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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,
Nic
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And just in time for next week's treasury auctions! How coincidental!
China's chance to sit on the sideline for effect?
You can't say it's coincidental timing if the US is offering huge debt issuance each and every week.
Not when it's a record amount....
NEW YORK -- The Treasury Department said Thursday it will issue $112 billion in notes next week. A record $43 billion in 2-year notes will be sold on Tuesday, followed by $40 billion in 5-year debt on Wednesday. The final offering will be $49 billion in 7-year notes on Thursday. The amounts are each $1 billion more than last month -- the most ever for each security -- and in line with estimates of some of Wall Street's biggest bond dealers. The government will also sell $85 billion in shorter-term bills. After the announcement, 2-year note yields, which move inversely to prices, remained up 1 basis point on the day, at 1%, the highest this month.
I'm looking at long term treasuries and the dollar. TBT, I think it has hit a floor with quant easing and starting to move up slowly. Bottom of the tbt about 46. This looks like a real solid floor? but who knows, if this goes up then people whill actually have an interest in buying a security of an adequate yield.
Is issuing a dollar denominated lianbility against existing $ bonds in inventory = hedge. missing what?
By the way did anyone catch the bloom article that the Secret Service is investigating those $100 billion in bonds captured in Italy?
You mean $134.5 billion seized in Chiasso, Italy, yes? If so, you have a link?
Ok so it survives the weekend. But if it goes out teabagging the sterling with the euro and then spends all sunday watching samauri movies with the yen will it be ready to go to work on monday?
Dollars going to bounce short squeeze coming-
this is what i hear as well
So, will cnbc tell us that a strong dollar is not good?
Like Gartman said this morning, EVERYONE is short the $USD. There are not enough life preservers on board to save everyone when the trade takes on water. Short SLV long GLD long USD till the waves calm down
I got an idea, we should issue our bonds in pounds or marks, or better yet yen. That'll fuck some minds and models up....lol!
Correct me if I'm wrong but aren't currency swaps pretty close to this?
Im long DTO (2x short crude). Also betting on a USD reversal. That and winter time crude tends to trade lower. Either way, should be a good trade.
I've been posting the Foreign credit Swaps as the Foreign TARP for almost a year when the FED started ramping up.
Most has been repaid... with the FED receiving the protection of receiving payment at the U$D level when foreigner drew on the swaps. Since that almost always assures a profit for the FED, profits will be used to cover losses to American Bailouts in the FED-Treasury disasters.
I'm glad to see someone finally keyed on this... only took about a year!
regards TIB
"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!"
On the contrary, what this could mean is that they are borrowing now in stronger USD and would pay back in weaker USD. If US is ever to get out of it's debt, devaluing the USD is the only way to go.
That is the real play and I'm surprised the writer couldn't see it. For a major exporter like Germany it is easy enough to get the dollars through normal activities. They won't have any problems paying those bonds and it will be with less valuable dollars.
Fully agree. The issuance of USD debt by Germany and others is just a cheeky way to ride the Dollar Devaluation bandwagon.
And give back paper worth one third less in 3/5 years maturity.
The trade is fine for the FED, quashes an insatiable thirst for (no more) cheap imports and boosts exports notably of planes, weapons and software (does the Us exports anything else??)
The "squeeze" might happen only if a major equity drop comes...and The Plunge Protection Team is firmly in charge there.
It will go to the bitter end...a strong USD is NOT a preferred policy of anyone...really NOONE wants it...particularly the Fed.
Moreover...Ben just barely started to print, as the velocity of M2 and M# is still plunging, so they are not in the LEAST worried by the quantities they are printing, until the velocity is still plunging.
Forget a USD "squeeze"...and just welcome some temporary corrections as sell opportunities
USD Survives but these banks didn't...
Irwin Union Bank, F.S.B., Louisville, KY
Irwin Union Bank and Trust Company, Columbus, IN
A lot of dollars died with those banks.
TD--
Very important and somehow MSM missed it:
http://www.zerohedge.com/forum/irs-has-granted-servicers-securitized-cre-mortgages-flexibility-modify-terms
Please address
i believe the story was prominently displayed on B'berg the other day (not that they are MSM).
MSM is probably never going to carry that item.
NIC makes a good argument. A dollar reversal would indeed cause the most pain for recent market participants. Selling the dollar (long everything else) has been the "easy" trade. The Fed and Treasury could easily reverse the dollar with a simple comment saying "...they, along with their counter parties favor a strong dollar." Remember too, the FOMC meets next week. Don't be greedy, especially not in this market. Lastly, cycles, seasonals, technicals, and fundamentals are all alinged for a potential reversal. Good luck everyone, and once again, special thanks for Tyler and the ZH staff.
nicely said AR.
i've heard the fomc might chat up the dollar in advance of the g string 20 show coming to the city formerly known at steel, usa.
It has been very quiet and with the economistas and politicoistas patting themselves on the back for saving the economy, methinks that we will see an event soon. It may be a bank that isn't on anyone's radar like, ohidon'tknowwells? and it may be something else, but I can't help but thinking that it's out there. Such an event would cause a flight to safety which would lower yields and cause the dollar to rise, correct? Lower yields might not be a bad thing. If I was Fed chairmanista or el General, I'd want them.
Short WTIC til USD breaks major support
Final comment. This week, we asked a rather large colleague of ours ($5.5 Billion hedge fund) what he thought of the dollar. His answer: We covered our dollar shorts. Then, we asked what trade he thought would hurt the most investors. Answer: The dollar reversing and the "unwinding" of all those trades related to selling the dollar. As ZH states ("... 'nuff said...). Good luck.
Nobody would want to invest in EUR denoted treasuries, the currency is at all time highs but still there is a huge fiscal mess in Europe, which isn't getting fixed.
Instead of QE, Europe are letting unemployment and bankruptcies get to inexorable levels, with Spain, Greece and Ireland baring the brunt of the Euro nations, then there is eastern Europe and partially Scandinavia and possibly Switzerland who have HUGE Euro denominated loans all increasing their unemployment levels and bankruptcies and failure to pay thise Euro denominated loans.
The
USD/EUR trade is on.
AUD/EUR trade is almost on - need a couple of blips from China and more Iron Ore arrests.
kicking off "thank goodness it's bank failure friday", we got 2 on board already (looks like same bank in two different states, but the fdic called it as 2), Irwin Union in Indiana and Louisville, KY (we are all gonna need some KY before this is all over). anyways, cost to the FDIC newly tapped Treasury home equity line of credit came in at a little under one billion at $850 Million.
good start for sheila bair and team. looking forward to more tonight.
When we see both the USD and the S&P going lower, you'll know the game is over.
Interesting blog: http://fdralloveragain.blogspot.com/2009/09/keep-your-eye-on-ball.html
There's a worthy image in the link, but apparently I can't use img tags.
This comment on the Dollar (Euro) from Elliott Wave International's - European Short-Term Update Report dated 09-18-2009:
The Euro, the Dollar & Gold
The euro continues to appear close to a wave C high against the dollar. This top, when completed, will mark the important low for the dollar that EWI has been focusing on in recent weeks. The second chart today shows gold priced in euros per ounce. Gold’s move above $1,000 has garnered a fair amount of press. Yet this chart shows that gold in euros has been a non-event, as this final rally appears to be a small blip up to complete a long, sideways B wave. The important point is that gold recently has become another avenue out of dollars, and this move out of dollars is likely close to a near-term climax. But gold’s inability to advance in other currency terms highlights the fact that gold will not be a world-wide favored investment as long as financial pressures from the collapsing credit bubble remain.
See post from #73910 a few posts above. Right now the dollar is the sinking ship because we are debasing more relative to everyone else. Everyone is looking for relative value. As #73910 points out, Europe is not debasing their currency as much, but fiscally they have a ton of problems. Eventually the other shoe will fall off. Those problems will rise in prominence. There is a lot of hiding/lying right now. The question is will we see another flight to safety in the dollar or will people start to see it is all funny money and we'll start to see the move in gold universally? It is like we have one of those balloons clowns shape into animals...we push down here and another part expands. We push down there and another part expands. At some point we're going to be pushing down on all the pressure points and something is going to pop.
I know this...the PPT and GS will be back to GUN up the US DOLLAR and to make fools of everyone who bought into this weak dollar/strong commod trade
you can guarantee it
they gunned up stocks...now they will dump stocks and gun up the dollar and treasuries for the rest of the year
buy UUP or UUP calls if you're not a currency trader
In addition to all this I would estimate the USD on a trade weighted basis to be somewhere beyween 20 - 25 % "cheap" to the basket
In addition to all this I would estimate the USD on a trade weighted basis to be somewhere beyween 20 - 25 % "cheap" to the basket
I think the dollar will get stronger and that gold will fall.
USD will bounce and test 78 on the USD index; once it fails, I look for it to roll over and decline into the end of the year with a potentially nice short term rally in equities. But by 2010, the dollar declines and equities start the process of creating a new crater in our economy as earnings realities set in.
Anyone catch the MONSTER jump in UUP afterhours?!? I'm guessing it gaps down by monday?
http://www.google.com/finance?q=uup
or it could gap up by monday :)))
with all this talk how everybody is short the dollar, this board certainly doesn't seem as a fair representation of the populace... Everybody here, myself included, is in agreement that dollar is gong to rally.... HMMM
More American banks going bust today ; so bad they are shut-down. However no banks in central/eastern europe were closed today. In fact some central european banks announced they are actually expanding this week. And unbelievably these bank managers didnt attend Harvard or any other Ivy League "institution".
Good stuff CB
Credit and money supply is falling at the fastest rate since the onset of the great depression.
In deflationary cycles, dollars are needed to cover debts.
Good call Tyler.
all the people believing in the USD demise will be crushed soon.........you were warned here 1st on ZEROhedge
fasten your belts,gentlemen. Very few will survive in coming wave 3 of MEGABEAR, as even short-sellers might find theyselves anable to cash out their right bets as banks and broker go bust. Buy long treasuries and equity puts now, then watch closely basis in gold futures market - as soon as gold futures sunk into backwardation, convert all your capital into gold and get your bullions digged in a deep vault in an idle place and check if you have your riffles, machineguns and ammunition close to you, coz we all are f*cking doomed:)
I'll ask again. What are the ramifications of China allowing the yuan to appreciate against the USD? Some time ago Hugh Hendry mentioned this was the one scenario under which he might turn bullish on risk assets.
Basically, if the Yuan appreciated, some US producers would be competitive again domestically. This would cause job growth, less outflows into China, and create real economic growth (not the artifical type we love so much here). This would probably help the overall risk market (aka equities).
China would suffer because certain industries there are built on specific cost structures that would become redundant. They would suffer massive unemployment (if the appreciation were steep enough). So although they would be technically wealthier from the appreciation, they would suffer quite the domestic backlash because of all the shutdown factories.
China would be better off in the long run by doing this, but would suffer greatly short term. However, no country I know of makes any decision based on the long run.
Except, maybe, precisely China!