Price Action

Here is a review of the technical condition of the major currencies.  In my professional experience, I know few purist fundamental traders in the foreign exchange market.  Even for those, like myself, who study the macro economic and political fundamentals, technical analysis allows us to quantify the risk. Those who make money in the markets, do not do so because they are right more often, but rather they are disciplined risk managers.  Technical analysis provides a way to manage the risk by helping to identify where we are wrong.    It is offered here not as a substitute for fundamental analysis, but as a complement.  

It was a busy session for Chinese "data" (more on the laughable validity of Chinese economic releases shortly), after China released January export and import data, which rose 25% and 28.8% from a year ago respectively. Futures were delighted by the data, until someone pointed out that January 2013 had some five more working days than 2012 due to the calendar shift of the Chinese new year, and that adjusted for this effect exports were a far more modest 12.5% while imports rose only 3.4%. Credit growth in January also rose to a record, with aggregate financing of 2.54 trillion, including new local-currency loans of 1.07 trillion, exceeding forecasts, as China dumped gobs of money into the economy, while somehow quite mystrriously inflation came right on top of the expected 2.0%. The Yen soared overnight following comments from Taro Aso who said that the Yen had depreciated too fast. Heading to Europe, the biggest news so far was the latest ECB LTRO repayment which saw some 21 banks repay €4.992 billion, less than the estimated €7.0 billion. Finally, trading today will be slower than usual as Nemo is finally found in the shape of some 12 inches of snow blanketing the Northeast.

Gold bullion for delivery in December climbed as high as 1.2% to 5,000 yen per gram on the TOCOM. In ounce terms, the yen fell to 155,180/oz against gold, its highest level since 1980.  According to the data on Bloomberg, the all-time record high for gold priced in yen was 204,850 yen on January 21, 1980. Thus, yen gold remains 33% below the record intraday nominal high from 1980. Given the Japanese determination to devalue the yen to escape deflation, the record nominal high will almost certainly be reached in the coming months. Platinum also climbed 2.7% to 5,130 yen per gram for the same month, the highest level for the most-active contract since May of 2010.

Slowly things in Europe are starting to go bump in the night again, with the EURUSD down some 150 pips from Friday's multi-year 1.37 high, Spanish bond yields spiking 20 bps to over 5.41%, back over the declining 50 DMA, Italian BTPs getting slammed up some 10 bps to 4.42%, as both Spanish and Italian stocks are sharply down on the day, by 1.2% and 1.9% respectively, following yet another Monte Paschi halt lower earlier in trading. The reason goalseeked by the media for today's weakness is signs of upcoming "political turmoil", namely the escalating Monte Paschi incident out of Italy, which we have been following closely, as well as the Spanish graft scandal, in which the ruling PP party and Mariano Rajoy have been implicated in massive kickbacks, and which may cost Rajoy his leadership at this pace. Of course, none of the data above is new, and neither is France's Moscivi repeating for the second time in a week that the EUR has risen far too high, and to call it catalytic is very naive, but it merely goes to show how the manipulated market decides when and if to actually follow the newsflow. As a result, US futures are pointing to a mildly lower opening, which however may reverse quickly once today's $2.75-$3.5 billion POMO kicks in. Of course, if the Italian political turmoil drags Draghi further into the mud, all bets are suddenly off about Europe being "fixed."

Gold market analysts have a tougher job than other financial analysts.  It is more difficult to analyze the yellow metal than equities because quantitative measures such as yield, cash flows, balance sheet leverage, and growth rates that provide a fundamental basis for analysis do not exists for gold. The fundamentals of gold are the current purchasing power of money; expectations about the future purchasing power of money; the growth rates of various national money supplies; the volume of bad debts in the system; expected growth rates of bad debts; the attractiveness of other available investments; and the investor’s preference for consumption rather than investment.   These factors do not act directly on the gold price.  Instead, they are focused through the prism of investor preferences, which are not measurable.  The price is the ultimate measurement of how investors view these factors.   Gold presents a paradox: that which drives the price cannot be measured, that which can be measured does not drive the price.

Here is an oveview of the forces that are driving the foreign exchange market and price targets for the euro and yen.  We identify the ECB meeting as a potential challenge to the existing price trends, but expect it to see the tightening of financial conditions in the euro area as partially a reflection of positive forces, especially that banks have reduced, on the margins, the reliance on ECB for funding.  Draghi will likely attempt to calm the market down with words not a rate cut.  Also we see the "currency wars" as being exaggerated, not just because the foreign exchange market has alsways been an arena of nation-state competition, but that it is primarily in the realm of rhetoric among the G7 countries.  Few, including Germany, who have expressed concern about what Japan is doing, have objected to the Swiss currency cap.  There is not a bleeding over into a trade war.  The push back against the Japan (among the G7) appears to have slakcened a bit.  Officials prefer Japan not provide price targets for bilateral exchange rates (like dollar-yen), but if stimulative monetary and fiscal policy weakens the yen, that is ok.  

If Peter Schiff is selling gold, then maybe you should too!

Here is a weekly over view of the currency market from a technical perspective.  The divergence between the performance of the dollar against the euro-bloc, with the exception of sterling, and the other major currencies is noteworthy.  In the analysis, I suggest a few opportnities for near-term contrarians.  I fully appreciate that some readers eschew technical analysis and regulate it to the same space as numerology and witchcraft.  Yet, even still, it is useful to recall Keynes' view that the markets are like a beauty contest and the trick is not to pick who one thinks is the most beautiful, but to pick who others will think most beautiful.  Moreover, technicals allow one to quantify how much one is willing to lose in a way that fundamental macro-economic analysis doesn't.  It is a tool then for risk management.  

As expected, moments ago the ECB announced the results of the first LTRO repayment option. According to media reports, a total of €137.2 billion will be repaid as 278 banks participate in the repayment. The consensus expectation was for a repayment figure of €84 billion, so a figure substantially more than both the expected, as well as the whispered goldilocks number of €100 billion. The banks that will free themselves of the LTRO stigma will be disclosed in time - there is no public list, however as a reminder some 523 banks participated in the first LTRO. Since Europe is currently in the risk on phase, don't expect an immediate retaliation against the primarily non-core banks that opt to keep the LTRO funds. The market response so far has been one of risk on, due to the perceived implication that the interbank market is healhtier than expected, coupled with a push up in the EURUSD as the repayment is, as noted previously, a gross deleveraging of the ECB balance sheet coming at a time when every other bank is explicitly devaluaing their currency. Indeed, moments after the announcement the EURUSD ramped up to 1.3460 despite some ugly UK GDP news earlier.

All in all, the market took apple`s takedown rather well, which is probably bullish! 

ECB will release data on the early LTRO loans repayment tomorrow. The release will help gauge the liquidity needs of the European banking sector. Consensus expectations seem to be around EUR100bn. Recent EURUSD resilience appears based on the market's growing concern that LTRO repayments will be larger than expected (thus reducing the ECB balance sheet / tightening more than expected) and driving up the EUR vs the USD (e.g. ECB vs Fed balance sheet). Critically, as Citi notes, the repayment of LTRO loans will free up collateral in the form of peripheral bonds. This seems to be particularly the case ahead of tomorrow given that Spanish and Italian banks were among the biggest borrowers under LTRO’s first tranche. If these banks opt to benefit from the spectacular rally in BTPs and Bonos and liquidate some of their LTRO collateral (shrinking their balance sheets in the process) this could fuel renewed upside pressure on the peripheral bond yields. This could then dampen any EUR upside post LTRO repayment - and as the main carry-driver for US equity performance, could lead to a risk-off switch quite rapidly. So tomorrow's LTRO repayment needs to be Goldilocks - too little and its clear banks have liquidity problems still; too much and the market's reaction could be notably risk-off.

Why do commercial investment advisers always tell you that gold (& silver) and PM assets are all massively risky? Here's the one chart that explains everything.

China’s monthly data dump was the main macro update overnight, which however with ongoing mockery of the Chinese data "goalseeking" and distribution methodologies, most recently by the likes of Goldman, UBS and ANZ, had purely political window dressing purposes for the new Chinese politburo. Sure enough, that all the data came precisely Goldilocks +1 was enough to put a smile on everyone's face. To wit - Q4 GDP growth came in just higher than consensus (+7.9%yoy v +7.8%). On a full year basis the economy grew by 7.8%, also a tad above expectations. Then we got industrial production, also just higher than expected (+10.3% v +10.2%) and retail sales - just higher as well (+15.2% v +15.1%). Much more important than meaningless, jiggered numbers, was the announcement from the PBOC that in light of the entire world going "open-ended" on easing, China - which now can't afford to lower rates for fears of rampant inflation together with importing everyone else's hot money - announced it will start short-term liquidity operations as additional tool for controlling liquidity, engaging in a reverse repo on a daily basis, which will have a maturity of less than 7 days. This way the central bank will be able to reacted almost instantly to any inflationary spikes across the economy, as it too has no choice but to ease although not by the conventional inflation targeting methods now used by everyone else.

The US dollar is trading firmly. The official verbal commentary this week by Europe's Juncker and Japan's Amari were more disruptive noise a true signal. These mis-directional cues whipsawed short-term participants and served to obscure what was really happening. One of the most important take aways, it seems, from this week's action is the narrowing of the breadth of the dollar's decline. It is really limited to only the euro...

There have been some large moves in the foreign exchange market in recent days.  The euro posted its largest rally in four months last week.  The yen has fallen to its lowest level against the dollar since June 2010 and extended the declining streak to nine consecutive weeks, something not seen since 1989.  The Canadian and Australian dollar rose to multi-moth highs, as did the Mexican peso.  

In last week's technical note, we suggested the key question whether the sharp drop in the major foreign currencies following the avoidance of the full fiscal cliff in the US was trend reversal or overdue correction.  We favored the latter and looked for the underlying trends to continue.   They did.  

Now market participants face a different question.  Given the out-sized moves, have the trends become stretched?  The answer, we propose, is more nuanced than last week.  There is not one answer for all the major currencies we review here.