The USD Survives The Weekend!
From Nic Lenoir of ICAP
Many people were a bit fired up by my call for a reversal in the USD slide this week, and it's fair to say I could have pleaded my case more convincingly. So here we go...
It is true that deficits that are being run are huge, and the US is a country that imports more than it exports, especially with respect to its energy needs. It is also true that the country as a whole is burried in debt, whether it is the private or the public sector. Lastly, it is true that the US economy is very weak with high unemployment. Fundamentally, the USD is not exactly a stellar investment.
However, many many people are short (too many?). In fact the CFTC report that USD shorts are the highest they have been since March 2008. More and more countries are issuing debt USD denominated, including countries like Germany for which issuing in EUR would not be an issue at all as it is one of the 3 major currencies and there is no one out there that would turn down the investment because they refuse the currency exposure. All the more curious when we hear everywhere that people want to end the role of the US as reserve currency, yet the same people are more eager than ever to use that currency for their funding! One thing people completely missed is that last year's USD sharp rally was as much a function of flight to quality, as it was a function of the lack of liquidity. Everybody was short, many businesses or traders borrowed USD to fund their various activities, and when things froze the USD strength was exacerbated by those people scrambling to buy USD to cover their funding. If you need proof just wonder why the Fed established $600Bn worth of currency swaps with other central banks... Specifically to avoid all the USD shorts to go completely bust.
So while the US fiscal deficit and debt problem are very concerning, a return of risk aversion, combined with the large outstanding short positions, could trigger another sharp squeeze.
It is also worth keeping in mind that while it is completely ignored right now, a lot of other countries are propping their economy with stimulus or quantitative easing right now. China is putting out more stimulus than the US with an economy that has supposedly kept growing above 5% even through the darkest hours... The magic with Foreign Exchange is that it is all relative, and opinion or positioning can switch very quickly.
The attached charts show interesting pivots: in hourly it seems EURUSD has broken the support of the bullish move started around 1.42, we are hitting major resistance on the weekly chart as the former nulti-year support line is now a big resistance (both EURUSD and AUDUSD), AUDUSD daily shows significant divergence, and weekly we see the RSI is also against a major resistance. We conclude with USDJPY, where the market has been on a 60 minute chart in a downtrend channel, but we are challening the resistance here. While the daily channel indicates we are still in a downtrend, a break higher here past 91.60 could lead to a 4% or 5% move up in USDJPY.
We conclude with a quick word on USDJPY to illustrate how perception can change quickly in FX. For the best part of the last 10 years the JPY has been the favored currency to borrow to sponsor any sort of carry trade, and as a result every risk aversion move was synonymous with sharp short coverings which led to JPY strength. Well since last December USDJPY trades inversely correlated to stocks, rather unusual and it not only shows a change in perception of the USD, it is also a change of perception for the JPY. With the new party wining the elections, we are told we are entering an era of JPY strength. Could a government announcement change the stance on the USD? Who knows, maybe that debt ceiling is not raisedafter all!
Have a great weekend,