Cliff Wachtel's  Instablog

FX

The USD continued to move opposite of stocks, thus stocks rising to new highs caused the USD to hit new lows, which in turn triggered a sharp rally across the forex market with currency pairs such as the EUR/USD, AUD/USD and NZD/USD hitting 12 month highs on a near daily basis. For the EUR/USD and NZD/USD, it was the longest streak of gains since March.

However it is rare to see a trend this strong without a correction and judging from the latest price action in the forex and equity markets, a deeper correction may be in store for the coming week. It is important to realize that a 2 percent sell-off in the majors would still be needed to break the uptrend.

FX Moving More With USD Weakness Rather Than Rising Risk Appetite

Although some people may have credited the sell-off in the U.S. dollar to the improvement in risk appetite, we believe that it has been a story about the dollar and not risk because of the corresponding weakness in USD/JPY. If these movements were part of a broader risk appetite theme, then the USD should have gained against the JPY.

The rather tepid growth projected for the coming year was supposed to be priced in

Average PE for the S&P is above average, 17 at best, far higher at worst estimates, and we are in a far below average period in which most “good” economic news is some variant on “less decline than expected”

Banking, housing , and employment weakness , the root of the current crisis,  are still awful and as likely to get worse before they get better

Trading volume minus the high frequency trading in a few stocks is very low

ETC… I just haven’t seen any compelling arguments to support stocks at anything close to these prices.

Nonetheless, the stocks and other risk assets remain in uptrend, facts be damned.

This week is loaded with rate decisions, CPI and retail sales results from around the globe.

Here’s a quick look at the major coming weeks events and likely implications

NOTE: ALL TIMES ARE GMT, * = KEY IMPORTANCE

For kiwi traders, the week begins very early, on Sunday at 22:45 GMT with Retail Sales with are expected to rise. It's the primary gauge of consumer spending, which accounts for a majority of overall economic activity

Swiss PPI is published in the morning and is expected to remain stable. European Industrial Production is predicted to drop again, this time by 0.4%. This is the main EUR event of the day. It tends to have a relatively mild impact because Germany and France, which account for about half of the Eurozone's economy, release earlier production data.

However, since these two are already assumed to me on the mend, surprises in either direction for the weaker half of the EZ could move the EUR, and thus the USD. It's relevant as a leading indicator of economic health - production reacts quickly to ups and downs in the business cycle and is correlated with consumer conditions such as employment levels and earnings; 

Near the end of the day, British RICS House Price Balance is expected to fall by 0.1% (delayed from last week).

Australia’s MI Leading Index starts the day down under.

Swiss Retail Sales are on the rise, and will probably do it again, this time by 1.1%. Swiss ZEW Economic Expectations will follow.

British Claimant Count Change is the first and foremost employment figure. It’s expected to remain stable. British Unemployment Rate is predicted to rise to 8%. Will GBP/USD stay behind on this as well?

European CPI isn’t expected to signal the end of deflation: it’s expected to fall again.

American CPI is expected to be different, and rise by 0.4% after falling last time. Core CPI is also expected to edge upwards.

TIC Long-Term Purchases, representing the cash flow in and out of the US, are expected to squeeze to 60 billion. This data represents the balance of domestic and foreign investment - for example, if foreigners purchased $100 billion in US stocks and bonds, and the US purchased $30 billion in foreign stocks and bonds, the net reading would be 70.0B. The market impact tends to be significant but varies from month to month.

Also in the US, Current Account, Capacity Utilization Rate and Industrial Production which is expected to rise by 0.5%.

Japan’s Tertiary Industry Activity is expected to continue rising, this time by 0.6%. Also not the Japanese BSI Manufacturing Index.

As the calendar suggests, the busiest day of a busy week.

No change is expected in the Japanese Overnight Call Rate, expected to remain at 0.1%. The focus will turn to the Monetary Policy Statement and the accompanying BOJ Press Conference.

British Retail Sales are predicted to rise by 0.5%, following last month’s rise. Also note CBI Industrial Order Expectations, which are still very low.

It’s Canada’s turn for the CPI release. Core CPI and CPI have been weak. Canada also releases leading indicators. Sounds important, but because most have already been released this figure doesn't tend to move markets.

Switzerland’s quarterly rate decision is due. The Libor Rate is expected to stay at 0.25%. The SNB hasn’t hesitated to intervene in the markets. Will they do it again? We’ll know at the SNB Monetary Policy Assessment. USD/CHF is not far from parity.

In the US, Building Permits are expected to rise to 580K. Housing Starts are predicted to rise to 590K. American housing is off the bottom.

Unemployment Claims, which made a surprise last week, are expected to rise back to 562K. Also note the Philly Fed Manufacturing Index which is expected to rise to 8.1 points.

German PPI is expected to rise by 0.1%, after posting a big drop last time. European Current Account is predicted to show a smaller deficit this time.

British Public Sector Net Borrowing is expected to grow, showing that the government lends more money.

Canadian Wholesale Sales close the week.

See Part II for more on the coming week’s outlook for specific currency pairs, commodities, and stock indexes.

Disclosure and Disclaimer: The views expressed to not necessarily represent those of AVAFX. The author has positions in the above instruments