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Cliff Wachtel
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Cliff Wachtel, CPA, is currently the Director of Market Research, New Media and Training for Caesartrade.com, a fast growing forex and CFD broker. He covers a variety of topics including global market drivers, forex, currency hedged and diversified income investing, and is currently working on a... More
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THE SENSIBLE GUIDE TO FOREX
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THE SENSIBLE GUIDE TO FOREX
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The Sensible Guide To Forex: Safer, Smarter Ways To Survive & Prosper From The Start
  • Coming Week Market Movers: Contagion Warnings, FOMC, Top Trends, Calendar Risks 1 comment
    Mar 11, 2012 12:30 AM | about stocks: SPY, DIA, UUP, UDN, FXE, ERO, URR, ULE, EUO, DRR, FXA, FXB, FXC, FXD, FXF, FXEN, FXY, JYF, CYB, GLD, CNY, USO, DUG, USL, NBO, DBV, ICI, CEW, PHYS, SLV, OIL, SDS, RSW, BXDC, SPXU, SH, EWC, EWA, TLT, XHB, ITM
    Part 2: Coming Week Market Movers

    The following is Part 2 of our weekly review and preview strategy guide for traders and investors of all major asset classes via both traditional instruments and binary options, covering coming week's market movers and trade ramifications

    See Part 1 for our review of last week's top market movers and their lessons for the coming week

    SUMMARY

    1. Greek Default, Haircuts Risk Repeat of July 2011 Contagion

    2. Will EU, FOMC Meeting, Risk Appetite, EURUSD Weekly Trend Fuel Further USD Gains?

    3. Other Top Calendar Events

    1. Greek Default, Haircuts Risk Repeat of July 2011 Contagion

    Remember how Italian bond rates started spiking only in July 2011 after PSI risks entered market calculations? That was because the operating assumption up to that time was that the EU would not bite the hand that feeds it and so would not let private investors get hurt. Unfortunately, the EU just couldn't afford it, neither economically nor (especially) politically given voter and opposition party rejection of baring bailout burdens alone while bankers avoid paying for their own bad decisions.

    With that assumption debunked, market reaction was swift and severe. Bond yields spiked, not only for the usual suspects, but now also for Italy and France. Equally disconcerting was that EU banks as a group became tainted by association. Getting overnight loans for normal operations became more expensive or impossible to obtain, leaving many on ECB life support. Contagion had arrived, not only at too-big-to bail Italy, but also at the doorstep of the core funding nations. EU bank shares plunged, leading to a ban on their short sales.

    We'll soon find out if we're about to get a repeat of July 2011. Keep an eye on:

    • EU bank shares - consider shorting them while you still can.
    • GIIPS bonds CDS spreads and bond yields
    2. Will EU, Risk Appetite, FOMC Meeting, EURUSD Weekly Trend Fuel Further USD Gains?

    As noted in Part 1, events in the EU (along with technical resistance on multiple risk asset charts) bolstered the case for coming pullback in risk assets that would benefit safe haven assets like the USD.

    Last week the USD was the top performer. Note that it has, by default, become the preferred safe haven currency.

    Why The USD The Top Safe Haven Currency

    Essentially, the other two classic safe haven currencies have seen their safe haven status compromised over the past year.

    The CHF- Hit By EU Debt Crisis, Intervention Threats

    Firstly, about 60% of Swiss exports go the EU, tying Switzerland's fate to that of the economically weaker EU. That connection alone has been enough to hit the CHF in times of rising concern about the EU. For example, note in the monthly chart below, note how the CHF has dropped vs. the USD in times of rising concern about the EU debt crisis.

    ScreenHunter 01 Mar 09 13 37 Coming Week Market Movers: Contagion Warnings, FOMC, Top Trends, Calendar Risks

    USDCHF MONTHLY CHART NOVEBER 2009 - PRESENT

    CHART COURTESY OF metaquotes software corp. AND thesensibleguidetoforex.com

    01 MAR 091337

    In other words, bad times in the EU are assumed to ultimately hurt the Swiss and the CHF.

    Because of the EU Crisis and its downward pressure on the EUR and the competitiveness of Swiss exports, we have a related but distinctly separate problem - and vigorously interventionist SNB that is determined to limit or prevent the CHF's appreciation despite its safe haven appeal, and keep the EURCHF around 1.2.

    So despite Switzerland having a much healthier, lower debt balance sheet than either Japan or the US, any gains in the CHF can be quickly erased by SNB action, and that has driven away safe haven flows from the CHF.

    The JPY: Threatened By BoJ Intervention, Possible New Trade Deficit Trend, Debt/GDP Levels

    Meanwhile the JPY's #1 safe haven currency status has been compromised by the dual blows of both active BoJ intervention AND, just recently, the first Japanese trade deficit in many years. Note that Japan's long record of strong trade surpluses has been the key for keeping its bond rates low despite Japan's having the highest debt/GDP in the developed world, around 200%.

    For perspective, keep in mind that 200% rate is far above that of Greece (~130%) or any of the GIIPS.

    Markets have long tolerated this high debt level for the same reason a bank will lend to those with high debt as long as their income is sufficiently high to cover the debt service and other ongoing expenses. However, if the trade deficits become more common, Japan's current 1% rates on 10 year JGBs could soar and suddenly make the not insignificant impact of Greece's debt troubles look trivial.

    For perspective, consider that even with 1% rates, Japan's debt service consumes over 25% of its budget. If those rose to just 2%, Japan's debt service would double and consumer over half its budget. Note that 2% on 10 year bonds is still quite low (the US has been paying 3-4% for years). Japan is also the third largest economy in the world, so everyone is exposed to the via bonds ownership and supply chain ties.

    Yes, unlike Greece, Japan can always print money and pay bondholders - as long as bond markets are willing to accept 2% return paid in rapidly devaluing Yen.

    In sum, the more fear or risk aversion over the course of 2012, the better for the USD. Bad times for the global economy generally mean good times for the value of the USD. How will you monitor global sentiment? The S&P 500 chart is my favorite quick and dirty version. There are many ways, but a discussion of them is beyond the scope of this article. I cover other ways to monitor risk appetite in my coming book due out this September, The Sensible Guide to Forex: Safer, Smarter Ways to Prosper From the Start.

    FOMC MEETING COULD PROVIDE FURTHER FUEL FOR USD RALLY IF QE 3 HOPES REDUCED

    An improving U.S. economy has made investors and central bankers more confident about the recovery. Fed Fund futures show a 62 % chance of a rate hike by January 2014, prompting a number of economists to forecast a 2013 rate hike, which is far earlier than the Fed's current estimate.

    The continuation of the USD rally will hinge upon the tone of Tuesday's FOMC statement. If it continues to acknowledge the improvements in the economy and places greater emphasis on inflationary pressures, the dollar could extend its gains as this would reinforce the market's belief that QE3 is no longer necessary. However if the central bank sounds cautious and downplays inflation or growth, the greenback could retreat quickly as such remarks would boost QE 3 expectations and reduce rate increase hopes.

    THE EURUSD TECHNICAL PICTURE SUGGESTS MORE DOWNSIDE AHEAD

    The below weekly EURUSD suggests the following:

    ScreenHunter 01 Mar 11 05 12 Coming Week Market Movers: Contagion Warnings, FOMC, Top Trends, Calendar Risks

    EURUSD WEEKLY CHART MARCH 2011 - MARCH 2012 COURTESY OF metaquotes software corp AND thesensibleguidetoforex.com 01 mar 110512

    • An overall downtrend in place since April 2011 that has reasserted itself in the past 2 weeks
    • The pair remains stuck....

    TO VIEW THE REST OF THIS ARTICLE PLEASE VISIT http://globalmarkets.anyoption.com AND FIND ARTICLE BY SAME NAME UNDER THE WEEKLY TAB.

    Our apologies for the inconvenience. My partners want these posts to introduce visitors to our website. Your visit helps keeps these posts coming to you free of charge. Thanks in advance for your help.

    One of the biggest lessons of the above is the need to protect yourself against the risk of crashing markets and currencies dragging you down with them. The best help I can offer you is, THE SENSIBLE GUIDE TO FOREX, SAFER, SMARTER WAYS to SURVIVE and PROSPER from the Start. It's the first book to show how both prudent active traders and long term investors with limited time and risk tolerance can tap forex markets to hedge currency risk and improve returns. See my profile page or the above link for details.

    DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN'T BE TELLING YOU FOR FREE, NOW WOULD WE?

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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  • Cliff Wachtel
    , contributor
    Comments (1778) | Send Message
     
    Author’s reply » for busy market watchers a quick useful way to be prepared for the coming market week - know what to watch for

     

    One of the biggest lessons of recent years is the need to protect yourself against the risk of crashing markets and currencies dragging you down with them. The best help I can offer you is, THE SENSIBLE GUIDE TO FOREX, SAFER, SMARTER WAYS to SURVIVE and PROSPER from the Start. It’s the first forex book ever published to show how both prudent active traders and long term investors with limited time and risk tolerance can tap forex markets to hedge currency risk and improve returns. See my profile page or the above link for details.
    11 Mar 2012, 12:31 AM Reply Like
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