Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

GLOBAL OUTLOOK OCT 12: Risk Assets, USD Rising Together

NB: When analysis is missing here find it at


-           Stocks: Thursday: Asia, Europe, US up, Friday morning Asia up, Europe down

-           FX: Higher equities, AUD rate rise brings bias against safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD down against most riskier majors, JPY, this trend continuing today.

-           Main events today: USD: Fed Chairman Speaks, Trade Balance, GBP: PPI input, EUR, ECB President Speaks, CAD: Unemployment, Trade data

-     Big Theme: Rising risk appetite, continued USD weakness, first high profile US earnings report from Alcoa spurs optimism & rally despite data that suggests otherwise (see Report Below)



Weekly Recap - Week ending 09-Oct-09U.S. equity markets rebounded this week, rising for five consecutive sessions to close sharply higher.  The S&P gained 4.5%.


Stocks ended last week up over 4% on the major US indexes, as markets focused on some genuine recovery news, like Goldman Sachs' analyst upgrade, Australia's solid recovery and employment news capped by an interest rate increase with more expected soon, surprisingly good employment data out of Canada, and Bernanke's acknowledgement of the obvious, a USD rate hikes after some "extended period."


Many believed one of the most important stories of the week was Alcoa's (NYSE:AA) better-than-expected earnings results. What pleased the markets and media was that AA reported an unexpected profit, not solely due to cost cutting but also to modestly better-than-expected sales, which is unlike the trend witnessed in the prior quarter, while management predicted global aluminum demand will improve in the second half of 2009. 


We agree that the story is significant, but for different reasons. As noted in last Thursday's daily analysis, compared to Q3 of 08,  AA's revenues are down 40%, EPS down 90%, yet the current share price is not even 4% lower. Q2 earnings season was also very much a case of markets and media celebrating overall poor results beating even lower estimates and driving valuations beyond the rational levels. Does market response to Alcoa suggest more of the same coming? Markets can stay irrational for longer than many think, but when reality dawns and panic profit taking begins, things could get ugly fast for all those long risk assets.


However, many in the media are saying that for stocks to keep rising they will need to show increasing revenues, since companies can't stay profitable in the long term solely by cutting costs. If enough big name announcements show steady or rising top line revenues, further gains are possible given the markets' willingness to give stocks the benefit of the doubt, though at some point markets may realize that stocks are simply a poor value at current prices.


There is also a bearish double top pattern forming on most major stock index charts.


In the end, next week's major earnings announcements will decide the fate of stocks for the near term. We'll get a clearer picture next week, when the likes of Johnson & Johnson (NYSE:JNJ), Intel (NASDAQ:INTC), JP Morgan Chase (NYSE:JPM), Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), Nokia (NYSE:NOK), Google (NASDAQ:GOOG), IBM (NYSE:IBM), Bank of America (NYSE:BAC) and General Electric (NYSE:GE) all provide results. There are enough big names here to set the tone.


Finally, the Treasury calendar was a focal point for investors once again this week, as $78 billion in longer-term securities (3-year Notes, 10-year Notes and TIPS, 30-year Bonds) were auctioned off.  While the results were positive, they did not appear to have much effect on equity markets. Index Started Week Ended Week Change % Change YTD %


Commentators have been frequently repeating that the next leg up in markets depends on revenue gains, which would indicate solid improvements in demand, rather than the unsustainable "sugar high" based on cost cuts that drove last quarter's successful earnings season.


Contrasting high-level commentary from BoA/Merrill Lynch and Credit Suisse showed just how opaque the picture is for markets as they head into earnings season. Analysts at BoA/Merrill believe a correction in S&P500 "appears underway" and that all signs point to a steeper declines, citing technical development and the weakening tech sector, among other factors. Analysts at Credit Suisse updated their global equity strategy, noting that they continue to believe that now is not time to sell equities. Credit Suisse believes that a near-term correction is possible, but sees the S&P500 at 1,100 at end of 2009. HSBC's CEO was also out with his own troubling read on the macro situation, noting that his firm would delay expansion of the bank because of fears over another downturn in the economy.



Asia: Nikkei ends above 10,000 as yen helps exporters 2:17am EDT TOKYO, Oct 9 (Reuters) - Japan's Nikkei average closed above 10,000 on Friday for the first time in a week, with exporters climbing on a slightly weaker yen, while Fast Retailing gained after forecasting a record profit for this business year

Europe: European equities edged lower on Friday, with the key index hovering around 1,000 points, as weaker miners offset telecom shares that rose after Telefonica (TEF.MC) offered bigger-than-expected dividends











N225I +1.87%

HS +0.03 %

SSEC +4.76%

FTSTI +1.09%

AORD -0.18 %


FTSE +0.14 %

DAX -0.08%

CAC -0.19 %



S&P +0.56%

DJIA +0.80%

NASDAQ +0.72%













N225I +1.87% (closed)

HS -0.93 %

SSEC -0.59%

FTSTI +1.05%

AORD -0.19 %






FTSE +1.31%

DAX +1.36

CAC +1.30%





Oil: The Kuwaiti oil minister says the current global oil prices are "suitable" for both exporters and consumers.Sheik Ahmed Al Abdullah Al Sabah told the state news agency that the price range $60 to $80 a barrel is acceptable -- endorsing remarks by fellow OPEC kingpin Saudi Arabia.Saudi Arabia and other members of the Organization for Petroleum Exporting Countries have said they were content with current crude prices, which, at around $71 per barrel, are over double their levels that December when OPEC cut 4.2 million barrels per day production.Kuwait is one the top five producers in OPEC -- a cartel of 12 nations, whose output accounts for two-thirds of the world's oil reserves, and, as of April 2009, 33.3 percent of the world's oil production.Gold:  Gold price rallied to 1062.7 before settling at 1056.3, +1.1%, as USD plummeted and crude oil soared. The yellow metal retreats to 1049 in Asia Friday, the first decline after surging for 5 days. We believe a correction is warranted as recent rally might have been overextended. However, any pullback should be short-lived. We remain bullish on gold in the long-term.Investor Jim Rogers said that will not buy gold at current price as fundamentals do not support. However, he reiterated his long-term bullishness on bullion and anticipated it would reach 2000 in the next decade. CURRENCIES:  Rising stocks and AUD rate hike give strong bias to risk currencies, boost commodities


USD:  The USD made a rare simultaneous move up along with stocks as Bernanke's admission that rates must rise and quashing of rumors (for now) about replacing the USD for oil trade pushed the dollar higher Friday, and it continues to hold its ground in Monday morning trade. Its extreme oversold position makes the USD very responsive to any supportive news that tempts nervous shorts take profits quickly. Overall USD trend remains firmly down. US earnings related news will assume increasing importance in the coming weeks. A better than expected trade deficit figure Friday suggests the weak dollar is helping in this area.


Sustainable Gains? The U.S. dollar strengthened dramatically on Friday, leaving many currency traders to wonder whether the dollar has finally hit a bottom. USD/JPY rose 1.6 percent, the strongest percentage gain in 2 months. The GBP/USD also sold off aggressively, paving the way for further losses. However in order to consider whether the gains can be sustained, we have to first understand the drivers behind the sharp rally in the dollar. Over the past few weeks, the dollar came under severe selling pressure and even hit fresh year to date lows against some currencies. In that type of environment, it doesn’t take much to turn things around. Comments from Fed Chairman Ben Bernanke triggered profit taking in the dollar after he suggested that the Fed will be prepared to tighten when the economy improves. Granted this is a relatively obvious statement, the timing was perfect for the dollar. We have been talking all week about “Where the Fed Fits In” on the global easing and tightening scale and up to now, Fed officials only expressed their reluctance to implement an exit strategy. Even though we still do not believe that the Fed is close to removing their ultra easy unconventional monetary policies, they are strategically moving themselves closer to their peers or could be attempting to indirectly prop up the dollar.


Can the Gains in the Dollar be Sustained?


However if you look beyond the price of USD/JPY and the GBP/USD, the greenback is still struggling to recover. For example, the EUR/USD sold off by less than 100 pips while the Canadian dollar extended its gains against the greenback. The Australian and New Zealand dollars are still holding near their highs. The trade deficit narrowed in the month of August, but the mild improvement is hardly enough to trigger a bottom in the dollar. Yet we are walking into a very busy data week that will allow investors to compare the current state of the U.S. economy with that of its peers. We already know that Australia, New Zealand and Canada are outperforming the U.S. economy (data-wise) but there is a good chance that the U.S. could play catch-up in the coming week which may actually be dollar positive. The releases to watch on the U.S. calendar include retail sales, the minutes from the most recent FOMC meeting, consumer prices and the Treasury International Capital flow report. Although economists expect a sharp drop in consumer spending following the expiration of the cash for clunkers program, the rise in the ICSC and Redbook retail sales reports suggests that the contraction in spending may not be as bad as expected. Given the latest comments from Bernanke and the recent trend of U.S. data, we anticipate optimism from the members of the monetary policy committee. As for inflation, the rise in commodity prices should bolster price pressure. The TIC report which measures foreign demand for U.S. Treasuries on the other hand is a bit of a wildcard. Talk of reserve diversification and the weakness of the dollar have traders fearing that foreigners have become less willing to buy dollars. However demand by foreign central banks is not that volatile and could therefore surprise to the upside. So overall, we believe that the odds are skewed towards stronger reports next week and we may finally see the dollar rally on good data. On top of that, White House Economist Romer repeated the Obama Administration’s support for the strong dollar.


Dollar Short Positions Increase


According to the latest CFTC report, forex positioning in the futures market is nearing extreme levels. For example, net short positions in the British pound rose against the dollar to the highest level ever while long positions in the euro rose to the highest since January 2008. Long positions in the Canadian dollar also doubled while long Australian dollar positions remained near 1 year highs. The only currency that traders trimmed their positions in was USD/JPY, but even then short USD/JPY positions remained near 1 year highs. This confirms our belief that the short dollar trade has become very overcrowded and because of that, the dollar is setting up for a rally. Next week’s economic reports could provide the necessary catalyst. In the meantime, Canadian and Japanese markets are closed on Monday for holidays. It will also be a Bank Holiday in the U.S. but the equity and currency markets will be open for trading.




EUR- EURUSD is likely to stay driven by investor risk appetite globally, and any perceived shifts in the relative timing of policy tightening between the ECB and the Fed. We continue to expect that both central banks will be among the last to begin the process of policy rate normalization.





The euro is suffering today thanks to Bernanke’s hawkish comments and some tepid German economic releases. First there was Consumer Prices, which on a harmonized basis, were unable to keep up with expectations. This renewed some deflationary concerns in the region as Germany’s growth in Q2 has not been enough to circumvent these threats. There was also the German Trade Balance which showed that their surplus narrowed thanks to weak exports and a boost in imports. Germany’s international shipments fell for the first time since July and were down 20% on an annualized basis. This begs the question of whether or not euro strength is starting to have an impact on the critical export sector. If so, the region may have to renew their distaste for a rapidly appreciating currency in an effort to ensure growth in the largest Euro-zone nation. However, in a day that showed a sluggish Germany also managed to reveal strength in France and Italy. Both countries reported better than expected Industrial Production. France, in particular, showed that output rose 1.8%, far exceeding last month’s gain of only 0.10%. Italian output on the other hand rose by the most in about two decades. However the true strength of these reports is somewhat distorted by massive government stimulus programs including their equivalent of the cash for clunkers. For next week, keep an eye on Tuesday’s ZEW Economic Sentiment Index, Thursday’s Consumer Prices, and Friday’s Trade Balance.



JPY -  BoJ meets this week With no economic data due today investors will look ahead to this week's two-day meeting of the BoJ, with the policy decision due to be announced on Wednesday. As no change in the base rate is expected, attention will focus instead on comments regarding the yen's relative strength. MoF Fujii's pro intervention comments recently suggest pressure from exporters and from a group of competing Asian countries that recently moved to devalue their currencies against the USD in order to gain advantage against Japanese exporters.




The dollar is finally making a break for it against the yen. The greenback took the biggest bite out of yen strength since the strong surge on August 7th. The fact of the matter is, now that expectations for a rate hike from the Fed have increased substantially, the BoJ seems to be falling behind the pack. There have been almost no inclinations that the BoJ is ready to raise rates, or stage an exit strategy for that matter. A critical weakness in the currency may have been finally realized. Nevertheless, economic data from today was pretty good. Machinery Orders rose off a record low to 0.5%. Even though this was not as much as markets had anticipated, it is still somewhat of a positive sign that spending cuts may start to subside. On a yearly basis, orders are down by 26.5%, better than the -34.8% reported last month. The main event for next week will be the Bank of Japan’s rate decision. However, after months of revealing little to excite markets, the decision is slipping into the realm of a currency market non-event. However, if they should reconcile today’s concerns by indicating that unwinding is not too far off, the yen should reverse its losses. Nevertheless, they will probably shy away from propping the yen up as, regardless of what Finance Minister Fujii says, it is becoming a destructive force for the economy.


GBP – GBP/USD:  MAJOR REVERSAL The British pound fell dramatically Friday despite stronger than expected economic data. Based upon the latest futures positioning from the CFTC, it appears that the short pound trade is getting just as crowded as the short dollar trade. However the momentum is on the side of pound bears along with fundamentals and technicals. Inflationary pressures are increasing based upon the latest producer price report and the trade deficit is narrowing, but compared to the rest of the world, the recovery in the U.K. has been modest. However the primary reason why the pound is underperforming is because of the dovishness of the Bank of England. Like the Fed, they are probably basking in the recent weakness of their currency but at the same time all it would take is one word from the BoE and the GBP/USD could completely reverse its decline. Until they open their mouths and either express frustration with the decline in the pound or suggest that they are not planning to increase monetary stimulus, the pound could continue to fall. In the week ahead, there is a great deal of key economic releases due for release from the U.K. including their inflation and employment reports.


AUD: Australian Dollar May Simply Consolidate After RBA-Induced Rally. Much will depend on growth in global risk appetite, of which the AUD remains THE leading beneficiary due to its highest interest rates of any major currency.


Fundamental Forecast for Australian Dollar: Neutral


- The Reserve Bank of Australian surprised everyone and hiked rates by 25bps to 3.25%

- Australian employment unexpectedly rose by 40,600 in September


The Australian dollar was easily the strongest performer last week, gaining over 4 percent against both the greenback and Japanese yen, after the Reserve Bank of Australia surprised everyone and became the first major central bank to raise interest rates after the global financial meltdown. Indeed, the RBA raised rates by 25 basis points to 3.25 percent, as the central bank determined that “growth [is] likely to be close to trend over the year ahead [and] inflation close to target,” adding that “the risk of serious economic contraction in Australia [has] passed.” Meanwhile, RBA Governor Stevens said that “it is now prudent to begin gradually lessening the stimulus provided by monetary policy,” suggesting more rate hikes may follow, with Credit Suisse overnight index swaps now pricing in another 175 basis points worth of increases over the next 12 months.


In being the first to take this bold step, the RBA has upped the ante for other central banks, but more specifically, the Reserve Bank of New Zealand, the European Central Bank, and the Bank of Canada, as the markets are speculating that they may be the next to follow suit. That said, with increased speculation comes increased disappointment when the central bank strikes a neutral tone, as we saw with the euro’s response to the ECB’s statement last week.


Event risk will be comparatively low for the Australian dollar this coming week, and as a result, price action may simply constitute a consolidation period for the currency following its massive rally. The releases of NAB business confidence and Westpac consumer confidence are likely to reflect robust optimism, as the sharp increase in employment suggests firms are doing well enough to hire and more households are earning income. Likewise, consumer inflation expectations could continue to creep higher, adding to evidence that the RBA will increase rates further.


NZD: New Zealand Dollar Rally Surviving on Borrowed Time and Strength


Fundamental Outlook for New Zealand Dollar: Bearish


-    A surprise rate hike from the RBA pulls forward speculator’s expectations for the RBNZ’s timeline

-    Risk appetite leads the kiwi and all its high-yield counterparts higher

-    Is the NZDUSD advance growing technically winded?


The New Zealand dollar is not the Australian dollar. This may seem like an obvious observation; but you wouldn’t think so when comparing the price action between the two currencies. The reason for the Aussie’s strength is clear: the RBA has already initiated a hawkish policy stance and economic data is fully supporting a progressive economic recovery. Yet, the kiwi doesn’t share these fundamental benefits. The New Zealand recession is still quite prominent, there is now a more appealing investment currency among the majors and RBNZ Governor Bollard has explicitly expressed his intentions to keep his nation’s benchmark lending rate unchanged at 2.50 percent until “late” next year. These are glaring discrepancies and they will not hold out forever.


Looking out over the coming week, the currency’s relationship to its Australian counterpart (and more importantly risk appetite) will be tested with a notable round of economic data. A critical step towards putting interest rates back on that much-sought-after hawkish policy is establishing a true economic recovery. Data has so far shown a tepid recovery; and we will look for heat with the economic indicators on the docket. Retail sales, business activity and housing sales will offer a relatively complete picture of economic activity. Of the three, the retail spending figure holds the greatest potential for volatility. However, the sales data is the most promising indicator for the week. The third quarter Consumer Prices data will provide Governor Bollard a clear gauge for establishing the need for restrictive monetary policy. Still trying to support an economic recovery; the central banker will have to see a threat of inflation before his is prompted to rate hikes (and most likely preemptive ones at that). It is true that he has said he would hold the benchmark well into next year; but he could easily renege on that vow; and his propensity for aggressive policy shifts is renowned. However, the issue here too is that he does not want to further encourage his currency to appreciate.


In the meantime though, the direction and momentum of any genuine trend for the kiwi will lie with risk appetite. It has been said that a rising tide floats all boats; and the New Zealand currency is certainly riding the surf. In fact, all commodity dollars have enjoyed the advance in risk appetite (even the Canadian dollar which has neither no real return to speak of nor a particularly hawkish future ahead of it). For the kiwi, demand for yield finds a significant return with the nation’s high benchmark; but there is also the sentiment factor. For those currencies considered fundamentally depressed (like the British pound), a bullish outlook for the global economy and markets offers a far greater reward. Taking stock of direction in sentiment, the proxy for sentiment (equities) is on the cusp of new yearly highs. A breakout or reversal can develop; but there are no clear catalysts offering to resolve the standoff. This in itself is an important observation; because without an engine to keep risk appetite on a rise, the currently high levels of optimism will eventually appear extreme and will encourage a retracement. -


CAD: USD/CAD:  hits 13 month high on blowout employment numbers, expect more of the same in the future, though the pair is likely to continue to move on risk appetite, especially as influenced by US earnings.


The big story in the currency market Friday was the Canadian dollar which soared to a 13 month high against the greenback after the stronger than expected employment numbers. Canada is expecting continued job gains, the US anticipates more losses. Guess which currency will be doing better and seeing higher interest rates to curb inflation?  For our readers, the report should not be much of a surprise since we've said that given the sharp rise in the employment component of IVEY PMI, we believe that not only could job losses be minimal but there is a good chance that Canada experienced positive job growth for the second month in a row. A strong labor market report should add to the upside momentum in the Canadian dollar and send it a fresh 12 month high against the greenback.


Job growth in September was the strongest since the Spring which reflects the relative outperformance of the Canadian labor market with that of the U.S. The unemployment rate also fell for the first time in over a year from 8.7 to 8.4 percent. When you have a country like Canada experiencing larger than expected job growth and another experiencing larger than expected job losses, you can imagine what the trend of the currency pair will be going forward.


However not all news was good news for Canada this morning. The trade deficit in Canada hit a record low in August as exports plunged 5 percent. Imports also fell but not as aggressively as exports. Weaker demand was seen in most products but agriculture and machinery took the biggest hit. Although we are worried about the trade numbers, we do not believe that it will erase the upside momentum in the Canadian, but we will become very worried if trade fails to recover in September. That could renew intervention concerns.


With USD/CAD trading below the 1.05 level, there is no major support until parity. Looking ahead, the most important economic releases from the commodity currencies next week include retail sales and consumer prices from New Zealand and consumer prices from Canada.


CHF Swiss Franc Forecasts Neutral Given Major SNB Headwinds

Fundamental Forecast for Swiss Franc: Neutral


-    One-sided sentiment points to further USD/CHF declines

-    Swiss Franc falls as Consumer Price Index loses more than expected

-    View our Swiss Franc Exchange Rate Forecast for October


The Swiss Franc was one of the worst-performing currencies to end the week’s trade, as a broad rally in key risky asset classes decreased flight-to-safety demand for the European currency. Recent Swiss National Bank forex market intervention likewise stayed fresh in many traders’ minds, and markets are understandably reluctant to force major CHF appreciation. The week’s Consumer Price Index inflation figures only reinforced fears of further SNB FX intervention; prices fell more than expected in the 12 months ending in September. Central bank officials have made it relatively clear that they will continue to fight Swiss Franc appreciation in the face of broader deflationary pressures in the domestic economy. Absent a material shift in CPI, we can reasonably expect the SNB to continue defending the key SFr 1.5000 mark against the Euro. Broader US Dollar weakness has left the USD/CHF lower in recent weeks, but our overall forecast for the CHF remains neutral on the persistently looming threat of SNB intervention.


Another relatively lackluster week of economic event risk leaves the Swiss central bank as the primary attraction for Swiss Franc in the days ahead. A Swiss Retail Sales report is the only real exception, but this report seldom forces major moves across CHF pairs. Traders should instead keep an eye out for important shifts in global financial market risk sentiment. Equity market bulls continued to rule the roost through last week’s trade and forced fairly universal gains across global indices. A continuation of such strength would almost certainly prove bearish for the Swiss Franc, but continued risk sentiment gains are hardly guaranteed. Despite strong year-to-date performance across key risky assets, it remains relatively clear that fortunes can and do improve at a moment’s notice. Swiss Franc traders should accordingly be on the lookout for any such deterioration in financial market risk sentiment and its effects on the safe-haven Swiss currency.


CONCLUSIONS: Bias to risk currencies as stocks rise on questionable earnings data and AUD keeps rallying on good news. These favor short USD trades near term, long term, until stocks pull back or there is other major pro USD news. Earnings season begins to dominate news. Trading Opportunities:                 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts.  Always use sell stop orders.


Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back, no trend continues forever.






Dollar Reaches Breaking Point at Banks Shifting Record Reserves Into Euro


•European Stocks Climb, Led by Philips, Allied Irish; Asian Shares Decline


•Philips Posts Unexpected Profit as Consumer Unit Earnings More Than Double


•Latvia Will Seek Last-Minute Deal on Budget Cuts to Appease Bailout Donors

Multi-FX Gold View and Shanghai Reminder

A Global Cabal Plotting to Dump the Dollar?

Brown Brothers on Dollar Weakness, Alternative Currency Basket Reports and RBA Rate Hike

Dollar Hegemony Is Ending

Declining Dollar: The Markets' Take

The Economic Recovery That Isn't

Ugly Jobs Report Puts a Dent in V-Shaped Recovery Scenario

Ten Reasons for an Imminent Stock Market Crash

The Next Major Crisis Brewing

CIT's Failure Could Threaten Financial Sector's Overall Recovery