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Competitive Devaluation: Leave Shame And Principles At Home!
From Nic Lenoir of ICAP
The Bank of Japan is back pounding the QE/debasement/Keneysian madness table: this time they don't buy bonds, they buy REITs and ETFs. Did you hear that Mr. Bernanke? You no longer have to wait for a business to be insolvent to buy (bail?) it. More and more countries are in the pool. Central banks joining the game range from Peru with a few millions worth of USD, Brazil, to Japan committing to $300Bn of FX intervention with the first $20Bn unsterilized, to the Fed where estimates for QE 2.0 range from $300Bn to $500/750 Bn every quarter. Commodities love it obviously and last night Japanese quantitative escapade did not leave Copper or Gold insensitive as they scream to new (recent or all time) highs.
There are a few points worth noting this morning however. With the bank of Australia leaving rates unchanged and the bank of Japan back doing whatever it can to get USDJPY off the lows, the USD should not be trading that weak this morning. EURUSD strength is understandable. We had indeed pointed out that buying EURUSD volatility or calls on the pair against similar structures for the USD index should perform well given that the ECB is just about the only central bank not debasing. In that sense EUR should bear the brunt of USD weakness and massively outperform other currencies. But beyond EURUSD, there seems to be little reason to be selling USD based off last nights events. It is a relative value game, and a lot of people seem to have forgotten about it. We don't know what the Fed will do even though certainly a lot is priced in already, but we had two central banks implicitly supporting the USD by their actions last night.
Technically there is a double top triggered in AUDSD and a gap/resistance at 0.9651, not to mention the former bullish channel support now resistance at 0.9665. I believe that short term you are supposed to sell here to play further weakness down towards 0.9465/0.9407, with a stop if we reintegrate the bullish channel. USDJPY is clearly trying to shape a bottom here around 83.30 as well and it seems a good point to be adding or initiating longs, though my favored trade in the space is long USDJPY and 10Y treasuries against 10Y JGBs.
I will conclude with an open question which I hope will draw some interesting feedback from the FX-dealer community. Most macro funds are trying to get long USDJPY, with macroeconomic models pointing to a fair value closer to 110/115 than 83. The QE argument does not really hold since Japan has been doing it for 30 years and USDJPY has not rallied, so pricing in US QE as a rationale for USDJPY weakness is clearly wrong. It is definitely a catalyst for DXY weakness, but not USDJPY. Last but not least, many argue that below 80 Japanese exporters are basically broke. This is not a joke, their competitiveness is taken out so much that would basically have to file for bankruptcy, and recent numbers out of Japan are clearly highlighting that the pain is starting to be acute. In that context you might ask: who is selling USDJPY frantically in the face of the BOJ which is buying unsterilized? My hunch is China. With a pegged but not freely trade currency, China unlike Korea does not have to waste to much time and effort to buy USDCNY (not to mention they are naturally long from the trade balance...), and in fact implicitly benefits from USD weakness for its European exports. Also China stands to be the greatest beneficiary from Japanese exporters going belly-up, both from a competitive standpoint and for the pure satisfaction of getting pay back. Make no mistake, recent public relations between Japan and China are bad, and the bitterness is absolutely not a hype. It's real and nothing would make China happier than Japan economic misery. The PBOC has also made clear its intentions to diversify its foreign reserves, which is another reason to sell the USD. Call me a conspiracy theorist if you will, but I would be very surprised to be proven wrong on thsi one and I welcome any indication one might have that China is indeed out there selling USD. After all given Congress's preoccupation with the Yuan, it's not like it would be completely uncalled for.
This great battle will ultimately decide the future of all other asset prices as they are mainly driven by global liquidity expressed in USD, which in turn is greatly affected by USD weakness. As a short-term trade I must admit I like the set-up to sell AUDUSD here, and I also am going to take a closer look at USDCAD which is testing the bottom of its range.
Good luck trading,
Nic
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And why, today, are there wild rumors of a 55 ISM ?
USA gov is selling tens of billions of advanced weapons to Muslim-based Saudi (i actually don't care if they were atheists but this might stop those anti-whatever people). Israel is also getting a nice cache of weapons delivered to them from the USA. Am sue there are others getting billions in weapons or are expecting weapons delivery in the near-term.
Meanwhile the Financials continue to lag the overall market. Look at the XLFvsSPX chart. Is this the proverbial canary?
http://rosenthalcapital.com/blog/2010/09/stock-market-strategy-financial-sector-flashes-warning-reduce-riskincrease-diligence/
your date needs some food. man up. feed your date
My suggestion is to NOT be short ANYTHING at this point.
Even individual currencies will occasionally rally as they are all priced relative to each other. Stocks, PMs, beef, boots and ammo are all going higher. Don't try to be Mr Smartguy-TopCaller just to have 24 hours of glory. You'll get your ass handed to you a few days later.
Preserve, protect and defend. Its not just for the cops anymore.
Trying VXX again down here. Long, of course.
Credit to Turd who called a front run yesterday with SP at 1135........1160, 2:25PM ET.....one day later.
On a related note also agree with Turd re shorting until the following question gets vetted;
What designs are being worked out inside the FED for the FOMC Nov 2 and 3 call, and beyond?........
Best guess from this a/h's perspective is the FED intends to maximize and extend its leverage and already impressive ability to manipulate public perception and market price.......also guess the FED is using this time VERY smartly to possibly introduce and refine a surprise design element of the 'expected' QE.......maybe a QE with a warp speed or some evolutionary, cutting edge aspect.
Technically, shorting looks tempting, but the FED trumps
heres some help from MSM .....they have listed the 20 safest banks......and voila look at BANCO SANTANDER......rank 14...
http://business.rediff.com/slide-show/2010/oct/04/slide-show-1-worlds-20...
Awe. The MSM is so sweet to us.
I said this last...(Feb?) that shorting the Aussie is a road paved with dead traders. You could be right on this one, but it sure is hard to hit the currency that is both linked to commodities and linked to China, without having a short commodities/china view.
It will be interesting to see how the different interests will play out. I do not know the history of the BOJ or who it's owners are. The FED, being a private entity, has share holders. Eventually, policy moves by the FED will be to protect the wealth of these share holders. Therefore, I believe the FED will eventually hold the line on hyperinflation (causing depression). Once they do this, China will start to show its true self and it will be interesting how Japan deals with the transition from a USD groupie to more Yaun centric.
Hi Nic
I often say thanks for your updates which I appreciate. I am able to reply with something more helpful this time I hope. I see that you suggest that Japanese exporters are in effect bankrupt at an exchange rate of 80 to the US dollar.
However I have seen this on notayesmanseconomics.
"The reasoning goes as follows. Japan uses a different system for addressing import prices than she does for addressing consumer prices. If the import price system was used for consumer prices then we would have had lower prices or more disinflation. This does not sound good but if you allow for it and say that nominal GDP figures are the same then real GDP suddenly becomes higher."
My thinking is that if you apply this logic that prices may have fallen by more than her CPI index suggests it might be an explanation of how Japanese exporters have been surviving and that they may survive at higher exchange rates that might appear likely.
http://notayesmanseconomics.wordpress.com
Srebro Kobiety!!!!!!!!!
Especially with current chinese interest in Eurozone and cautious "If you would be so kind" utterings from ECB at the same time US Congress starts getting loud and uppity.
So who is buying massive size JPY driving USDJPY down to 83 ... ?
China indeed ...
carry traders. "we'll take what if you don't call a worthless dollar you make one and use it." the dollar is the reserve currency because a guy named Volker made it so by wrecking our already wrecked economy back in 81-82. needless to say "the traders appreciate the niceities of today" they loved so much back before Volcker. Will the Chairman be forced to act? Will he be forced to resign? Would you like to go back to your constituents and tell them "what a good job you're doing"? Crazy. Always remember young Grasshoppers "when they fit you for your suit always ask what said activity it is to used for."
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