Fresh back from vacation in the Sunny Caribbean – here are some trades that I like off the bat:
1) Short AUD – After last week’s disappointing GDP, retail sales, service and manufacturing PMI reports, there is no chance the RBA will be talking about another rate hike this evening. The last time we heard central bank governor Stevens speak, he was crystal clear in saying that the current level of interest rates is appropriate. He also indicated that the next rate hike may not be until mid next year. Last week’s dismal economic reports served to confirm that not only is now not the right time to continue raising rates, but it would be smart to let investors know that the RBA is officially on hold until the U.S. and/or Chinese recovery gains momentum. Now of course, the U.S. has its own problems so even though I am bearish Aussies against the U.S. dollar (AUD/USD now @ 0.9875), I particularly like shorting Aussies against the Japanese Yen (AUD/JPY now @ 81.65).
2) Short CAD – Same story in Canada. Even though there was an increase in employment last month, it was all in part-time and not full-time work. If this shift becomes a continuous trend, it would suggests that companies are growing concerned about future business activity. Back in October, the Bank of Canada downgraded their growth forecasts and last month the BoC warned that they could intervene in their if there was extreme movements in the currency market. As a result, with USD/CAD trading just a tad above parity (USD/CAD now @ 1.0070), I think that the BoC will remain cautious, warning of the downside risks that will impede them from normalizing monetary policy. There is a good chance that USD/CAD will be trading back above 1.02 before the end of the year.
3) Short EUR – European sovereign debt problems have not gone away and despite the weak U.S. NFP report, traders have resumed their sale of euros. All eyes are still on Spain and Portugal and this is not likely to change anytime soon. EUR/USD is currently trading @ 1.3270 and I am looking for another move into the 1.30 handle.
If you can’t tell – I am bearish risk. Good luck trading.
I was on the Business News Network this morning discussing the non-farm payrolls release and the decline in the EUR/USD. Click on the image to access the video
Over the past few years, traders have become accustomed to the idea that the day to day moves in stocks impact currencies. When equities sell off aggressively like they have today, the U.S. dollar usually strengthens across the board as investors pile into the low yielding safe haven currency. When equities stage a strong rally on the other hand, the dollar tends to sell off as safe haven flows ease.
However often times currency traders will forget about this correlation and for good reasons because currency movements can oftentimes decouple from equities. This happened in June when the correlation between the EUR/USD and the S&P 500 fell to 50 percent. In comparison, since the beginning of the year, the correlation between these two instruments has been greater than 80 percent. This meant that 80 percent of the time that stocks rallied, the EUR/USD strengthened as well.
Yet the correlation between equities and currencies has recoupled over the past week with the EUR/USD and the S&P 500 moving in unison 90 percent of the time. Even the correlation between USD/JPY and the S&P 500 has hit 85 percent. This is particularly notable because the correlation between USD/JPY and U.S. equities was 80 percent last year but for this year up until last week, the correlation was negative 6.9 percent. In other words, there was no correlation whatsoever.
With earnings season underway, we expect this renewed correlation to be one of the dominant drives of price action in the currency market so if you aren’t doing so already, make sure to always keep an eye on how U.S equities are trading intraday.
2008 has been a crazy year in the foreign exchange markets and hopefully 2009 will bring more steady times for the global economy as a whole. The tremendous amount of fiscal and monetary stimulus that central banks around the world have doled out should begin to have their effect in the second half of the year. Countries that will be the first to rise from the ashes are the ones whose currencies have lost the most value in 2008. In contrast, the countries whose currencies soared will have a much more difficult time recovering.
In 2009, we will be celebrating the 10 year anniversary of the Euro and in January, people around the world will cheer the inauguration of brand new US President. Obama embodies change and hopefully that change will help to pull the US economy out of recession.
Make sure you read my 2009 currency forecasts. I talk about what I expect fundamentally and technically for the following currencies in the year ahead.
US dollar forecast
British pound forecast
Japanese Yen forecast
Australian dollar forecast
New Zealand dollar forecast
Canadian dollar forecast
Swiss Franc forecast
Also, I will be soaking up some sun in the Bahamas from Jan 2 – Jan 6, so there will be no new blog posts until January 7th.
Update – 5 Reasons Why the British Pound is Being Pounded – Access my latest article Feb 28, 2010
How Did the British Pound Trade in 2008?
The British pound was one of the worst performing currencies in 2008. It fell to a 6 year low against the US dollar and record low against the Euro in addition to selling off against every other G10 currency. The overwhelming weakness in the currency is a direct reflection of the impact that the credit crisis had on the UK economy. In the month of December, many currencies recovered against the US dollar, but unfortunately the British pound was not one of them. Although the pound could continue to weaken in the first quarter, the government’s aggressive fiscal and monetary stimulus should help the country recover towards the end of 2009.
Official Recession in 2009
Without two consecutive quarters of negative GDP growth, the UK economy is not technically in a recession but that should change in the first quarter of 2009, when the 2008 Q4 GDP numbers are released. Growth has been slowing materially and the weakness is reflected in the British pound. GDP growth fell by 0.6 percent in the third quarter, the largest decline in 18 years. The housing market and the financial sector have been the engine of growth in UK for the past few years and both blew up in 2008. Unfortunately the worst is probably not over for the 2 key components of the UK economy, particularly following the Bernie Madoff’s Ponzi scheme. In addition to losses suffered from the subprime mortgage crisis, many large hedge funds and European banks invested with Madoff’s. In 2009, they will be forced to write down those losses and deal with what could be pretty severe consequences for the financial sector as a whole. With the financial and housing market sectors expected to remain weak in the first half of 2009 and layoffs predicted to rise, GDP growth could fall as much as 2 percent next year. Although we believe that the country could be one of the first to recovery from the global economic downturn, this will not before more pain is felt in the UK economy. The severity of the UK recession will be largely dependent upon how quickly the credit markets are restored in 2009.
Inflation to Fall Back to 2%