Monday, November 2, 2009

Global Markets Outlook Nov 2-6: Pullback or Reversal? This Week Decides


The S&P 500 fell about 4% this week, a fairly representative figure for the major indexes. Thursday's better than expected US GDP brought a temporary knee jerk reaction bounce. However, the markets concluded that the GDP result was mostly from unsustainable government stimulus programs rather than genuine private sector growth. Friday's 2.8% drop wiped out that gain and then some, marking the steepest one-day selloff since July 2. It also meant that the index fell 2 per cent in October, marking the first monthly decline since the stock market began to rebound in early March. The S&P currently sits at multi-week support around 1040.

Peter Schiff of Europac Capital wrote:

Even the giddiest commentators admit that the upside GDP surprise resulted almost entirely from government interventions. But, by pushing up public and private debt, expanding government, deepening trade deficits, and pushing down savings rates, these interventions have succeeded only in putting our economy back on an unsustainable path of borrowing and spending. Accordingly, they have prevented the rebalancing necessary for long-term health. Could there be a simpler illustration of trading long-term pain for short-term gain?

During the decade that corresponds to the Great Depression, annual GNP expanded for six years and contracted for four. After nose-diving in the early years of the decade, GNP turned positive in 1934 and then logged three more years of solid growth (the four year average annual growth rate was 8.5%).

But does anyone really believe the Great Depression ended in 1934, when the economy first stopped contracting? Unemployment reached 19% in 1938, nearly the peak of the entire Depression, almost a full decade after the stock market crashed! Why will we be so much luckier this time around?

The unpopular truth is that rather than curing the economy, government stimulus has made it sicker. The Bush Administration and the Greenspan Fed pursued this policy recipe in the 2002-2003 recession. The result was four years of phony growth, greater global imbalances, and the development of unsupportable asset bubbles. Clearly we have learned nothing from those mistakes.

Third quarter 'growth' was largely driven by a 23% increase in residential construction (the largest quarterly increase since 1986) and a 3.1% increase in consumer spending, which included a 22% jump in durable goods purchases – mostly automobiles – and 2.3% gain in government spending. Since the increase in consumption outpaced the increase in production, the trade deficit expanded, reversing the positive trend for most of 2008 and 2009. Because the increase in spending outpaced the increase in incomes, the savings rate plunged from 4.9% in the prior quarter to 3.3%.

The sizzling numbers for housing and autos resulted from heady cocktail of policy stimulants: near-zero interest rates, government-guaranteed mortgages, Federal Reserve purchases of mortgaged-backed securities, tax credits for homebuyers, bailouts for auto finance companies and 'cash for clunkers' for car buyers.

Noted Kathy Lien of

Thursday's surprising GDP report may have indicated that a more substantial recovery is underway, but a series of economic indicators from today showed that consumers will not be leading the rise. The idea that a consumer led recovery may not be the case this time around is very troubling because it is unclear if there is any another sector that would be able to recharge growth like the consumers have in the past.

Personal Spending was today’s first sign of concern, dropping for the first time in five months by 0.5%.

To add insult to injury, wages and salaries declined and the savings rate rose, adding to the indication that consumers have their wallets sealed tight.

Likewise, spending on durable goods took a nosedive by 7.2%, giving added evidence to the theory that government assistance has been the main driver that turned up spending in the third quarter.

Ironically, another sign that trouble is ahead was produced by a report that blew away expectations. Chicago Purchasing Managers’ reported a significant rise to the highest level in more than a year. However, the optimism that the headline number exuded was quickly forgotten because the employment component actually fell last month. As a harbinger for next week’s employment report, the PMI wound up reinforcing the idea that continued job losses will substantially curtail expenditures now that some forms of government support have been eliminated.

The preceding factors, accompanied by substantial market swings and volatility, have already started to weight down confidence. The University of Michigan’s Consumer Sentiment Index fell off of yearly highs to reach 70.6. It seems that the market has a right to be worried that growth is composed of artificial factors rather than a dynamic rebirth of activity. That is not to say that we are not on the road to recovery, it’s just that there may be a few extra bumps along the way than many expected.

Actually, the bigger question is how big those bumps will be and have risk asset prices discounted these?

Major events for this week

The Labor Department's October employment report will likely be the most closely watched report, but data on manufacturing, services and home sales could also move markets. The Federal Reserve will also comment after a two-day meeting on interest rate policy.

Outside of the US, major events include policy statements from the ECB, BoE, and RBA, which is expected to raise the cash target rate by 25 bps again.

While the overall picture from Q3 earnings(healing but mostly still hurting and not hiring) is already old news, investors will also be paying attention to third quarter corporate earnings results this week from some of the remaining marquee names. Ford Motor Co., Cisco Systems Inc., Kraft Foods Inc., Marathon Oil Corp., Starbucks Corp. and Time Warner Inc. are scheduled to report.

While equities tend to drive currency markets, there are times when currency markets can move both equities and commodities. Much depends on the context of overall sentiment. In the past month we have seen the same kind of currency news affect the markets in opposite ways, due to the prevailing mood when the news came out. When Australia announced that it was raising interest rates, markets were already in rally mode and moved higher still on the news, citing this first rate increase among the major economies as further proof of ongoing global recovery.

Yet just this past week, Norway became the first European country to raise rates. The markets should have been thrilled. After all, Australia is part of the higher growth Asian block, and has the fastest growing economies as primary trading partners. Norway, however, has to manage in a tougher, slower growth neighborhood, Europe. That the Norges Bank would have enough confidence to raise rates could have been seen as even more bullish.

However, markets were already in retreat mode due to justifiable concerns that stocks and other risk assets were already overpriced. Thus when the news about Norway's rate increase came out, the media cited it as one of the reasons for continuing market pullback. Why? Because perhaps the rate increase was premature and would cut off the nascent recovery!


Fell along with stocks. -3.61% Friday on the swing back to negative sentiment. Prices rose above $77 a barrel Monday in Asia, recovering some ground after a big fall, as investors eyed upcoming figures on the U.S. economy and a volatile dollar. The Labor Department's October employment report will likely be the most closely watched report, but data on manufacturing, services and home sales could also move markets. The Federal Reserve will also comment after a two-day meeting on interest rate policy. Oil gave up much of its gains this past week falling from around $81 to $77 per barrel, and fell 3.61% on Friday alone. Gold fell from around $1060 to$1040, and fell just 0.61% on Friday. Barring any surprises, they are expected to continue to follow sentiment as represented in equities, particularly the S&P 500.


A packed news week ahead, as is always the case with weeks ending in the month's climactic US Non Farms Payroll and employment rate reports. Employment lies at the very heart of the US recovery, given its central role in fueling consumer spending (70% of US GDP), and in turn driving consumers' ability to repay debt and revive housing and the banking sectors. These are the very industries that have lead the world's market collapses and rallies over the past years, thus the credibility of the recovery story depends greatly on US employment, which is still not showing steady improvement.


Key Events Likely to to Favor Risk Aversion, and thus the Safe Haven US Dollar


Outlook for US Dollar: Bullish

- Main Events, ISM Mfg index, Non-Mfg index, Fed policy st., ADP NFP, US DoL NFP & Employment Rate, other central bank policy statements also could influence the USD

- US Dollar rallies on S&P 500 losses-more of the same likely if the coming reports disappoint

- Forex Options and Futures point to US Dollar bottom as excessive USD shorting unwinds

- USD volatility likely on ADP NFP, Non Manufacturing PMI, Fed rate decisions and US NFP


The US Dollar finally showed signs of life through the past week of trading, moving higher against the Euro and other key forex counterparts. The US S&P 500 and other financial risk sentiment barometers continued their move down that they began the prior week, spurring the dollar turnaround. Given extreme bearish sentiment on the USD, it wasn't surprising to see it continue mostly higher through Friday’s close. We have long argued that the Greenback was way oversold and thus likely move sharply higher on any pullback in stocks and other risk assets. While it's dangerous to take early positions betting on major counter-trend moves before these moves are clearly established, the substantial week-long turnaround gives us reason to believe that the US Dollar may have finally set a major low and will likely continue higher through end-of-year trading.


A packed economic event docket means high potential for USD volatility. Because the dollar is a direct participant in at least 70% of all fx trade, that means significant potential volatility in forex this week. Forex options market volatility expectations are at their highest since early July ahead of highly-anticipated central bank decisions and the US Nonfarm Payrolls report. Recent US Q3 GDP figures suggest that the world’s largest economy is in better shape than previously thought, and consensus forecasts are for relatively steady improvements across key economic indicators. However bullish expectations leave plenty of room for disappointment, and the recent spike in the S&P 500 Volatility Index (VIX) suggests traders will dump risky assets at the first sign of trouble. No surprise there, given the widespread belief that markets have already priced in the growth and are overbought.

Early-week ISM Manufacturing and Pending Home Sales could move markets across classes, but the real action will probably start with Wednesday's triple-feature of results for the:


• ISM Non-Manufacturing

• US Federal Open Market Committee Rate Decision

Because most US jobs are not in manufacturing, the ISM Non-Manufacturing Employment Index will likely set the mood ahead of Friday’s climactic Nonfarm Payrolls result. The sub-index has shown reasonably steady improvements after setting record-lows through 2008, but the below-50 reading shows that employment will likely continue to contract through the near future. Surprises in either direction will likely set the tone for the afternoon’s FOMC decision, while Friday’s NFPs concludes this week of heavy economic event risk.

Given the eventful week ahead combined with continued questions about whether risk asset markets are overbought, the coming week could be another wild ride across USD pairs. Given our belief that markets are due for a pullback that should spark demand for the safe haven USD as fear rises and dollar shorts unwind, we suspect the dollar is due for further gains in the short term, though only in the short term, because its underlying fundamentals have not improved.


To start off, on Monday we will receive the ISM Manufacturing report which is expected to make further progress into the +50 expansionary levels. On Wednesday, the FOMC will provide the markets with some clarifications on current initiatives. Now that the deadline for Treasury purchases has approached, the Fed will have to determine what their next step will be in the Quantitative easing unwinding process. Wednesday will also produce the ISM Non-Manufacturing index which will have grave implications for Friday’s Non-Farm payrolls report. Now that the market has reached an inflection point where uncertainty has replaced confidence, the employment report will be key in providing markets direction for the coming month. That is just the schedule for the US. When accounting for the fact that the RBA, BoE, and ECB will all be announcing rates, it becomes clear how pivotal next week will be in ironing out some loose ends of the current economic landscape.


Risk Aversion, Possible USD Recovery Threatens Euro Uptrend


Forecast for Euro: Bearish

- Main Event: ECB Policy St. , Minimum Bid Rate, see also all the USD events above, as EUR moves opposite the USD

- German unemployment unexpectedly lower, but Merkel warns about optimism

- Monthly Flash consumer inflation index reports 5th straight negative print

- EURUSD trend retracing but has yet to reverse


The US dollar and euro account for the highest and second highest level of reserves in the world’s central banks, thus the EURUSD is the world's most liquid fx pair, accounting for about a third of all trading. Thus when one of these moves in one direction, the other tends to move in the opposite direction, because for every three EUR bought, a dollar is sold and vice versa. The dollar has been the top reserve currency, and in turn been used to value commodities and benchmark currencies for decades; but the academic, political and speculative communities have been abuzz for months about how the greenback is slowly losing its primacy. The euro is the next choice to serve as the financial medium for international investors and consumers. If it happens at all, such a profound shift would take at least a decade, likely longer. However, this relationship is linking the EUR and USD, leaving the dollar’s strength and weakness to guide the broader trends of the euro.

While the euro has only a small yield advantage of many of the majors and is anchored in the relatively solid German and French economies which account for about half of Euro-zone GDP, the euro's anti-dollar role has made it behave like a risk currency, moving opposite the USD's direction for good or bad.

Thus euro traders always have to watch the dollar carefully. There are plenty events to watch as well. The myriad of rate decision (primarily the RBA, but also the Fed and ECB) as well as Friday’s US labor figures offer tangible catalysts to prepare for.

While risk appetite is always important to monitor whatever one is trading, the euro may still find volatility through its own event risk, especially Thursday’s ECB rate decision. The market and economists are unanimous in their forecasts for rates to be held unchanged at 1.00 percent; but there is potential for the statement and President Jean Claude Trichet’s commentary to fuel speculation for the eventual, hawkish turn.

This past week, ECB member Axel Weber stirred this pot when he suggested that it was time to start withdrawing stimulus from the markets. And, just to confirm his bias, he went on to say that policy officials will not wait for employment to pick up to hike rates as by then it may already be too late. In contrast, a draft of the EU’s recent summit reveals officials’ belief that it is too early to start pulling back support for the recovery, though they did not repeat the 2011 timeframe that was suggested before. Euro traders should also be wary of the BoE’s policy announcement (due the same day and nearly the same time) as an expected change to the MPC’s bond purchasing program could spark interest rate speculation throughout the majors.


Yen Consolidating Following Major Rally?


Outlook for Japanese Yen: Bullish

- Events: Average Cash Earnings y/y, BoJ Gov. speaks & policy st.,

- Retail sales top forecasts for September, up 0.9% from August

- BoJ left rates at 0.10%, and will allow liquidity program to conclude in December

- Does the recent drop in carry trades indicate a broader reversal?


Playing its traditional role as chief safe haven currency in the context of a market pullback, they JPY was easily the strongest of the majors over the past week, rallying nearly 7 percent against the New Zealand dollar and over 4 percent versus the euro, Australian dollar, and Canadian dollar. There was also a 2% drop in USDJPY. Clearly

• risk aversion has made a big comeback

• The Japanese yen has maintained its top “safe haven” status, followed by the USD

Indeed, the CBOE’s VIX volatility index, one of the prime “market fear” gauges, rose above 30 for the first time since July, which may indicate that the shift in sentiment may extend into the weeks ahead.

That said, the moves we saw in the Japanese yen crosses were extreme, which suggests some caution at the start of this coming week, as the majors could see a bit of a consolidation period. At the same time, event risk for currencies like the Australian dollar, US dollar, euro, and British pound will be very high ahead of related central bank rate decisions, which could move markets if they produce any surprises.


Japanese-specific news will be quite limited, and we expect the JPY to move with market risk sentiment. First, the minutes from the Bank of Japan’s latest policy meeting, no surprises expected. Next, Japan’s leading economic indicator is projected to rise to, which would mark a one-year high as well as the sixth month of improvement. Likewise, the coincident index is forecasted to rise to a 10-month high of 92.5, all of which would reaffirm the BOJ’s more optimism.


BoE Decision: QE or Not QE? That is the Question


GBP Outlook: Neutral

- Events: Mfg PMI, Halifax HPI, Services PMI, Asset Purchase Facility, MPC Rate St., BoE Official Bank Rate, PPI Input

- Risk sentiment will outweigh GBP events, though these may contribute to overall sentiment

- Consumer confidence up to a 21-month high, purchasing plans to 23-month high, but both are still net negative

- GBPUSD a rare pair struggling with a range rather than potential trend reversal


Though they are linked, economic health and interest rate policy pose two very unique concerns for sterling traders. The extension of the nation’s record-breaking recession a few weeks ago has devalued the currency’s standing amongst peers that are already in more advanced stages of recovery. In turn, this raises questions about interest rate timing and monetary policy. The Bank of England (BoE) meets this coming Thursday and the outcome - whether it result in looser, tighter or no change to policy - will almost certainly influence trends volatility. Will any moves last long enough to break prominent ranges (GBPUSD) and perhaps reestablish the pound’s standing in the constant ebb and flow of risk trends?

Over the past month, we have seen a number of dramatic swings in the pound; and nearly every one of them has been tied to interest rate speculation. On Friday October 23, GBPUSD plummeted after disappointing GDP data showed that the UK contracted for a sixth consecutive quarter – extending the worst recession on records going back to 1955. This specific release has been central to speculation about the BoE decision. There will be no change to the benchmark lending rate; but there is high debated disagreement on what will happen with the quantitative easing program.

A few weeks ago, a central bank economist stated his belief that the group will likely pause its purchases. In fact, former MPC member Goodhart projected the same thing despite the dismal outcome of the economic update. However, markets are highly skeptical. Economists are calling for a 50 billion pound extension to 225 billion, though both the very existence as well as size of the extension is unclear. Because the current target for gilt purchases was already reached this past Thursday, the central bank will have to make a decision to pause or increase the target.

After the surprise expansion of the economy’s painful recession through September, there is now less concern over whether the pound can remain competitive in the slow, global return of interest rates and more worry that the UK won’t be able to make a significant push into positive growth before the world-wide recovery levels off.


Forecasts for general growth and its major components will be of primary concern; but inflation projections should be noted. Aside from the central banks outlook, there are a number of economic releases on deck to watch for potential volatility explosions. Indicators for housing, consumer confidence, manufacturing, services and construction health will provide a well-round and timely update on activity.

Overall risk sentiment outweighs events

And, though pound traders have a lot of notable event risk to keep track of next week; it should not be forgotten that the underlying current is still investor sentiment. Should the BoE’s asset purchase target be altered, the impact on the pound will be filtered through the progression of risk appetite. Stationed at the extreme of the risk spectrum, this currency moves like a risk currency because its financial markets and economy stand to benefit the most through the global advance of growth and investment.


Swiss Franc Likely to See Major Breakout Versus Euro If Risk Aversion Persists


Outlook for Swiss Franc: Neutral

- Swiss KOF rises to its highest in 17 months

- Swiss Franc Futures and Options positioning nonetheless points to CHF losses

The Swiss Franc finished the week modestly higher against the Euro in open defiance to clear Swiss National Bank FX intervention threats. The Euro/Swiss Franc exchange rate hit the sensitive SFr 1.5080 mark and very quickly reversed—raising clear suspicion of SNB selling. Indeed, the EURCHF hit its lowest levels in nearly a month following a much better-than-expected Swiss KOF Leading Indicator report. Yet the declines were temporary, and the SNB seemingly drew yet another “line in the sand” to prevent excessive Swiss Franc appreciation. Holding with its policy, the Swiss central bank neglected to comment despite the telltale signs of intervention.

No surprise that the intervention failed; the EURCHF finished just above pre-intervention levels through the end-of-week close. Sharp drops in global equity markets led traders to sell the risk-sensitive Euro and buy the safe-haven Swiss franc—leaving questions as to whether EURCHF intervention may be effective. That will clearly depend on how scary things get. We question whether the SNB will succeed if the reversal becomes a stampede out of risk assets.


The countervailing forces of Swiss National Bank intervention and financial market flights to safety should make for another eventful week of Swiss Franc trading. A busy week of economic event risk likewise promises no shortage of excitement, and FX Options markets are pricing in the most EURCHF volatility in nearly a month. The major highlight will likely be Thursday’s Swiss Consumer Price Index report. Given the SNB’s resolve to prevent CHF appreciation in the face of deflationary pressures, any strong surprises in either direction could force considerable price movements. Pressure remains on the SNB to stave off deflation, but a considerably above-forecast print would almost certainly ease said pressure. Traders will otherwise look to Friday’s combination of Swiss and US Employment numbersGiven the increasingly narrow week-to-week ranges in the EURCHF, one gets the sense that the pair is preparing to make a substantial break in either direction.


Driving the CAD: Oil First, Risk Appetite Second, Employment Data Third


Outlook for Canadian Dollar: Bearish

- GDP Disappoints, Contracts by 0.1% in August

- Crude Prices Continue To Dominate CAD direction


The Canadian dollar fell to its lowest level in nearly a month against the USD as broader risk aversion sank oil prices and weak growth figures helped erase early October gains. Canadian GDP unexpectedly fell in August by 0.1% disappointing economists who were looking for growth of 0.1%. Oil and gas extraction and, to a lesser extent, manufacturing were the main sources of the decline. The Canadian economy is expected to feed off of the global recovery and government stimulus. Therefore, the surprise contraction will weigh on the outlook for future growth but the lagging indicator’s relevance could diminish if upcoming reports continue to point toward a sustainable recovery.

However, what may be of more concern for currency traders are the central bank’s continued talk of intervention. The verbal efforts may not be driving current weakness but could limit bullish sentiment going forward.

Bank of Canada Governor Carney repeated this week that policy makers have “options” to slow the “loonie’s” appreciation, if its strength makes hitting their inflation target of 2.0% prohibitive. Market participants shouldn’t expect any action over the near-term as the Governor would go on to say that "history has shown intervention in and of itself without backing policy moves...seldom is effective over the longer term." The central bank leader recommitted to keep the bank’s key interest rate at 0.25% through June 2010, unless inflation threatens their 2% target. Policy makers would point to greenback weakness as the culprit for the local dollar’s strength and continues to view the current trend as a negative for the Canadian economy. The U.S. is Canada’s main trading partner and demand for exports will continue to be impacted as the exchange rates make Canadian goods more expensive for US customers.


This week’s economic calendar offers new event risk and insights into the Canadian economy. Just like the past week we will have to wait till the end of the period with the Ivey PMI on Thursday and the employment report on Friday. Manufacturing activity is forecasted to have slowed to 59.5 from 51.7 but remain in expansion territory for a fifth straight month. Meanwhile, economists are forecasting that the Canadian economy added another 10,000 jobs in October following the unexpected gain of 30,600 the month prior. The surprise job growth sparked a “loonie” rally that sent the USD/CAD to a fresh yearly low of 1.0205. Continued job creation may spark bullish sentiment for the CAD, helping erase recent losses. However, traders must also consider the U.S. NFP report in determining price direction. The USD/CAD found trend line resistance around 1.0835which could set the pair up for a reversal to start the week. However, a break above the level exposes potential to 1.1100-9/2 high.


Rate Hikes Priced In, AUD Will Trade With Market Optimism


Outlook for Australian Dollar: Bearish

- Australian Lending Unexpectedly Falls, Threatens Recovery

- New Home Sales Decline for First Time Since May, Says HIA

- Inflation Hits Decade Low in Q3, But Rate Hikes Still Expected Given Prior RBA Remarks

- Business Confidence to Highest Level in 15 Years Per NAB

- Producer Prices Drop Most on Record on Currency Gains

The Australian Dollar may find little lasting support after the central bank delivers another interest rate increase as risk aversion undermines demand for the high-yielding currency and the rate hikes are largely priced in given the recent bullish comments that virtually promised more rate increases.

Traders clearly took Stevens at his word: a Credit Suisse gauge of priced-in rate hike expectations has steadily shown that investors are fully convinced that another 25 basis points will be tacked on to borrowing costs on November 2nd and probably in the months to come as well. In fact, expectations of an increase have been unwavering even as the annual inflation rate declined to the lowest in a decade and producer prices fell at the fastest pace on record, hinting that little upward pressure in the pipeline. To that effect, the risks to the Australian Dollar seem stacked on the downside considering there is little that the RBA’s hawks can say at this point that has not been priced into the exchange rate, with the announcement having significant market-moving potential only in the unlikely event that policymakers backtrack on their aggressive posture.

Even if they go ahead with rate increases and there is not major pullback in stocks, one can't rule out an AUD pullback. Why? Just this past week, when Norway became the first Euro-zone country to raise rates analysts widely viewed it negatively, as a threat to the nascent recovery! This after Australia's rate increase was seen as recovery evidence and sparked rallies mere weeks ago.

As we've noted elsewhere, this opposite reaction to such similar news suggests that risk appetite has been sated for now and markets are viewing news as an excuse to take profits.

AUD Events- Who Cares?

Looking beyond the rate decision, the trend in risk sentiment is likely be the dominant catalyst for price action, rendering local news almost irrelevant.

After two consecutive quarters of a breakneck bullish momentum across the spectrum of risky assets (stocks, commodities, high-yielding currencies), investors seem to have turned sheepish: the MSCI World Stock Index declined for the first time since June, registering the biggest loss in eight months in October; meanwhile, the VIX index of US stock options volatility that is often seen as a proxy for investors’ risk aversion jumped 23.9% on Friday, the largest one-day spike in a year.

If this proves to signal a substantial shift away from risky assets, the Australian Dollar will face tremendous selling pressure. Indeed, a trade-weighted index of the antipodean currency’s average value against top counterparts is now 91.8% correlated with the aforementioned MSCI global stock benchmark.


Drop Likely as Risk Appetite, Employment, Wage Growth Sputter


Fundamental Forecast for New Zealand Dollar: Bearish

- RBNZ Holds Benchmark Interest Rate Steady

- Business Confidence Lower in October

- Trade Deficit Narrows as Imports Tumble

The NZD fell 3.75% against the dollar this week as investors reduced expectations for higher interest rates, and the currency may continue to face increased selling pressures in November as the economic docket is expected to reinforce fears of a protracted recovery. The Reserve Bank of New Zealand held the benchmark interest rate at 2.50% this week and pledged to maintain borrowing costs at the record-low throughout the first-half of the following year in order to foster a sustainable recovery, and noted is wasn't worried about inflation as much as "subdued" business spending.

Moreover, the RBNZ said that the Kiwi's rise “has limited the scope” for an export-led recovery, and sees the current account deficit widening over the medium-term as global trade conditions remain far from favorable. As a result, Credit Suisse overnight index swaps shows investors see a 2% chance for a rate hike in December, and uncertainties surrounding the economic recovery may continue to weigh on interest rate expectations as policy makers anticipate growth and inflation to remain subdued going into 2010.

Further, Prime Minister John Key argued that New Zealand dollar is “a little bit overvalued” and said that he would “prefer a lower exchange rate” to help support the recovery, but went onto say that “it is very difficult” for the government to temper the appreciation following the weakness in the global reserve currency. In addition, Mr. Key saw a risk for the government budget to stay in deficit “for a decade” after marking the first short-fall in nine-years, and the cautious outlook held by policy makers may continue to drag on the New Zealand dollar as investors weigh the prospects for a sustainable recovery.


The economic docket for the following week is expected to reinforce a weakened outlook for household spending as economists forecast employment to fall 0.3% in the third quarter, with the jobless rate anticipated to reach a nine-year high of 6.4% from 6.0% in the three-months through June, while private wages are projected to rise 0.3% during the same period, which would be the lowest level of growth since 2000.

Thus the NZD/USD may continue to test the 50-Day SMA at 0.7170 for near-term support and if global markets continue down the kiwi-dollar may test the 100-Day SMA at 0.6846, as investors unwind NZD longs. However, a rise in risk appetite may lead the pair to retrace the sharp decline over the following week and could test the 10-Day SMA (0.7448) for resistance.


Seeking risk aversion plays. JPY and USD vs riskier currencies when these breach resistance or support., short oil gold when breach support. See below for specific opportunities with the EURUSD, CRUDE

Trading Opportunities: Near term favors SAFE HAVEN currencies, shorting risk assets. Thus:

be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY.

Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite.

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.


Crude Oil

Broke support at the first Fibonacci retracement level at $77.83 last week, holding on near its 20 day MA. When/if risk appetite returns, next resistance is at last week's high and round price level of $80/bbl. If risk assets like stocks continue to drop, next support level is at the significant 38.2%/61.8% Fibonacci retracement level at $75.51, which is near the multi-month price support of around $74/bbl.

WTI Crude Oil Daily Chart

03 Nov 02


Holding just above strong support level of $4.4720 (50 day MA + 23.6% Fiboncci retracement from its June rally, also lower BB band around 1.4657). Look to play a break above this if there is bullish news to at least 1.4845, the high of the past few days, or if more bad news or drops in global equities, a break below to at least the lower Bollinger Band at around 1.4653, next support at around 1.4600, a convergence of past price support AND just above the 38.2% Fibonacci retracement from the June rally at 1.4565 .


01 Nov 02

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