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Does "No Decoupling" Mean Dollar Set To Surge?
Earlier we presented Morgan Stanley's traditionally bullish opinions on the economy as relates to the firm's view on rates, which nonetheless translated into an opposite trade recommendation: one that goes against the very core of the bullish economic sentiment. Curiously, Morgan Stanley did a comparable bait-and-switch in its FX analysis last week, when it called for a spike in the recently beaten down USD, on the back of an expectation of US economic growth by 3.4% and 3.3% in Q3 and Q4 (these numbers will shortly be revised lower as MS is way above consensus, see Exhibit 1, and even sellside strategists are finally becoming aware of the double dip), or economic data weakening elsewhere. In other words, no decoupling. With the EUR surging, and the recent strength in Europe's manufacturing centers driven purely by a surge in exports, the likelihood that foreign economies are looking at a step function drop is pretty much guaranteed. Which brings us to a parallel observation, one we have brought up previously, namely that various governments will likely escalate the trade imbalances on an increasingly shorter timeframe, taking advantage of the record short-term volatility in key crosses, and ping ponging quarter after quarter between export strength and weakness, all the while hoping to ride the crest of the wave of recent strength beyond upcoming economic declines. In other words, borrowing a term from TV jargon, the economy will soon downshift from "progressive" to "interlaced" as instead of operating at full steam constantly, each developed economy will be in a quarterly On:Off regime, all the while hoping to remain in investors' good graces when it comes to stock markets, and be punished aggressively when it comes to FX. Judging by the results in Q1 and Q2, and the interplay between Europe and the US in light of a surging then plunging dollar, it is working... for the time being. One wonders however how long the developed, overleveraged economies can hope to maintain this ruse, which is nothing short of another confidence game on risky assets and a bet for central planning.
Back to Morgan Stanley. Below is Stephen Hull's view on why nondecoupling means it is time to take profits on USD shorts and unwind all those EUR longs.
Our core views from the remainder of 2010 remain unchanged, namely that after a period of weakness we think that the dollar
is close to forming a bottom against the major currencies. Following a string of weaker than expected economic data, expectations about the outlook for US activity has meant the dollar has been in the sweet spot for bears. Going forward, we do not expect the US economy to decouple from the major economies. We expect the dollar to recover via either US growth rebounding in the second half of 2010 or data weakening elsewhere, or both!
We forecast the US economy to grow by 3.4% and 3.3% on an annualised basis in the third and fourth quarter, higher than consensus estimates as Exhibit 1 shows. While that is our core view, it is also possible that the US is just leading a broader decline in global activity, and if that is the case then we should soon start to see weakness in other economies, which presumably might be associated with a period of risk aversion. If we are right with either of these outcomes, we would expect the dollar to recover from its recent selloff.
One of the factors which has hindered the dollar more in recent weeks has been concerns that the Federal Reserve might start to ease further. Expectations that the Fed might reinvest the proceeds of their MBS portfolio have been boosted by recent press articles, and there seems to be a decent chance that the Fed might want to keep the excess reserves in the system at around US1trn as insurance against any further weakness in activity. To some degree this has already been reflected in the price of the USD; certainly interest rate markets are priced back at levels last seen in the crisis period. Indeed, the rolling eighth Fed Funds contract has made new highs, reflecting the fact that the market anticipates the Fed to be on hold for as long as it did even when the S&P 500 was back at the 666 lows (Exhibit 2). So a lot of bad news is in the price, and presumably the market is already assigning a fairly high probability that the Fed may ease further.
How about other currencies? Not too surprisignly, MS is also quite bearish on the Yen, speculating that there is an abnormally high chance that the BoJ will intervene to lower the JPY from near record levels.
We continue to monitor the capital flow situation in Japan and note that Japanese investors have put a record amount of capital into foreign bond markets in the new fiscal year. Given the recent strengthening of the yen it would seem that this outflow has been done on a currency hedged basis. However, if sentiment towards the JPY changes, the currency risk could be unhedged and, given the strength of the tradeweighted yen, not helped by the fact that CNY is fairly weak against the JPY, it is perhaps unlikely the JPY will strengthen much further. Our models continue to show that there is a high probability of BoJ intervention. Currently we calculate this to be about 48%, compared with a long-run average of 20%, a reading which is higher than occasions when the BoJ have actually intervened in the past. A policy response to Japan’s growing deflation problem and the strong Yen is perhaps not far away.
Lastly, and just as notably, is the disclosure that Morgan Stanley has opened up a new 10% EURCHF short with a 1.31 target and a 1.41 stop. The cross was at 1.38 as of this writing, and still sufficiently high to cause nightmares for a whole generation of Central and Eastern European underwater mortgage borrowers.
We have decided to add a short EUR/CHF trade to our portfolio. Following the recent correction we think these are good levels to attempt to buy the franc as the Swiss economy remains robust, while our valuation models suggest that the Franc is not expensive, helped by Switzerland's continued low levels of inflation. We are adding a short of 10% with a target of 1.31 and a stop at 1.41 (current 1.3781).
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This is all just such worthless bullshit.
All of these sell-side morons continue to spout the same the same old bullish nonsense as 10 years ago, as if nothing has changed.
We are at the end of The Great Keynesian Experiment. All which you thought you knew is wrong. It is a new paradigm, a brave new world. Where is the analyst that can think for him/herself? Where is the analyst who dares look over the horizon?
Uncle Sam has the shakes! Quick! Bring him a fifth of burbon!
Agree
Just when people expect the dollar to go up(DEFLATION), it will go the same way the Euro did when the Euro zone was on the cusp of debt distruction.(INFLATION) Not the demand pull variety.
EURCHF is a good short.
agreed. short EUR v anything is a good trade after the recent bounce.
Anyone going short in the EuroCHieF at this time is not paying any attention at all to the weekly chart. There is still significant upside from here; probably to near one-and-a-half. You know, the old cup and saucer trick (with a massive fail...).
Who are these "analysts" anyway?
/:
Gartman is short on EURCHF so no doubt he will be stopped out.
the race to currency destruction will help commodities. central banks don't know how to fix things, they only know how to make things worse. I think Faber has the best understanding.
I'm an md, many of us give out antibiotics that are either too strong for the infection or being given for a virus. it is the urge to do something that often makes things worse instead of standing back and letting the body work to heal itself. Central bankers are the same.
look Greenspan just came out and said to take away the bush tax cuts. He was for them before because a government surplus made execution of monetary policy more difficult. Think how much better off we would be if we had a surplus to fight the recession. The idiots actually don't think government should save for the bad times. They just make things worse, and even worse they actually believe the stupidity they spout.
One thing to consider; seeing that the Fed, the bankers and the politicians have joined forces, they will likely make a concerted effort to seek the best hedge for their wealth.
We still seem undecided between inflation and deflation. I think were looking at deflation, but I think that can change.
Watch the banks.
Watch the Fed.
Watch the Politicians and the lobbyists.
If they decide that they will loose less wealth in an inflationary scenario, they will move their assets and/or money around and position them selves accordingly. Likewise with deflation.
Since they can rig the game, they may after positioning themselves, even hasten deflation or inflation.
There will be losses either way but they know they cannot keep up that tightrope walk forever and they will have to choose the lesser of the evils.
Also, I believe as things get more hairball, financial stats will become more and more useless as they falsify and skew whatever data they can for their benefit. Already, the stock market is certainly being manipulated, and as CNBC has properly demonstrated, is better used as a propaganda tool.
ive never seen currencies playing such a major role in stock markets as they have the past 18 months. The key question is where does the USD go from here? its recent fall has spured the rally in stocks (with some help from the FED) and commodities there is no doubt about it but quite a few of the USD crosses are looking pretty tired AUDUSD in particular which could signal some near term risk asset weakness ahead.
If the FED does QE2 as is widely expected will the USD fall further or is it already priced in? or will investors finally realise there is no recovery and move back to the safe haven USD? I just want to trade stocks but without the right FX strategy you are wasting your time.
any help here folks?
put yourself in the other guys shoes. How is china and japan liking this? They are players too. I watched the dollar drop nite after nite for 2 weeks . Why would that stop? It (USD) hasnt improved (fundamentals suck)
Not a believer in rectangular bits of green paper. Likes beads
Only time will tell.
DOW and SP500 weekly charts update :
http://stockmarket618.wordpress.com
Charting is more than just drawing trendlines - it's about finding patterns that are reliable.
http://i38.tinypic.com/13z0qv5.jpg
Understanding the Dollar Standard
This is me, I like things simple and me being simple even I understand the bulk of the G20 are bankrupt, The Bankrupt nations of the G20 cant possibly pay off the several $tn of debts and hundreds of $tn future liabilities, Because of this fact how do I think this will pan out?
The need for default must be desired to be done by inflation and the financial axis of evil is the US$ Lets cost in a 90% devaluation of the US$ over 10 years, oil trading near $1000 and such like would work, Lower living standards in the West and debts inflated away job done, Inorder to achieve this type of goal and for the elite to profit a number of credit crises or war would be needed to debase the US$,
The US T bills are yielding zero shorterm and sub 3% 10 year, This looks to me the smart money is already in before the next crash then as the markets crash the smart money starts selling T bills buying stocks oil etc.
In another crash the $ should surge but longterm dosnt look good for me and Dr Copper is on the up looks like QE 2 Dr C is pricing in.
To be honest I havnt a clue how things will pan out but inflation looks good anyway.
The Chinese buying Japanese Bonds, are part of their game.
They have made at least two announcements that they are NOT happy campers with the USD,and see no way for US to get out of obligations except thru inflating, this is not a good deal, and Treasuries,and Bonds are not appealing to them.
One more round of a major QE, will likely be the death knell for them continuing to hold them, and I look for a weaning process, and a cashing out, using the USD's to buy any assets that are worthwhile long term.
Not overnight but, the JIG is up.
Look for the Chinese to stop propping the US debt bubble up, they are on a worldwide tear, buying up, and in, with PM/RE miners, and any hard asset based properties.
They have started a major shift into the PM"s,started an open market in China, a huge one.
India is contemplating one also.........
We know how this plays out, WHEN is the question.............
d i v o r c e
de - couple
get it, got milk?
hi,would you please send me the report to susiesss910@gmail.com