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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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  • Global Markets In Brief - 1/4-1/8 : Beware 11 Market Moving US Dollar Events  0 comments
    Jan 3, 2010 2:16 PM

    NB: THE FOLLOWING IS AN ABRIDGED VERSION FOR FULL ANALYSIS AND CHART ILLUSTRATIONS OF RECOMMENDED TRADES GO TO http://fxmarketanalysis.wordpress.com/   AND SELECT "WEEKLY OUTLOOK" FOR 1/4

    STOCKS: Market Outlook For 2010: These 3 Economic Forces To Steer Market Direction

     

    While predicting market and sector performance for the coming year is difficult to the point of futility, identifying the types of forces and events is not, and is far more useful. As long as we’re focused in the right directions, we’ll see what’s coming before much of the market. That’s usually good enough to make profitable trades and investments.

     

    S&P 500 Daily AVA FX Chart     05 DEC 31 H

    Can global equities and other risk assets continue to climb in 2010? The balance of forces for and against them remains the same.

    Forces in favor of continued rally include:

     

    1. Continued low interest rates. Even if much of the developed world sticks to mid 2010 as the deadline for beginning rate increases, these will likely be small and cautious moves unless growth in jobs and spending or inflation is really heating up, which few expect to happen. This helps demand for stocks as it supports earnings by keeping credit costs down, and also leaves yield-seeking capital few alternatives.

     

    1. Moral Hazard Weakened: Risk taking investors can take a certain comfort in knowing that the global policy makers will not allow  the financial system to collapse, at least if they can at all avoid it. So far, they’ve managed, regardless of the future bill to their taxpayers. Thus insolvent banks can indeed be seen as rational stock buys if they are too big to fail. Ditto overpriced stocks and the high yielding bonds of major EZ countries, at least for now.

     

    Forces in favor of a pullback

    They are numerous. Most can be summarized as variations on the following basic idea:

    1. Massive and growing debt levels that may not be sustainable:

     

    a)       On every level, from international banks and central banks to individual homeowners. So far, accepted Keynesian theory as handed down by Bernanke and other central bank heads has been to print money, bail out any large lender, and keep the national and international financial system and real estate market on life support until it can sustain itself.

    b)        Fine if it self-sustaining growth or at least stability in jobs, spending, and earnings occurs before governments don’t exhaust the supply of buyers for their debt, at least at affordable rates. If they do, then bond rates rise, mortgage rates rise, debt defaults rise, banks or the global credit system gets shakier.  No one really seems clear on how long the game can go on how many bullets governments have left, or how creative they can be in devise ways to keep things going until genuine recovery kick in.

    c)       We know it’s like a game of dominos. The more debt per player, the higher stacked and less stable that domino becomes, and the more vulnerable it is to even minor tremors. The more players in debt or dependent on steady repayments from the others, the closer the dominos are packed, and thus more vulnerable they are to even a distant, single collapse that sets of a chain of falling institutions (and governments?) that rapidly spreads to all. Or at least to enough so that confidence in the credit system fails and causes a credit seizure, which is almost the same result.  Consider:

    • Australia’s latest GDP report, though not dramatic in its nominal results, showed seeds of deep trouble. It revealed that most of the growth, the best in the developed world, as the result of government spending, not self sustaining growth. Australia has many advantages over most of the developed world, including relative proximity to China and a relatively healthy banking system. If Keynesian spending has not yet worked for them, what does that say about the chances for the UK, EZ, and the US?

     

    • There is strong reason to believe that US housing sales will drop off once the $8K credit for first time buyers expires, as purchases were not increased but merely pushed forward, suggesting an equal or worse drop off in home sales once the credit is finished.

     

    • The prices on longer term US bonds are already dropping as demand has been fading, thus driving up yields, the same yields on which mortgage rates are set. Most homeowners with mortgages in the US have either zero or negative equity in their homes as prices have fallen in the past year. However, With millions of adjustable rate  mortgages due for reset in 2010 and 2011, that could mean soaring defaults and foreclosures if rates become too high as falling or stagnant incomes render homeowners incapable or unwilling to continue paying on homes in which they’ve zero or negative equity. Should home prices truly begin to rise, that may push off such a fate

     

    • Hint: The crisis began with trouble in the banking and credit sector, and perceived improvements or at least survival of these sparked the ongoing March 2009 rally.  Because growth in jobs and consumer spending seem to be the missing components of a recovery that allows the financial and housing markets to recover on their own, watch for news about anything that impacts these.

    Conclusion:

    We don’t know what will happen. We can, however, make a good stab at what key events to watch for given the above key forces that are likely to drive markets in 2010.

    Watch for any news that

    • Suggests continued or added borrowing or stimulus beyond that which is currently planned.
    • Points to growing default rates in any major sector of the US or global economy
    • Raises the risk of major sovereign debt downgrade of default
    • Suggests that growth was due mostly to government stimulus rather than self sustaining growth

     

    Our bias: we remain impressed by global policy makers’ ability and creativity in keeping the Keynesian public spending fest going. We are skeptical that it can continue unless self sustaining growth kicks in soon.

    Last Week

    Light news and volume caused stocks to drift for most of the session, but some late pressure caused stocks to close at session lows. Still, stocks settled only slightly below their 52-week highs with strong gains for the year.

    Typical of the week, there was little reaction to the little news that there was.

    SEE FULL VERSION FOR THE REST

    KEY COMMODITIES

     

    The commodity sector performed very well in 2009 with the Reuters/ Jefferies CRB Index rising +23% on annual basis. Central banks worldwide reduced policy rates to record low levels and implemented stimulus programs to combat the worst recession since WWII, and dollar weakness added to the appeal of hard assets. Data in the past months suggests recovery is in process, though it’s yet unclear whether the global recession has ended.

    Crude Oil

     

     

     

    CRUDE OIL Daily AVA FX Chart     09 DEC 31

     

    Summary

     

    Short Term Trade Status: Avoid until the trend clarifies. Oil is currently sitting almost equidistant from support and resistance levels, allowing for no clear entry point or risk / reward advantage either way.  Specifically, we’d consider going long on a break above $82 backed by fundamental improvements, or going short on a renewed USD rally or other change in fundamentals that sends crude back to test support.

     

    Crude oil experienced what was among the most volatile years in memory in 2009 with price diving to as low as 32.7 in January and then rallying to 82 in October. The annual gain of 78% has marked the best performance since 1999.

    Geopolitical tension, inventory decline, cold weather and strong macro data firmed oil prices in the last week of 2009. The February contract touched 80 and closed at 79.36 Thursday, up 1.7% on weekly basis.

    SEE FULL VERSION FOR THE REST

    Precious Metals

     

    Gold

     

    GOLD Daily AVA FX Chart      10 DEC 31

    Short Term Trade Status: Avoid until trend clarifies. That will most likely happen as a response to the whether the coming week’s data shows whether the USD rally is continuing or not. If so, expect more downside. If not, gold could make another test of resistance levels established over the past months.

    SEE FULL VERSION FOR THE REST

    CURRENCY

     

    US Dollar 1/4 Weekly Outlook: Beware 11 Events to Move the USD - And Global MarketsUSD OutlookAlert: Employment Events To Move USD, Most Global Markets

     

    EUR/USD Daily AVA FX Chart     11 DEC 31

    Summary

    USD Forecast: Bullish/Neutral –

    This week: Mostly Depends on Market Reaction to Job Related Data – See Below For List of Reports To Watch.

    Longer Term: Moving Opposite Risk Appetite Except When There Is Positive Jobs Or Spending Data

    -    Events Sun.- Fed Chairman Bernanke Speaks, Mon.-ISM Mfg, Tues.-Pending Home Sales m/m, Factory Orders, Wed.- Challenger Job Cuts y/y, ADP Employment Change m/m, ISM Non=Mfg PMI, Crude Oil Inventories, FOMC Meeting Minutes, Thurs.- Unemployment Claims Fri.- US BLS Non-Farms Payrolls Change, Unemployment Rate 

    -    US Dollar retreats as improved signs of global growth reduce its safe-haven appeal without advancing interest rate or stimulus exit expectations

    -    Short-term US Dollar view clouds on overbought options sentiment

    -    Key jobs data likely to force a surge in trading volume and volatility for the USD, and thus most FX, Commodity, Stock Markets. USD to move this week as data suggests whether Friday’s NFP and Unemployment reports will beat or disappoint. Friday’s result to decide whether the USD rally and other related trends in December throughout world markets continue.

    -    The Dollar Index closed the month with a 4.1% gain, but finished the year with a 4.1% loss.

    Key Points

    As the past month showed, any major movements in the USD literally rock all global asset markets. These are especially potent in forex and commodities, which are mostly priced in USDs, but also true for stocks. If you’ve no time to read the full analysis below (and you should), you must beware of the following events that will likely move most major financial markets this week. In sum, they are that are most likely to move the USD.

    Background

    The 3 Keys To Understanding US Dollar Movements, And Why They Matter So Much

    As we’ve repeatedly reminded readers, the three key types of event that move the USD are:

    1. Fear inducing events that play to the USD’s role as a safe haven currency
    2. Data that suggest improvements in US jobs and spending, the key metrics the Fed is using to determine the pace and size of stimulus reduction and eventual interest rate increases
    3. Anything that undermines the Euro and thus almost forces a move up in the USD

     

    The 11 Must-Watch Events That Could Rock Markets

    The coming week is so packed with US jobs data that US employment and the dollar rally are literally the overriding theme of the week. Scheduled economic events all traders or investors must watch include, in rough order of importance: SEE FULL VERSION WEEKLY OUTLOOK FOR THE REST

    Euro Weekly Outlook: 1/4:Euro Weekly Outlook 1/4:Following USD Events, PIGS Complicate Policy Decisions

     

    Like its chief counterpart, the USD, the EUR faces a likely busy and volatile week as it is likely to move on much of the same news.

    EUR/USD Daily AVA FX Chart     11 DEC 31

    Summary

    Fundamental Forecast for Euro: Neutral – much depends on US jobs data and market reaction to it

    -    Key Events: Mon.-Euro-zone (EZ) Sentix Investor Confidence,  Final Mfg. PMI,  Tues.-German Jobs Change, EZ CPI Flash Estimate y/y, Wed.-EZ PMI Composite, EZ Industrial New Orders, Thurs.-EZ Retail Sales m/m,  EZ economic Confidence Survey, Fri.- German Trade Balance, EZ Unemployment Rate

    -    US jobs data to decide if EUR/USD resumes downtrend

    -    Reaction of EUR/USD to Risk Sentiment is Changing As USD Moves Up With Jobs, Spending

    -    PIGS (Portugal, Italy/Ireland, Greece, Spain) and others’ default risk complicates ECB monetary policy, as both hawkishness and dovishness carry dangers

    -    Long-term fundamentals are still disappointing as of year end

    -    German consumer-based inflation figures hit an eight-month high – fueling the hawkish momentum despite credit rating troubles in weaker countries

    -    Short-term EURUSD technicals conflict with longer-term trends

    GBP  Weekly Outlook 1/4:Bank of England Policy Decision, US Jobs Data to Drive British Pound Direction

     

    GBP/USD AVA FX DAILY CHART    25 DEC 31

    Summary

    British Pound Forecast: Neutral

    -    Events: Mon.- Halifax HPI m/m, Mfg PMI, Net  Lending to Individuals m/m,  Tues.-Construction PMI, Wed.-Services PMI, Thurs. Asset Purchase Facility, MPC Rate St., Official Bank Rate, Fri.-PPI Input m/m

    -    Bank of England decision dominates British Pound event risk in week ahead, though USD data may override it.

    -    UK Hometrack data points to improved real estate market

    -    British Pound forecast bullish vs. the Japanese Yen

    JPYJapanese Yen Weekly Outlook 1/4: Moving On USD Events, Risk Sentiment Due to Lack of News 

     

    USD/JPY  15 DEC 31

    Summary

    -           Key Events: None- Likely to trade off USD data, risk sentiment

    -          Pair continues to show strength despite USD pullback, suggesting more upside

    -          With the USD/JPY pair at decade lows, odds favor more upside, barring a major pullback in risk assets.

    CHFSwiss Franc Outlook 1/4: Following Sentiment, USD, EUR News

     

    USD/CHF DAILY  AVA FX CHART    18 DEC 31

    Summary

     

    -          Key Events: Mon.- SVME PMI, CPI m/m

    -          Illiquid holiday week characterized by tight range trading over profit taking on USD rally 

    CADCanadian Dollar Weekly Outlook 1/4: USD Driving Oil, CAD

     

    USD/CAD DAILY AVA FX CHART  19 DEC 31

    Summary

     

    Canadian Dollar Outlook: Short Term Neutral/Bearish, as Oil Approaches Resistance Levels Long Term Bullish – Moving Opposite the USD

    -          Key Events: Thurs.- Ivey PMI, Fri.- Employment Change, Unemployment Rate

    -          Moves with crude oil, which is moving with the USD and risk appetite

    -          Like other FX, will be heavily influenced by USD moves this week

    AUDAustralian Dollar Weekly Outlook 1/4: Local Events To Be Overridden by USD, GBP News.

     

    AUD/USD 16 DEC 31 HOME

    Summary

     

    -          Key Events: Mon.- HIA New Home Sales m/m,  Tues.-AIG Services Index, , Building Approvals m/m, Wed.- Retail Sales m/m, Trade Balance

    -          Up 27% vs. USD, almost 30% vs. JPY as highest yielder in risk hungry year.

    NZDNew Zealand Dollar Weekly Outlook 1/4: Moving Opposite USD, With Market Sentiment

     

    NZD/USD DAILY AVA FX CHART 20 DEC 31

    Summary

    New Zealand Dollar Outlook: Neutral

    -           Key events: Wed.- Trade Balance

    -           Will likely move opposite the USD, with overall risk sentiment, though good jobs data could have USD gaining on it

    DISCLOSURE: NO POSITIONS

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