. Earlier this year, Nakheel, the property company owned by Dubai World, which is the chief protagonist, received financial support.
Like the similar reasoning that the US Federal Deposit Insurance Corporation (FDIC) often uses in announcing bank closures after the markets have closed on a Friday, Dubai World’s request for a six month standstill on the servicing of its $59 billion of debt, including a $3.5 billion sukuk (Sharia compliant bond-like instrument) that was to mature in December, while it restructured took place on the eve of the Eidal-Adha religious holiday November 23rd.
The usual lack of transparency, coupled with the region religious holiday and the Thanksgiving Day holiday in the United States, made for extremely thin market conditions and encouraged risk-minimization and defensive actions.
Matters were further complicated by the postponement of a Dubai World press conference and a computer glitch at the UK’s London Stock Exchange, which incidentally but unrelatedly is reportedly a fifth owned by the Dubai.
Many believe that as goes Dubai World so goes Dubai, and expect its larger and richer cousin, Abu Dhabi to exact political concessions in exchange for providing support. Dubai World accounts for roughly three quarters of Dubai’s debt and about half of Dubai’s $25 billion remittances.
There are seven emirates in all that make up the United Arab Emirates (UAE). Dubai’s GDP of roughly $40 billion accounts for something on the magnitude of 2% of UAE’s GDP. Yet what ails Dubai appears to be affecting the UAE as whole. Some reports indicate that nearly half of the $582 billion construction projects are on hold or simply cancelled.
Implications
There are a number of channels by which the events in Dubai can have a material impact on the global capital markets even for those who are not directly exposed. However, we judge the immediate reaction excessive, while at the same time recognizing that the panicked reaction confirms our suspicion that despite (and perhaps partly because of) the rally in risk assets since late March, market sentiment remains fragile and jittery.
First, a review of data from the Bank for International Settlements suggests that outside of the UK, foreign bank exposure to the UAE itself is rather diversified, though as one might have suspected, they are concentrated in Europe. Of the roughly $123 billion UAE foreign obligations, UK banks are responsible for about $50 billion and Europe as a whole almost $90 billion. US banks account for about $10.6 billion, while Japanese banks have just shy of $9 billion exposure.
Trying to drill down to the emirate level and company level are a bit more difficult as the data is hard to find and what is available appears few years old at best. Nevertheless, while a default by Dubai, should it come to that, would be the largest sovereign default since Argentina in 2001, would do the beleaguered banks no favors, it probably will not undermine capital ratios in any material sense.
A second potential impact is on the monetary policy of the major central banks. Central banks in the developed countries for the most part, with the UK a notable exception, are unwinding some of the extraordinary measures associated with the crisis, though for the most part (Australia and Norway are the exceptions) stopping shy of actually raising interest rates. The new albeit mild shock for their troubled banks and, should the heightened volatility in the global capital markets be sustained, would seem to encourage policy makers, in anything, to move slower and more cautiously perhaps than before. We think this is of marginal significance at the moment.
A third potential impact is on the UAE’s peg to the dollar. While the Saudi’s stance toward the dollar peg has been unwavering, the UAE’s central banker has been all over the board. In mid-November, Kuwait’s basket approach was seen favorably as an alternative to the dollar-peg, but late in the month, desire to drop the dollar appeared to have cooled off significantly. The dollar’s peg among the Gulf Cooperation Council, except for Kuwait, is an element of stability and may be marginally less likely to be jettisoned now than before.
Butterfly Effect
Appreciating that butterflies flapping their wings in Rio can impact the monsoon in India, it is possible that Dubai’s financial crisis prompts larger market moves. There have been significant equity market rallies this year and risk assets in general have outperformed. This could be the spark to encourage investors to reduce risk and leverage by taking realizing some profits.
It may also prove to be a distraction. We have identified the vast liquidity that central banks have provided as the key mover of the markets. We have suggested that liquidity more than valuation has driven asset prices this year. And the central banks of the US, Europe, Japan and China do not appear poised to take away the punch bowl for the next several months at least. This driver remains in force.
ECB officials have underscored the importance of this week’s meeting. President Trichet is expected to provide details of what will likely prove to be the last of the 12-month repo operations and some indication of what to expect in the coming quarter. While there would be some benefits to a variable rate repo instead of the 1% fixed rate that government the last two 12-month operations, our contacts report the many ECB officials fear that it could be more disruptive that constructive. We suspect the most likely scenario is for the ECB to replace the 12-month repo operations with six-month repos in the early part of next year.
The euro has established a shelf over the past three weeks or so near $1.4800. A convincing break is required to signal a move to $1.46. Only a break of $1.46 would signal a more significant high may be in place. Just before the weekend, the dollar spiked down below the JPY85 level. Market participants are wary of official action, given the pace and magnitude of the move and unlikely to be particularly aggressive. A move back above JPY88 would help stabilize the tone.
The 5- and 20-day moving average cross over system we often use to help identify the near-term trends made a bearish crossing at the end of last week for the Australian dollar and the British pound. The Reserve Bank of Australia meets this week and it is clearly in a tightening mode having lifted rates at the previous two policy meetings. The most recent economic data has been stronger than expected and Australian dollar’s upside momentum has stalled over the last couple of weeks. We retain a constructive outlook for the Australian dollar, but see enough policy uncertainty over the RBA see it as a risky entry opportunity.
On the other hand, there is much less uncertainty over the outcome of the Bank of England’s MPC meeting. Yet sterling has already fallen five cents from its peak in mid-November and there is a strong band of support in the $1.60-$1.62 area. We do not think fundamentals are supportive for sterling, even though investors from Norway to South Korea may be attracted to some UK real estate investments and there continues to be talk of M&A activity. However, current prices do not look like attractive opportunities to establish fresh short positions.
Disclosure: No positions

Complete Story »]]> ERO GBB Marc Chandler ECB and BOE: Adding Fuel to the Dollar Liquidity Fire http://seekingalpha.com/article/175306-ecb-and-boe-adding-fuel-to-the-dollar-liquidity-fire?source=feed 175306 The U.S. dollar has been sold off today and the European Central Bank (ECB) and the Bank of England (BOE) have added fuel to the fire. They continue to provide dollars to their member banks, which then appear to turn around and sell them.

While longer-dated dollar repos have largely stopped, the ECB and BOE continue with their one-week operations. The SNB had a dollar auction as well, but no bids were turned in.

]]> Wed, 25 Nov 2009 11:01:31 -0500 Marc Chandler Marc Chandler submits:

The U.S. dollar has been sold off today and the European Central Bank (ECB) and the Bank of England (BOE) have added fuel to the fire. They continue to provide dollars to their member banks, which then appear to turn around and sell them.

While longer-dated dollar repos have largely stopped, the ECB and BOE continue with their one-week operations. The SNB had a dollar auction as well, but no bids were turned in.


Complete Story »]]> UUP UDN Marc Chandler Brazilian ADRs vs. Local Shares: Is the 2% Tax Changing Things? http://seekingalpha.com/article/175302-brazilian-adrs-vs-local-shares-is-the-2-tax-changing-things?source=feed 175302 One of the noteworthy developments in Q4 has been the renewed interest in capital controls by countries trying to manage the flood of portfolio capital. Brazil's 2% tax on purchases of Brazilian stocks and bonds is among the most significant examples.
A number of ADRs on Brazilian companies trade in the United States and often with very good liquidity. When we initially compared the price of the local shares for Petrobras (PBR) and the ADR, we found the ADR pricing did not account for the 2% tax on the local shares.
Subsequently Brazil has announced a 1.5% tax on new ADR issuance. We thought it timely to look again at the ADR/local share performance.
First, returning to Petrobras. The ADRs still are trading in line with the local shares and the 2% tax on foreign purchases of real for local shares is not reflected in the price of the ADR.
Second, we looked at Vale (VALE), one of the the country's key commodity producers. The ADR has been trading at what appears to be a small premium to the local shares, but not 2%.
Third, we looked at the Gerdau (GGB), the steel company. The premium of ADRs to the local shares appears near 2%.
This exercise suggests that for investors indifferent to owning the ADR or local shares that decisions need to be made on a case-by-case basis. Academic work suggests that the ADRs will likely price in the tax over time and that the arbitrage opportunities may close.
Disclosure: No positions
]]> Wed, 25 Nov 2009 10:50:03 -0500 Marc Chandler Marc Chandler submits:
One of the noteworthy developments in Q4 has been the renewed interest in capital controls by countries trying to manage the flood of portfolio capital. Brazil's 2% tax on purchases of Brazilian stocks and bonds is among the most significant examples.
A number of ADRs on Brazilian companies trade in the United States and often with very good liquidity. When we initially compared the price of the local shares for Petrobras (PBR) and the ADR, we found the ADR pricing did not account for the 2% tax on the local shares.
Subsequently Brazil has announced a 1.5% tax on new ADR issuance. We thought it timely to look again at the ADR/local share performance.
First, returning to Petrobras. The ADRs still are trading in line with the local shares and the 2% tax on foreign purchases of real for local shares is not reflected in the price of the ADR.
Second, we looked at Vale (VALE), one of the the country's key commodity producers. The ADR has been trading at what appears to be a small premium to the local shares, but not 2%.
Third, we looked at the Gerdau (GGB), the steel company. The premium of ADRs to the local shares appears near 2%.
This exercise suggests that for investors indifferent to owning the ADR or local shares that decisions need to be made on a case-by-case basis. Academic work suggests that the ADRs will likely price in the tax over time and that the arbitrage opportunities may close.
Disclosure: No positions

Complete Story »]]> VALE GGB EWZ PBR Marc Chandler Why the Dollar is Continuing Lower http://seekingalpha.com/article/175293-why-the-dollar-is-continuing-lower?source=feed 175293 The combination of the apparent resolution of the West LB situation and the FOMC minutes have conspired to send the US dollar broadly lower today.

The FOMC minutes in particular have been seized upon. On one hand, it is unusual for the FOMC to give so much space to a discussion about the dollar. This is, however consistent with what appears to be a stepped up campaign by both Treasury and Fed officials to cite the dollar in an unsolicited way. The ostensible purpose is likely to demonstrate that there is no "malign neglect."

]]> Wed, 25 Nov 2009 10:15:21 -0500 Marc Chandler Marc Chandler submits:

The combination of the apparent resolution of the West LB situation and the FOMC minutes have conspired to send the US dollar broadly lower today.

The FOMC minutes in particular have been seized upon. On one hand, it is unusual for the FOMC to give so much space to a discussion about the dollar. This is, however consistent with what appears to be a stepped up campaign by both Treasury and Fed officials to cite the dollar in an unsolicited way. The ostensible purpose is likely to demonstrate that there is no "malign neglect."


Complete Story »]]> UUP UDN Marc Chandler Greek Troubles Continue to Weigh on the Euro http://seekingalpha.com/article/175152-greek-troubles-continue-to-weigh-on-the-euro?source=feed 175152 The pressures on Greece continue to increase and this fact is reflected in the credit default swaps and the country's interest rate spread over Germany. Indeed, that is a key development in the euro zone over the past month. Greece yields have risen above Ireland, which had been the highest yield in EMU this year. Ten year Greek yields are just below 5%, while Ireland is near 4.75%.
Greece fundamentals are poor. It was lagged going into recession and may lag on the exit. That lag may mean that the ECB may unwind some liquidity facilities before Greece is ready.
As we have noted previously, the new Greek government revealed a much larger deficit that the outgoing government 'fessed up to. The budget deficit this year is near 12% of GDP. The current account deficit was around 14.5% of last year and is fallen this year. The monthly deficit is around 2 billion euros this year, which is about a third smaller than the same period in 2008.
The EU estimates that Greece's public debt to GDP stood at almost 100% last year and will rise to 135% by the end of 2011 without dramatic action.
Some of the efforts of the new government, which had campaigned on a platform to increase spending, to rein in spending, like freezing state worker pay at 2000 euros a month, is meeting stiff resistance.
Greece has moved to shorter maturities to reduce its debt servicing costs, but this will "kick the can" down the street but only until Q2 next year, when Greece will have 18 billion euros coming due.
The new talk on Tuesday suggests that senior Greek officials are meeting with several large Chinese lenders and a possibly a couple of large US banks to either buy Greek bonds in the secondary market or in a future placement.
Why should investors with no Greek exposure be interested in this story?
First, as tensions on the periphery remain high, with Greece just the most acute example, it could influence the timing and magnitude of the ECB's withdrawal of liquidity. When the ECB first offered one-year funding at a fixed rate of 1%, we suggested that in that act of monetary policy lay a fiscal support program on ideas that some of the receivers of the funds would buy high yielding European bonds and interest rate differentials over Germany did narrow, lending credence to our argument. One of the implications of the pressure in the region is that it may favor the ECB replacing 12-month refi operations with a six month operation(s).
Second, the pressure on Greece may spill over to other periphery members. This is not to suggest that Greece or another country will drop out of the euro zone, like "bets" suggested the odds of a country dropping out of the euro zone by the end of 2010 was nearly 1 in 3. Those odds have fallen considerably.
The point is that the euro zone remains a great experiment of monetary union without political union. This coupled with the fact that member countries do not control the euro printing press, like the US controls the dollar press and UK the sterling press, makes it harder to conceive of the euro eclipsing the dollar.
Thirdly, the pressures on Greece may illustrate that the opportunity for strains that were felt sharply during the crisis will not necessarily diminish during the recovery. Inside the euro zone, few countries can compete with German and its ability to resist upward pressure on unit labor costs. Outside of the euro zone, many key trading partners, like the UK, have experienced currency depreciations that adversely impact some euro zone members.
Disclosure: No positions
]]> Tue, 24 Nov 2009 16:17:42 -0500 Marc Chandler Marc Chandler submits:
The pressures on Greece continue to increase and this fact is reflected in the credit default swaps and the country's interest rate spread over Germany. Indeed, that is a key development in the euro zone over the past month. Greece yields have risen above Ireland, which had been the highest yield in EMU this year. Ten year Greek yields are just below 5%, while Ireland is near 4.75%.
Greece fundamentals are poor. It was lagged going into recession and may lag on the exit. That lag may mean that the ECB may unwind some liquidity facilities before Greece is ready.
As we have noted previously, the new Greek government revealed a much larger deficit that the outgoing government 'fessed up to. The budget deficit this year is near 12% of GDP. The current account deficit was around 14.5% of last year and is fallen this year. The monthly deficit is around 2 billion euros this year, which is about a third smaller than the same period in 2008.
The EU estimates that Greece's public debt to GDP stood at almost 100% last year and will rise to 135% by the end of 2011 without dramatic action.
Some of the efforts of the new government, which had campaigned on a platform to increase spending, to rein in spending, like freezing state worker pay at 2000 euros a month, is meeting stiff resistance.
Greece has moved to shorter maturities to reduce its debt servicing costs, but this will "kick the can" down the street but only until Q2 next year, when Greece will have 18 billion euros coming due.
The new talk on Tuesday suggests that senior Greek officials are meeting with several large Chinese lenders and a possibly a couple of large US banks to either buy Greek bonds in the secondary market or in a future placement.
Why should investors with no Greek exposure be interested in this story?
First, as tensions on the periphery remain high, with Greece just the most acute example, it could influence the timing and magnitude of the ECB's withdrawal of liquidity. When the ECB first offered one-year funding at a fixed rate of 1%, we suggested that in that act of monetary policy lay a fiscal support program on ideas that some of the receivers of the funds would buy high yielding European bonds and interest rate differentials over Germany did narrow, lending credence to our argument. One of the implications of the pressure in the region is that it may favor the ECB replacing 12-month refi operations with a six month operation(s).
Second, the pressure on Greece may spill over to other periphery members. This is not to suggest that Greece or another country will drop out of the euro zone, like "bets" suggested the odds of a country dropping out of the euro zone by the end of 2010 was nearly 1 in 3. Those odds have fallen considerably.
The point is that the euro zone remains a great experiment of monetary union without political union. This coupled with the fact that member countries do not control the euro printing press, like the US controls the dollar press and UK the sterling press, makes it harder to conceive of the euro eclipsing the dollar.
Thirdly, the pressures on Greece may illustrate that the opportunity for strains that were felt sharply during the crisis will not necessarily diminish during the recovery. Inside the euro zone, few countries can compete with German and its ability to resist upward pressure on unit labor costs. Outside of the euro zone, many key trading partners, like the UK, have experienced currency depreciations that adversely impact some euro zone members.
Disclosure: No positions

Complete Story »]]> ERO Marc Chandler South Africa: Home to the World's Strongest Currency http://seekingalpha.com/article/174869-south-africa-home-to-the-world-s-strongest-currency?source=feed 174869 The South African rand is the strongest currency as of Monday, gaining 1.87% against the sagging greenback. Several factors are helping lift the rand.

Many are linking the rally in gold to new record highs with the rand's strength. Year to date the correlation between dollar-rand and gold is -18.8%. The euro has been more correlated with gold year to date (26.5%). However, in the last three months, the rand has shown a 60% correlation, eclipsing the euro's 50% correlation.

]]> Mon, 23 Nov 2009 12:45:15 -0500 Marc Chandler Marc Chandler submits:

The South African rand is the strongest currency as of Monday, gaining 1.87% against the sagging greenback. Several factors are helping lift the rand.

Many are linking the rally in gold to new record highs with the rand's strength. Year to date the correlation between dollar-rand and gold is -18.8%. The euro has been more correlated with gold year to date (26.5%). However, in the last three months, the rand has shown a 60% correlation, eclipsing the euro's 50% correlation.


Complete Story »]]> ERO UUP UDN Marc Chandler T-Bills Beginning to Attract More Attention http://seekingalpha.com/article/174854-t-bills-beginning-to-attract-more-attention?source=feed 174854 With U.S. T-bill yields hovering near zero, today's weekly bill auctions may attract more general market attention than usual.

Here is what is going on. Due to the approaching debt ceiling, the US debt managers have reduced T-bill sales. At the same time, the demand for short-term paper is great. First, many medium term investors want to stay fairly liquid, as the liquidity preference has risen given the financial crisis, and because they expect interest rates to rise. Second, the government's guarantee on money market funds ended last month and, while the commercial paper market has re-opened, outstanding CP is still $1 trillion lower than where it was before the crisis. Last week's $30 billion three-month bill sale drew nearly four times more bids. Bids for the $31 bln of 6-month bills were slightly less but with a bid-cover of 3.65 it was still very strong. These bid-cover ratios are historically high.

]]> Mon, 23 Nov 2009 11:31:05 -0500 Marc Chandler Marc Chandler submits:

With U.S. T-bill yields hovering near zero, today's weekly bill auctions may attract more general market attention than usual.

Here is what is going on. Due to the approaching debt ceiling, the US debt managers have reduced T-bill sales. At the same time, the demand for short-term paper is great. First, many medium term investors want to stay fairly liquid, as the liquidity preference has risen given the financial crisis, and because they expect interest rates to rise. Second, the government's guarantee on money market funds ended last month and, while the commercial paper market has re-opened, outstanding CP is still $1 trillion lower than where it was before the crisis. Last week's $30 billion three-month bill sale drew nearly four times more bids. Bids for the $31 bln of 6-month bills were slightly less but with a bid-cover of 3.65 it was still very strong. These bid-cover ratios are historically high.


Complete Story »]]> Marc Chandler Speculators Adjusting Their Currency Positions http://seekingalpha.com/article/174844-speculators-adjusting-their-currency-positions?source=feed 174844 The latest commitment of traders, reported late Friday for the week through November 17th, showed that speculators (non-commercials) had pared back their bets. Given that interest rate differentials remain decidedly dollar negative, sentiment poor and some ideas that the U.S. may be forced to extend either its credit easing or its fiscal stimulus longer than Europe, the pared back positions may clear decks sufficiently to fuel a year end dollar slump short-term players re-establish positions.
This seems particularly true of the euro, where the net speculative long position was cut in half to about 12k contracts. The net long euro position peaked in early October near 51k contacts, but as of last Tuesday was the smallest net long position since early September. Given that there was little change in the second half of last week, and after a review of volume and open interest, the net exposure probably did not change much. A move above last week's high near $1.5016 may force more players to chase the market. There is some talk that the large option structure that "bet" euro would stay between $1.48 and $1.51 may have expired last week, but other contacts report similar positions are still in play.
The net short sterling position was also halved to about 6.5k contacts from 15.6k contracts. This is the smallest net short position since early September. Given the subsequent price action and futures activity, speculators may have already begun rebuild short sterling positions. Speculators have not been net long sterling futures since August 2008. In the middle of October 2009 a record short position of 65.3k was reported.
The yen is a noteworthy exception. The Commitment of Traders shows more than a 50% jump in net long positions to 35.5k from 21.8k. It is the largest net long position in a month. The dollar has been trending lower against the yen since peaking just above JPY92 in Oct23-27. Although there is some talk that the dollar carry-trade will be replaced by a yen carry-trade, there is not evidence among the speculative community. The net speculative yen position was short from late March through mid-May and again flirted with a net short position in mid-June through early July.
The dollar's downside momentum appears to be easing in the JPY88.60-80 area and there is much talk of barrier structures near JPY88.00, which corresponds to the October 7 low just ahead of that level. The low for the year was set in late January near JPY87.13.
The net noncommercial positioning in the Swiss franc, Canadian dollar and Australian dollars were little changed. Of note, speculators have been fighting the Swiss National Bank and have been net long francs in the futures market since the middle of Q2, with a single exception in mid-August. At a little more than 22k contracts long, the net speculative position is within a few hundred contracts of its longest position in five years.
Disclosure: No positions
]]> Mon, 23 Nov 2009 10:50:00 -0500 Marc Chandler Marc Chandler submits:
The latest commitment of traders, reported late Friday for the week through November 17th, showed that speculators (non-commercials) had pared back their bets. Given that interest rate differentials remain decidedly dollar negative, sentiment poor and some ideas that the U.S. may be forced to extend either its credit easing or its fiscal stimulus longer than Europe, the pared back positions may clear decks sufficiently to fuel a year end dollar slump short-term players re-establish positions.
This seems particularly true of the euro, where the net speculative long position was cut in half to about 12k contracts. The net long euro position peaked in early October near 51k contacts, but as of last Tuesday was the smallest net long position since early September. Given that there was little change in the second half of last week, and after a review of volume and open interest, the net exposure probably did not change much. A move above last week's high near $1.5016 may force more players to chase the market. There is some talk that the large option structure that "bet" euro would stay between $1.48 and $1.51 may have expired last week, but other contacts report similar positions are still in play.
The net short sterling position was also halved to about 6.5k contacts from 15.6k contracts. This is the smallest net short position since early September. Given the subsequent price action and futures activity, speculators may have already begun rebuild short sterling positions. Speculators have not been net long sterling futures since August 2008. In the middle of October 2009 a record short position of 65.3k was reported.
The yen is a noteworthy exception. The Commitment of Traders shows more than a 50% jump in net long positions to 35.5k from 21.8k. It is the largest net long position in a month. The dollar has been trending lower against the yen since peaking just above JPY92 in Oct23-27. Although there is some talk that the dollar carry-trade will be replaced by a yen carry-trade, there is not evidence among the speculative community. The net speculative yen position was short from late March through mid-May and again flirted with a net short position in mid-June through early July.
The dollar's downside momentum appears to be easing in the JPY88.60-80 area and there is much talk of barrier structures near JPY88.00, which corresponds to the October 7 low just ahead of that level. The low for the year was set in late January near JPY87.13.
The net noncommercial positioning in the Swiss franc, Canadian dollar and Australian dollars were little changed. Of note, speculators have been fighting the Swiss National Bank and have been net long francs in the futures market since the middle of Q2, with a single exception in mid-August. At a little more than 22k contracts long, the net speculative position is within a few hundred contracts of its longest position in five years.
Disclosure: No positions

Complete Story »]]> ERO UUP UDN GBB FXY JYN FXC FXA SZE Marc Chandler Euro Moves Could Signal Increasing Dollar Stability http://seekingalpha.com/article/174553-euro-moves-could-signal-increasing-dollar-stability?source=feed 174553 There is much talk in the markets about a double-no-touch structure between $1.48 and $1.51. However, more immediately we think the $1.4880 area is a key pivot. A move above $1.4880 would take neutralize the downside pressure on the euro and point to a retest on the $1.4960-$1.5000 that has capped upticks over the past few sessions.
In conversations with clients, two things continue to be noteworthy. First is the extent of the negative dollar sentiment. The dollar bears are numerous and with the dollar falling since the start of Q2, it continues to seem to be a crowded trade.
Second, the market is nervous. It has not embraced the euro in its own right, but rather has moved toward the euro because it is not the dollar and is the liquid alternative. The nervousness of the long euro holders is evident in the options market where the premium being paid for euro puts over euro calls (equidistant from the forward strike) reached a new high for the year Friday at 1.19%. In contrast, in early June when the euro was just getting above the $1.40 level, the market was paying a similar premium but for euro calls not puts.
Interest rate differentials continue to move against the US. This week alone the 2-year note spread moved almost 25 bp in Germany's favor over the US. The June 2010 Euribor-Eurodollar spread is making new highs (in Europe's favor) today. This is not the stuff that is usually associated with a dollar bottom.
On the other hand, the technical condition points to the vulnerability of the euro (and other foreign currencies by extension). More talk of a double dip in the main economies, disappointing economic data, some increased concerns about the financial fragility are serving to slow the risk-on trades and give the dollar a sense of stability.
Disclosure: No positions
]]> Fri, 20 Nov 2009 12:13:56 -0500 Marc Chandler Marc Chandler submits:
There is much talk in the markets about a double-no-touch structure between $1.48 and $1.51. However, more immediately we think the $1.4880 area is a key pivot. A move above $1.4880 would take neutralize the downside pressure on the euro and point to a retest on the $1.4960-$1.5000 that has capped upticks over the past few sessions.
In conversations with clients, two things continue to be noteworthy. First is the extent of the negative dollar sentiment. The dollar bears are numerous and with the dollar falling since the start of Q2, it continues to seem to be a crowded trade.
Second, the market is nervous. It has not embraced the euro in its own right, but rather has moved toward the euro because it is not the dollar and is the liquid alternative. The nervousness of the long euro holders is evident in the options market where the premium being paid for euro puts over euro calls (equidistant from the forward strike) reached a new high for the year Friday at 1.19%. In contrast, in early June when the euro was just getting above the $1.40 level, the market was paying a similar premium but for euro calls not puts.
Interest rate differentials continue to move against the US. This week alone the 2-year note spread moved almost 25 bp in Germany's favor over the US. The June 2010 Euribor-Eurodollar spread is making new highs (in Europe's favor) today. This is not the stuff that is usually associated with a dollar bottom.
On the other hand, the technical condition points to the vulnerability of the euro (and other foreign currencies by extension). More talk of a double dip in the main economies, disappointing economic data, some increased concerns about the financial fragility are serving to slow the risk-on trades and give the dollar a sense of stability.
Disclosure: No positions

Complete Story »]]> ERO UUP UDN Marc Chandler What Bernanke's Comments All Mean http://seekingalpha.com/article/173820-what-bernanke-s-comments-all-mean?source=feed 173820 Leaving aside the market's immediate reaction, Fed Chairman Bernanke's comments Monday about the dollar are very revealing; not just for his thinking, but for the fact that they likely reflect the thoughts of many senior officials in the Obama Administration as well.

In its last FOMC statement, the Fed highlighted three considerations behind its view that its Fed funds target can remain exceptionally low for an extended period of time: capacity utilization, price pressures and inflation expectations. In his speech, Bernanke outlined the conditions under which the dollar's movement would become more salient for the conduct of monetary policy. The dollar becomes a more important policy consideration if the change of its value jeopardizes the ability to achieve the dual mandate of full employment and price stability. It is this commitment to its dual mandate and to what Bernanke calls "underlying strengths of the US economy" that will "help ensure that the dollar is strong and a source of global financial stability."

]]> Tue, 17 Nov 2009 10:52:35 -0500 Marc Chandler Marc Chandler submits:

Leaving aside the market's immediate reaction, Fed Chairman Bernanke's comments Monday about the dollar are very revealing; not just for his thinking, but for the fact that they likely reflect the thoughts of many senior officials in the Obama Administration as well.

In its last FOMC statement, the Fed highlighted three considerations behind its view that its Fed funds target can remain exceptionally low for an extended period of time: capacity utilization, price pressures and inflation expectations. In his speech, Bernanke outlined the conditions under which the dollar's movement would become more salient for the conduct of monetary policy. The dollar becomes a more important policy consideration if the change of its value jeopardizes the ability to achieve the dual mandate of full employment and price stability. It is this commitment to its dual mandate and to what Bernanke calls "underlying strengths of the US economy" that will "help ensure that the dollar is strong and a source of global financial stability."


Complete Story »]]> UUP UDN Marc Chandler Bernanke: Don't Expect Declining Dollar to Prompt U.S. Policy Changes http://seekingalpha.com/article/173676-bernanke-don-t-expect-declining-dollar-to-prompt-u-s-policy-changes?source=feed 173676 We have noted that, in recent weeks, Fed officials have not been shy about commenting about the dollar, even when unsolicited by reporters.

The first comments from Bernanke on Monday pointed to this as well. Bernanke said that the Fed is keeping an eye on the dollar -- though apparently not sufficiently to mention it in the recent FOMC statement. He also said that the Fed's policy will help ensure that the "dollar is strong," though it is not clear what exactly that means.

]]> Mon, 16 Nov 2009 17:33:27 -0500 Marc Chandler Marc Chandler submits:

We have noted that, in recent weeks, Fed officials have not been shy about commenting about the dollar, even when unsolicited by reporters.

The first comments from Bernanke on Monday pointed to this as well. Bernanke said that the Fed is keeping an eye on the dollar -- though apparently not sufficiently to mention it in the recent FOMC statement. He also said that the Fed's policy will help ensure that the "dollar is strong," though it is not clear what exactly that means.


Complete Story »]]> UUP UDN Marc Chandler Greek Bonds Continue to Struggle Under Weak Aegean Economy http://seekingalpha.com/article/173622-greek-bonds-continue-to-struggle-under-weak-aegean-economy?source=feed 173622 Greek bonds continue to be the worst performer among European bonds. The 10-year bond yield is up another 10 bp Monday after a move of roughly the same magnitude at the end of last week.
When the new government under PM Papandreou (elected early October) claimed that the deficit it was inheriting was twice what the previous government had projected, there was much hand wringing and disbelief. This weighed on Greek bonds and drew some derisive comments from the rating agencies.
Just before the weekend, Greece reported much weaker than expected Q3 09 GDP figures and downward revisions to past data. In essence the economy contracted by 0.3% in Q3, thought economists had forecast a flat reading. Q2 GDP was revised to -0.1% from the preliminary estimate of a 0.2% expansion, while Q1 GDP was revised to show a 0.5% contraction instead of the 0.3% expansion. Q4 08 was revised to a 0.7% contraction from the initial +0.3% reading. This new data is part of the benchmark revisions going back to 2003.
The data shows a significantly weaker economy than was previously thought and shows the contraction has now lasted four consecutive quarters. It is far from clear that a recovery is at hand. Tourism and Greek shipping remain depressed. And the weaker growth profile points to the risk of more fiscal deterioration and this in turn weighs on Greek bonds.
The deficit is the biggest in the euro-zone at more than 12% of GDP this year and forecasts near 13.7% for next year. This would seem to limit the scope for additional fiscal measures to resist or offset the economic contraction.
We had noted before that indicative pricing in the credit default swap market implied a greater risk of Greek bonds than Irish bonds, but that the Greek-German bond spreads were narrowed. This is no longer the case, as the sell-off in the past two days has pushed Greek bond yields above Irish yields (now by around 9 bp).
Lastly, another aspect of the situation that is troublesome is that Greek banks appeared to be heavy users of the ECB 12-month lending facility. Greece's central bank figures suggest that Greece banks accounted for about 42 billion euros of the 570 billion euros of the ECB's long dated operations. The central bank wants the domestic banks to outline potential funding sources as the ECB begins to tighten its liquidity provisions. Early reports suggest Greek banks would consider more covered and conventional bonds and the interbank market (short-term borrowings).
Next month's ECB 12-month provision is expected to be the last, though there is nothing concrete yet, just some veiled hints by ECB President Trichet. There is speculation that the ECB will not stop cold turkey nor adopt variable rate repos. Rather most guesses are that the ECB will provide 1 or 2 six month fixed rate operations.
Clearly the news about Greece or the tensions within the euro zone bond market are not sufficient to derail the euro. The $1.50 area is capping it Monday. Last week's high was $1.5048. Support is seen near $1.4920.
Disclosure: No positions
]]> Mon, 16 Nov 2009 13:42:54 -0500 Marc Chandler Marc Chandler submits:
Greek bonds continue to be the worst performer among European bonds. The 10-year bond yield is up another 10 bp Monday after a move of roughly the same magnitude at the end of last week.
When the new government under PM Papandreou (elected early October) claimed that the deficit it was inheriting was twice what the previous government had projected, there was much hand wringing and disbelief. This weighed on Greek bonds and drew some derisive comments from the rating agencies.
Just before the weekend, Greece reported much weaker than expected Q3 09 GDP figures and downward revisions to past data. In essence the economy contracted by 0.3% in Q3, thought economists had forecast a flat reading. Q2 GDP was revised to -0.1% from the preliminary estimate of a 0.2% expansion, while Q1 GDP was revised to show a 0.5% contraction instead of the 0.3% expansion. Q4 08 was revised to a 0.7% contraction from the initial +0.3% reading. This new data is part of the benchmark revisions going back to 2003.
The data shows a significantly weaker economy than was previously thought and shows the contraction has now lasted four consecutive quarters. It is far from clear that a recovery is at hand. Tourism and Greek shipping remain depressed. And the weaker growth profile points to the risk of more fiscal deterioration and this in turn weighs on Greek bonds.
The deficit is the biggest in the euro-zone at more than 12% of GDP this year and forecasts near 13.7% for next year. This would seem to limit the scope for additional fiscal measures to resist or offset the economic contraction.
We had noted before that indicative pricing in the credit default swap market implied a greater risk of Greek bonds than Irish bonds, but that the Greek-German bond spreads were narrowed. This is no longer the case, as the sell-off in the past two days has pushed Greek bond yields above Irish yields (now by around 9 bp).
Lastly, another aspect of the situation that is troublesome is that Greek banks appeared to be heavy users of the ECB 12-month lending facility. Greece's central bank figures suggest that Greece banks accounted for about 42 billion euros of the 570 billion euros of the ECB's long dated operations. The central bank wants the domestic banks to outline potential funding sources as the ECB begins to tighten its liquidity provisions. Early reports suggest Greek banks would consider more covered and conventional bonds and the interbank market (short-term borrowings).
Next month's ECB 12-month provision is expected to be the last, though there is nothing concrete yet, just some veiled hints by ECB President Trichet. There is speculation that the ECB will not stop cold turkey nor adopt variable rate repos. Rather most guesses are that the ECB will provide 1 or 2 six month fixed rate operations.
Clearly the news about Greece or the tensions within the euro zone bond market are not sufficient to derail the euro. The $1.50 area is capping it Monday. Last week's high was $1.5048. Support is seen near $1.4920.
Disclosure: No positions

Complete Story »]]> ERO Marc Chandler What to Expect from Bernanke http://seekingalpha.com/article/173587-what-to-expect-from-bernanke?source=feed 173587 Federal Reserve Chairman Bernanke will speak about the economy at a lunch Monday in New York City. There are a few points that the market will be closely watching.
1. He is likely to reiterate the general thrust of the recent FOMC statements. The economy is recovering, but it remains fragile and price pressures remain well contained. The Fed is in no hurry to raise rates.
2. The last FOMC statement underscored three conditions the Fed is monitoring for adjust monetary policy: capacity utilization rates (which includes unemployment), inflation expectations and current price pressures. While there has been a small tick up in inflation expectations, measured by the University of Michigan consumer confidence survey, 5-year/5-year forward and break even on TIPS. However, these readings remain largely confined to the recent ranges.
3. Notable for their absence from the Fed's inflation watch were gold prices and the dollar's performance. This dovetails well with our understanding of the Fed's position. While we do not think that a weakening dollar is one of the Fed's policy objectives, we do recognize that its decline has come at a fairly low cost to it in terms of interest rate and/or inflation pressure and that it does not contradict the extraordinary monetary policy stance.
4. That said, in recent weeks some Fed officials, including Bernanke, have appeared to talk the dollar up without being prompted to do so by reporters. It would not be surprising if Bernanke said something to the effect of the strong dollar being a desired goal of US policy. Separately, our contacts in Washington suggest that while the US will not lead the move, if there was a request to intervene to support the dollar, the US would not reject it out of hand.
5. Bernanke may reiterate the general outline of the Fed's exit strategy, the tools that it has at its disposal and its commitment to use them in a timely fashion, without breaking new ground. A recent staff paper underscored the importance of paying interest on excess reserves as being an important innovation that will help prevent the potential inflationary threat.
Disclosure: No positions
]]> Mon, 16 Nov 2009 12:02:49 -0500 Marc Chandler Marc Chandler submits:
Federal Reserve Chairman Bernanke will speak about the economy at a lunch Monday in New York City. There are a few points that the market will be closely watching.
1. He is likely to reiterate the general thrust of the recent FOMC statements. The economy is recovering, but it remains fragile and price pressures remain well contained. The Fed is in no hurry to raise rates.
2. The last FOMC statement underscored three conditions the Fed is monitoring for adjust monetary policy: capacity utilization rates (which includes unemployment), inflation expectations and current price pressures. While there has been a small tick up in inflation expectations, measured by the University of Michigan consumer confidence survey, 5-year/5-year forward and break even on TIPS. However, these readings remain largely confined to the recent ranges.
3. Notable for their absence from the Fed's inflation watch were gold prices and the dollar's performance. This dovetails well with our understanding of the Fed's position. While we do not think that a weakening dollar is one of the Fed's policy objectives, we do recognize that its decline has come at a fairly low cost to it in terms of interest rate and/or inflation pressure and that it does not contradict the extraordinary monetary policy stance.
4. That said, in recent weeks some Fed officials, including Bernanke, have appeared to talk the dollar up without being prompted to do so by reporters. It would not be surprising if Bernanke said something to the effect of the strong dollar being a desired goal of US policy. Separately, our contacts in Washington suggest that while the US will not lead the move, if there was a request to intervene to support the dollar, the US would not reject it out of hand.
5. Bernanke may reiterate the general outline of the Fed's exit strategy, the tools that it has at its disposal and its commitment to use them in a timely fashion, without breaking new ground. A recent staff paper underscored the importance of paying interest on excess reserves as being an important innovation that will help prevent the potential inflationary threat.
Disclosure: No positions

Complete Story »]]> Marc Chandler China's Monetary Policy and the Japan Trap http://seekingalpha.com/article/173583-china-s-monetary-policy-and-the-japan-trap?source=feed 173583 Next month will be the 20th anniversary of the peak in the Japanese stock market.

Chinese officials attribute Japanese capitulation to the relentless US demands for currency appreciation as a contributing factor to the poor performance over the past two decades and do not want to be caught in the same trap. Consider that in early 2005 notable economists were claiming that the yuan was 20-25% under-valued and that such a currency adjustment would be necessary to bring the bilateral trade into balance. Beginning in July of that year, China allowed its currency to appreciate 20-25% over the next three years and by the end of the period the Chinese trade surplus had doubled.

]]> Mon, 16 Nov 2009 11:54:18 -0500 Marc Chandler Marc Chandler submits:

Next month will be the 20th anniversary of the peak in the Japanese stock market.

Chinese officials attribute Japanese capitulation to the relentless US demands for currency appreciation as a contributing factor to the poor performance over the past two decades and do not want to be caught in the same trap. Consider that in early 2005 notable economists were claiming that the yuan was 20-25% under-valued and that such a currency adjustment would be necessary to bring the bilateral trade into balance. Beginning in July of that year, China allowed its currency to appreciate 20-25% over the next three years and by the end of the period the Chinese trade surplus had doubled.


Complete Story »]]> Marc Chandler APEC: Don't Expect Any Major Changes http://seekingalpha.com/article/173582-apec-don-t-expect-any-major-changes?source=feed 173582 There was no important breakthrough at the APEC meeting this past weekend.

The ministers promised to resist protectionism and adopt structural reforms as necessary to unwind the global imbalances, but without detailing specific changes or making new commitments one must assume that little has changed. If anything, the reluctance of officials to seek yuan appreciation kept the dollar bearish sentiment intact. If the yuan is not going to share in the adjustment process, some reasoned, then the euro and other "adjustable" currencies will have to.

]]> Mon, 16 Nov 2009 11:48:05 -0500 Marc Chandler Marc Chandler submits:

There was no important breakthrough at the APEC meeting this past weekend.

The ministers promised to resist protectionism and adopt structural reforms as necessary to unwind the global imbalances, but without detailing specific changes or making new commitments one must assume that little has changed. If anything, the reluctance of officials to seek yuan appreciation kept the dollar bearish sentiment intact. If the yuan is not going to share in the adjustment process, some reasoned, then the euro and other "adjustable" currencies will have to.


Complete Story »]]> Marc Chandler Is Another Israeli Rate Hike Coming Up? http://seekingalpha.com/article/173548-is-another-israeli-rate-hike-coming-up?source=feed 173548 The central bank of Israel hiked rates in August to become the first country to begin to normalize monetary policy during the recovery. It held rates steady in September and October, but speculation is increasing that it will hike rates again when it meets on Nov. 23.
Israel reported that Q3 GDP rose a preliminary 2.2%, the most in over a year, flattered by exports and investment. This is more than twice the Q2 annualized pace of 1%, which was revised from 0.8%.
Over the weekend, Israel reported that consumer prices rose 0.2% in October for a 2.9% year-over-year increase. Prices are particularly sticky in Israel. Although an outright decline in CPI was experienced in H1 07, the rise in housing prices, administered prices and taxes has ended the deflation threat.
Inflation is now at the upper end of the central bank's 1%-3% target. The benchmark 10-year note extended its rally to new 9-month highs and yields slipped a basis point to 4.32%, 93 bp above similar US yields. The eight day rally may be partly predicated on speculation of a rate hike later this month.
At the end of last week, Israel reported a trade surplus for the month of October. Although the surplus was a modest $45.7 million, it was the first surplus in at least 14 years. The government's report underscored the importance of technology exports, which increased an average of almost 4.5% a month from August through October.
Meanwhile, the governor of the central bank, Stanley Fischer, seemed to suggest that official sales of the shekels on the foreign exchange market will continue. This intervention operation began in March 2008 and, since then, reserves have nearly doubled to over $60 billion (as of the end of October) and the M1 money supply has increased nearly 55% in the past year.
The dollar has spent the better part of the last three months between ILS3.70 and ILS3.80, with minor exceptions to the downside in mid-October and minor penetration of the upside at the start of the November. Near-term risk is on the dollar's downside with ILS3.7450 the initial target and then ILS3.70. Key support is probably closer to ILS3.67.
Disclosure: No positions
]]> Mon, 16 Nov 2009 10:19:20 -0500 Marc Chandler Marc Chandler submits:
The central bank of Israel hiked rates in August to become the first country to begin to normalize monetary policy during the recovery. It held rates steady in September and October, but speculation is increasing that it will hike rates again when it meets on Nov. 23.
Israel reported that Q3 GDP rose a preliminary 2.2%, the most in over a year, flattered by exports and investment. This is more than twice the Q2 annualized pace of 1%, which was revised from 0.8%.
Over the weekend, Israel reported that consumer prices rose 0.2% in October for a 2.9% year-over-year increase. Prices are particularly sticky in Israel. Although an outright decline in CPI was experienced in H1 07, the rise in housing prices, administered prices and taxes has ended the deflation threat.
Inflation is now at the upper end of the central bank's 1%-3% target. The benchmark 10-year note extended its rally to new 9-month highs and yields slipped a basis point to 4.32%, 93 bp above similar US yields. The eight day rally may be partly predicated on speculation of a rate hike later this month.
At the end of last week, Israel reported a trade surplus for the month of October. Although the surplus was a modest $45.7 million, it was the first surplus in at least 14 years. The government's report underscored the importance of technology exports, which increased an average of almost 4.5% a month from August through October.
Meanwhile, the governor of the central bank, Stanley Fischer, seemed to suggest that official sales of the shekels on the foreign exchange market will continue. This intervention operation began in March 2008 and, since then, reserves have nearly doubled to over $60 billion (as of the end of October) and the M1 money supply has increased nearly 55% in the past year.
The dollar has spent the better part of the last three months between ILS3.70 and ILS3.80, with minor exceptions to the downside in mid-October and minor penetration of the upside at the start of the November. Near-term risk is on the dollar's downside with ILS3.7450 the initial target and then ILS3.70. Key support is probably closer to ILS3.67.
Disclosure: No positions

Complete Story »]]> Marc Chandler U.S. IPO Market Starting to Heat Up http://seekingalpha.com/article/173276-u-s-ipo-market-starting-to-heat-up?source=feed 173276 The US Treasury successfully completed its record quarterly refunding this week and corporate America, not deterred by the mid-week holiday, appear to have raised $20 billion in new bond offerings. Nearly $10 billion of corporate bonds was sold on Monday, Nov 9th, making it the busiest day in about a month. Typically, the post-Thanksgiving period sees a significant slow down of corporate bond issuance.
However, next week is shaping up to be one of the busiest weeks of the year for US IPOs. Five companies are likely to go to market and are trying to raise $1 billion. IPOs have raised almost $10 billion since September, according to Bloomberg data. Although other parts of the capital markets were recovering, the IPO market was quiet with an average of two IPOs a month.
In September and October, there were some 18 IPOs, but the performance has been disappointing. Bloomberg data suggests that over the past 15 years, in the first month of trading IPOs outperformed the S&P 500 by an average of a little more 21%. The IPOs in September and October beat the S&P 500 by an inconsequential 0.1% on average.
Foreign investors show a clear preference for fixed income products in the US, like Treasuries and corporate bonds, rather than equities. The TIC data shows that foreign investors have been gradually returning to US equities. In the May to August period, foreign investors acquired almost $75 billion worth of US shares, which is more than what was purchased in the previous 16 month period. The September TIC data is scheduled for release on Nov. 17.
The early call is for the TIC report to show that net long-term capital inflows rose off the low $28.6 billionin August to something in the $40-$50 billionrange.
Disclosure: No positions

]]> Fri, 13 Nov 2009 13:21:49 -0500 Marc Chandler Marc Chandler submits:
The US Treasury successfully completed its record quarterly refunding this week and corporate America, not deterred by the mid-week holiday, appear to have raised $20 billion in new bond offerings. Nearly $10 billion of corporate bonds was sold on Monday, Nov 9th, making it the busiest day in about a month. Typically, the post-Thanksgiving period sees a significant slow down of corporate bond issuance.
However, next week is shaping up to be one of the busiest weeks of the year for US IPOs. Five companies are likely to go to market and are trying to raise $1 billion. IPOs have raised almost $10 billion since September, according to Bloomberg data. Although other parts of the capital markets were recovering, the IPO market was quiet with an average of two IPOs a month.
In September and October, there were some 18 IPOs, but the performance has been disappointing. Bloomberg data suggests that over the past 15 years, in the first month of trading IPOs outperformed the S&P 500 by an average of a little more 21%. The IPOs in September and October beat the S&P 500 by an inconsequential 0.1% on average.
Foreign investors show a clear preference for fixed income products in the US, like Treasuries and corporate bonds, rather than equities. The TIC data shows that foreign investors have been gradually returning to US equities. In the May to August period, foreign investors acquired almost $75 billion worth of US shares, which is more than what was purchased in the previous 16 month period. The September TIC data is scheduled for release on Nov. 17.
The early call is for the TIC report to show that net long-term capital inflows rose off the low $28.6 billionin August to something in the $40-$50 billionrange.
Disclosure: No positions


Complete Story »]]> Marc Chandler Mulling the U.S. Dollar's Outlook http://seekingalpha.com/article/173275-mulling-the-u-s-dollar-s-outlook?source=feed 173275 The U.S. dollar appears to be stabilizing, and we continue to believe that the main forces that have undermined it are largely cyclical in nature rather than structural. Several months ago we identified three indicators that would help investors time the dollar’s bottom: short-term interest rate differentials, the status of the general risk-on/risk off trades and technical factors. We review these indicators here.
Interest Rate Differentials
Interest rates help shape the incentive structure for many participants in the general global capital markets in addition to the currency markets. Short-term U.S. rates remain below similar euro zone rates. This means that one is paid to be short the U.S. dollar against the euro.
Not only are short-term U.S. rates still below those in the euro zone but the differential has moved further against the U.S. in the recent period. As a proxy for short-term rates, we looked at the Euribor and Eurodollar futures contracts. In early August, when first discussing the indicators that would allow investors to time the dollar’s bottom, the December 2010 Eurodollar and Euribor futures contracts were at the same level. Now the Eurodollar contract yields 44 basis points (annualized) less than the Euribor contract, having set a 7- month peak in the first week of November.
Three months ago, the market was anticipating that 3-month Eurodollar rates would be well above (almost 50 basis points) Euribor at the end of 2011. Although the market had been reconsidering its assessment for some time, it was not until earlier this month that the U.S. rates were pushed back below the euro zone rates. A similar development is evident in the two-year swap rate. In August one could pick up about 25 basis points swapping out of dollars into euros. Now one earns about 40 basis points.
The take away point is that the interest rate story does not yet support a sustained dollar recovery. The most recent FOMC statement coupled with the unexpectedly large rise to 10.2% in the unemployment rate reinforces ideas that this general situation is unlikely to change substantially for several more months at least.
Positive Developments
Yet there have been a number of developments that under other circumstances would be understood as dollar positive. Could even the optimists have imagined as recently as the end of Q1 what has happened in the past eight months? The global economy is on the mend, with most countries returning to growth in the second or third quarters.
The financial crisis eased considerably with the assistance of unprecedented monetary and fiscal support. Numerous risk measures, perhaps best known of which are the TED spread (T-bills/Eurodollars) and the OIS-Libor spread have returned to pre-crisis levels.
If trend growth is associated with 2.5%-2.75% expansion of the U.S. GDP, then the world’s biggest economy is likely to grow above trend not only in Q3 but on average over the next several quarters. Its current account deficit, which before the crisis was said by many to be the greatest risk to the world economy, has fallen another percentage point of GDP over the past year to stand at 3.8% of GDP, the smallest in seven years.
The U.S. has issued a record amount of debt, but this has been fairly easily absorbed by the market. At a 3.48% yield, the benchmark 10-year note yield is 21 basis points lower than the yield that prevailed a year ago. That yield is in between Germany and France, the euro zone anchors.
While the Federal Reserve bought $300 billion of Treasury bonds, foreign investors have not been shy; buying around 45% of the record issuance, up from about 28% at last year’s smaller offering. It is not just debt securities that have done well, but the equity market too. In fact, here in the fourth quarter, (through November 12th) the S&P 500 is the best performing equity market in the G7. And the dollar has languished.
Risk On/Off
The pattern whereby the euro appreciates against the U.S. dollar while stocks rally is a key characteristic of the current market. That relationship, as measured by the correlation between the percent change in the euro and percent change in the S&P 500 and the Dow Jones Stoxx 600, has gotten tighter.
Using weekly data from 2005 through 2007, the euro and the S&P 500 were correlated 15.5%. The euro and the Dow Jones Stoxx 600 were inversely correlated. At -3.7%, this correlation is not statistically significant, but the negative sign is noteworthy.
Year to date, using daily data, the correlations are 50.5% and 30.5% respectively. For the latest three month period, the correlations between the euro and the S&P 500 is almost 66% and with the Dow Jones Stoxx 600 almost 62%.
For the dollar to rally one of two conditions likely will have to be met. First, the pattern can break down. It is not unreasonable. For most of the 1993 through 2004 period the euro (both the actual and the pre-EMU synthetic) was negatively correlated with the S&P 500. The strength of the current correlation is without precedent over the last two decades and is nearly as positive as the 2003 inverse correlation was negative.
The second condition for a dollar rally is a sharp drop in equities. As risk assets are liquidated, the financing leg of many of the trades, short dollar has to be bought back: Shades of H2 2008 and Q1 2009. It is conceivable that after this year’s dramatic equity rally, investors lock in some profits. Most recently, the late-October 6.8% pullback in the S&P 500 corresponded to a 3% pullback in the euro.
Since the S&P 500 bottomed in March, declines have been short and shallow. The largest was the 9.5% decline in the mid-June through early July. The other four “corrections” since have varied in size from about 3.8% to about 6.8%.
The dollar has tended to appreciate during those down drafts, as the correlation figures would suggest. However, euro corrections appear to have been largely limited to about 2.5-3.0% since the end of the first quarter.
Technical Considerations
Sometimes the price action itself may show the market is getting tired or has the news already priced in before more considered opinion shifts. The technical condition for the dollar may be in the process of becoming somewhat more supportive.
Sentiment readings are excessive, but this has been the case for some time. It is warning that when the dollar does turn, it could be dramatic as most will not be positioned for it. At the same time we have noted that in the options markets, investors are paying among the largest premiums of the year for euro puts (the right but not the obligation to sell euros) over calls, suggesting to us the perceived need for insurance. That said, speculative market positioning, judging from the futures market and from some of the currency ETFs, does not look particularly extreme.
Momentum indicators are not over-extended, but there are dollar bullish divergences appearing. The 14-day relative strength index made its high near 73.5 in the middle of September. The subsequent highs in the euro have not been confirmed by the RSI, suggesting downside risks may be growing.
More immediately, the euro is currently struggling to rise above $1.5050. A convincing break could trigger a move to $1.5300. It takes a break of $1.4600 to be significant. That level is of such importance that its violation would likely signal a top of some note. The area could also serve as a good location to structure options. A break of that area would likely be seen as confirming a topping pattern that would project toward $1.42 at a minimum.
The liquidity officials flooded the market with to quench the financial and economic meltdown, is the key driver of the currency and asset markets. It lies at the root of the risk-on trades. It is as if there had not been a crisis since Charlie Prince’s notorious aphorism that, “As long as the music is playing, you've got to get up and dance.” This liquidity has provided the new music, but the dance remains the same. It is all about carry and momentum now, but numerous measures of valuation, including the IMF/OECD’s measure of purchasing power parity, warn that the euro and most of the major foreign currencies are getting stretched.
Disclosure: No positions
]]> Fri, 13 Nov 2009 13:18:06 -0500 Marc Chandler Marc Chandler submits:
The U.S. dollar appears to be stabilizing, and we continue to believe that the main forces that have undermined it are largely cyclical in nature rather than structural. Several months ago we identified three indicators that would help investors time the dollar’s bottom: short-term interest rate differentials, the status of the general risk-on/risk off trades and technical factors. We review these indicators here.
Interest Rate Differentials
Interest rates help shape the incentive structure for many participants in the general global capital markets in addition to the currency markets. Short-term U.S. rates remain below similar euro zone rates. This means that one is paid to be short the U.S. dollar against the euro.
Not only are short-term U.S. rates still below those in the euro zone but the differential has moved further against the U.S. in the recent period. As a proxy for short-term rates, we looked at the Euribor and Eurodollar futures contracts. In early August, when first discussing the indicators that would allow investors to time the dollar’s bottom, the December 2010 Eurodollar and Euribor futures contracts were at the same level. Now the Eurodollar contract yields 44 basis points (annualized) less than the Euribor contract, having set a 7- month peak in the first week of November.
Three months ago, the market was anticipating that 3-month Eurodollar rates would be well above (almost 50 basis points) Euribor at the end of 2011. Although the market had been reconsidering its assessment for some time, it was not until earlier this month that the U.S. rates were pushed back below the euro zone rates. A similar development is evident in the two-year swap rate. In August one could pick up about 25 basis points swapping out of dollars into euros. Now one earns about 40 basis points.
The take away point is that the interest rate story does not yet support a sustained dollar recovery. The most recent FOMC statement coupled with the unexpectedly large rise to 10.2% in the unemployment rate reinforces ideas that this general situation is unlikely to change substantially for several more months at least.
Positive Developments
Yet there have been a number of developments that under other circumstances would be understood as dollar positive. Could even the optimists have imagined as recently as the end of Q1 what has happened in the past eight months? The global economy is on the mend, with most countries returning to growth in the second or third quarters.
The financial crisis eased considerably with the assistance of unprecedented monetary and fiscal support. Numerous risk measures, perhaps best known of which are the TED spread (T-bills/Eurodollars) and the OIS-Libor spread have returned to pre-crisis levels.
If trend growth is associated with 2.5%-2.75% expansion of the U.S. GDP, then the world’s biggest economy is likely to grow above trend not only in Q3 but on average over the next several quarters. Its current account deficit, which before the crisis was said by many to be the greatest risk to the world economy, has fallen another percentage point of GDP over the past year to stand at 3.8% of GDP, the smallest in seven years.
The U.S. has issued a record amount of debt, but this has been fairly easily absorbed by the market. At a 3.48% yield, the benchmark 10-year note yield is 21 basis points lower than the yield that prevailed a year ago. That yield is in between Germany and France, the euro zone anchors.
While the Federal Reserve bought $300 billion of Treasury bonds, foreign investors have not been shy; buying around 45% of the record issuance, up from about 28% at last year’s smaller offering. It is not just debt securities that have done well, but the equity market too. In fact, here in the fourth quarter, (through November 12th) the S&P 500 is the best performing equity market in the G7. And the dollar has languished.
Risk On/Off
The pattern whereby the euro appreciates against the U.S. dollar while stocks rally is a key characteristic of the current market. That relationship, as measured by the correlation between the percent change in the euro and percent change in the S&P 500 and the Dow Jones Stoxx 600, has gotten tighter.
Using weekly data from 2005 through 2007, the euro and the S&P 500 were correlated 15.5%. The euro and the Dow Jones Stoxx 600 were inversely correlated. At -3.7%, this correlation is not statistically significant, but the negative sign is noteworthy.
Year to date, using daily data, the correlations are 50.5% and 30.5% respectively. For the latest three month period, the correlations between the euro and the S&P 500 is almost 66% and with the Dow Jones Stoxx 600 almost 62%.
For the dollar to rally one of two conditions likely will have to be met. First, the pattern can break down. It is not unreasonable. For most of the 1993 through 2004 period the euro (both the actual and the pre-EMU synthetic) was negatively correlated with the S&P 500. The strength of the current correlation is without precedent over the last two decades and is nearly as positive as the 2003 inverse correlation was negative.
The second condition for a dollar rally is a sharp drop in equities. As risk assets are liquidated, the financing leg of many of the trades, short dollar has to be bought back: Shades of H2 2008 and Q1 2009. It is conceivable that after this year’s dramatic equity rally, investors lock in some profits. Most recently, the late-October 6.8% pullback in the S&P 500 corresponded to a 3% pullback in the euro.
Since the S&P 500 bottomed in March, declines have been short and shallow. The largest was the 9.5% decline in the mid-June through early July. The other four “corrections” since have varied in size from about 3.8% to about 6.8%.
The dollar has tended to appreciate during those down drafts, as the correlation figures would suggest. However, euro corrections appear to have been largely limited to about 2.5-3.0% since the end of the first quarter.
Technical Considerations
Sometimes the price action itself may show the market is getting tired or has the news already priced in before more considered opinion shifts. The technical condition for the dollar may be in the process of becoming somewhat more supportive.
Sentiment readings are excessive, but this has been the case for some time. It is warning that when the dollar does turn, it could be dramatic as most will not be positioned for it. At the same time we have noted that in the options markets, investors are paying among the largest premiums of the year for euro puts (the right but not the obligation to sell euros) over calls, suggesting to us the perceived need for insurance. That said, speculative market positioning, judging from the futures market and from some of the currency ETFs, does not look particularly extreme.
Momentum indicators are not over-extended, but there are dollar bullish divergences appearing. The 14-day relative strength index made its high near 73.5 in the middle of September. The subsequent highs in the euro have not been confirmed by the RSI, suggesting downside risks may be growing.
More immediately, the euro is currently struggling to rise above $1.5050. A convincing break could trigger a move to $1.5300. It takes a break of $1.4600 to be significant. That level is of such importance that its violation would likely signal a top of some note. The area could also serve as a good location to structure options. A break of that area would likely be seen as confirming a topping pattern that would project toward $1.42 at a minimum.
The liquidity officials flooded the market with to quench the financial and economic meltdown, is the key driver of the currency and asset markets. It lies at the root of the risk-on trades. It is as if there had not been a crisis since Charlie Prince’s notorious aphorism that, “As long as the music is playing, you've got to get up and dance.” This liquidity has provided the new music, but the dance remains the same. It is all about carry and momentum now, but numerous measures of valuation, including the IMF/OECD’s measure of purchasing power parity, warn that the euro and most of the major foreign currencies are getting stretched.
Disclosure: No positions

Complete Story »]]> UUP UDN ERO Marc Chandler Import Prices Continue to Trend Higher http://seekingalpha.com/article/173257-import-prices-continue-to-trend-higher?source=feed 173257 Although the market was expecting an increase closer to 1%, US import prices rose 0.7% in October. The underlying trend, however, is clear: Import prices have risen in all but two months thus far in 2009.
The fact that import prices are still off 5.7% from a year ago is reflecting the base effect of the collapse of import prices in the August-December period. Imported fuel costs are an important culprit. Excluding fuel (not just oil), imported prices rose 0.4% after a 0.5% rise in September.
The price of imported capital goods rose 0.2%, while consumer goods, excluding autos, rose 0.3%. The price of imported autos and parts rose 0.6%, marking the largest gain since late 2007. Expectations are for both headline and core PPI and CPI to increase based on today's import data when the price indices are reported next week.
Geographically, the cost of goods from China increased by 0.1% and goods from Japan increased by 0.2%. Goods purchased from the EU rose 0.6%, while goods from Canada rose 1.2% and goods from Latin America rose 1.4%.
One of the key ways that a depreciating currency impacts an economy is through imported inflation. There has been much work done on what economists call "pass-through" and how it is far from perfect. Three important issues are: 1) companies from Asia and Europe often compete in terms of market share rather than profit margin and therefore may be reluctant to pass on the full currency change; 2) 30-50% of the final price of an imported good may be derived from domestic costs -- storage, transportation and marketing; and 3) most goods the US imports are invoiced in dollars.
Disclosure: No positions
]]> Fri, 13 Nov 2009 11:12:11 -0500 Marc Chandler Marc Chandler submits:
Although the market was expecting an increase closer to 1%, US import prices rose 0.7% in October. The underlying trend, however, is clear: Import prices have risen in all but two months thus far in 2009.
The fact that import prices are still off 5.7% from a year ago is reflecting the base effect of the collapse of import prices in the August-December period. Imported fuel costs are an important culprit. Excluding fuel (not just oil), imported prices rose 0.4% after a 0.5% rise in September.
The price of imported capital goods rose 0.2%, while consumer goods, excluding autos, rose 0.3%. The price of imported autos and parts rose 0.6%, marking the largest gain since late 2007. Expectations are for both headline and core PPI and CPI to increase based on today's import data when the price indices are reported next week.
Geographically, the cost of goods from China increased by 0.1% and goods from Japan increased by 0.2%. Goods purchased from the EU rose 0.6%, while goods from Canada rose 1.2% and goods from Latin America rose 1.4%.
One of the key ways that a depreciating currency impacts an economy is through imported inflation. There has been much work done on what economists call "pass-through" and how it is far from perfect. Three important issues are: 1) companies from Asia and Europe often compete in terms of market share rather than profit margin and therefore may be reluctant to pass on the full currency change; 2) 30-50% of the final price of an imported good may be derived from domestic costs -- storage, transportation and marketing; and 3) most goods the US imports are invoiced in dollars.
Disclosure: No positions

Complete Story »]]> UUP UDN Marc Chandler Eastern European Recovery Still Lags Behind Euro Zone http://seekingalpha.com/article/173253-eastern-european-recovery-still-lags-behind-euro-zone?source=feed 173253 Of the major industrialized countries, only Japan and Canada have not reported Q3 GDP estimates. Japan reports on Monday and is expected to have expanded at almost the same pace as the US. On the quarter, the US expanded by almost 0.9%, while the Japanese economy may have expanded by around 0.7%.
With the Big Three in the euro zone reporting, the preliminary estimate is that the euro zone expanded by 0.4% after a 0.2% contraction in Q2. The UK's 0.4% contraction represents the outlier. Canada reports at the end of the month and the economy was probably fairly stagnant.
A number of countries from central Europe reported Q3 GDP figures on Friday. Slovakia and Czech reported positive quarterly growth of 1.6% and 0.8%, while Hungary was the weak sister. Its economy contracted 1.8% from the previous quarter, marking the sixth consecutive quarterly decline. The Hungarian government forecasts the economy will decline over the course of next year as well.
Poland does not report until the end of the month, but its Economics Ministry has been particularly upbeat in its recent comments suggesting growth could be as high as 2%, after 1.1% in Q2 year-over-year, and Q4 could be even better. The Czech kronua has appreciated about 5% against the euro, while the Polish zloty has gained a little more than 1%. Most of the other currencies in the region, including the Hungarian forint (-1.3%) and Russian ruble (-4.3%), have not kept pace with the euro.
That said, we continue to like the Polish zloty and do not think that the market appreciates its fundamentals sufficiently. We continue to look for the zloty to appreciate vis-a-vis Hungary and Czech.
However, we recognize that Czech and Hungarian debt instruments continue to outperform Polish bonds. We suspect that this means that if there is a unwind of the risk trades, the Polish zloty might not be quite as vulnerable.
Disclosure: No positions
]]> Fri, 13 Nov 2009 10:28:55 -0500 Marc Chandler Marc Chandler submits:
Of the major industrialized countries, only Japan and Canada have not reported Q3 GDP estimates. Japan reports on Monday and is expected to have expanded at almost the same pace as the US. On the quarter, the US expanded by almost 0.9%, while the Japanese economy may have expanded by around 0.7%.
With the Big Three in the euro zone reporting, the preliminary estimate is that the euro zone expanded by 0.4% after a 0.2% contraction in Q2. The UK's 0.4% contraction represents the outlier. Canada reports at the end of the month and the economy was probably fairly stagnant.
A number of countries from central Europe reported Q3 GDP figures on Friday. Slovakia and Czech reported positive quarterly growth of 1.6% and 0.8%, while Hungary was the weak sister. Its economy contracted 1.8% from the previous quarter, marking the sixth consecutive quarterly decline. The Hungarian government forecasts the economy will decline over the course of next year as well.
Poland does not report until the end of the month, but its Economics Ministry has been particularly upbeat in its recent comments suggesting growth could be as high as 2%, after 1.1% in Q2 year-over-year, and Q4 could be even better. The Czech kronua has appreciated about 5% against the euro, while the Polish zloty has gained a little more than 1%. Most of the other currencies in the region, including the Hungarian forint (-1.3%) and Russian ruble (-4.3%), have not kept pace with the euro.
That said, we continue to like the Polish zloty and do not think that the market appreciates its fundamentals sufficiently. We continue to look for the zloty to appreciate vis-a-vis Hungary and Czech.
However, we recognize that Czech and Hungarian debt instruments continue to outperform Polish bonds. We suspect that this means that if there is a unwind of the risk trades, the Polish zloty might not be quite as vulnerable.
Disclosure: No positions

Complete Story »]]> ERO Marc Chandler