Watch the US$

[haunting]

As usual, the decline in the US$ is beginning to worry the "vested interests" that want to see a "stable and a strong US$". Looking at the DXY index, there's every chance that the US$ will drop further, probably to 77.50 or around there before making a bounce.

Timing wise? Well, try Gann or Gun or Guru Whatshisnameagain... or you can try the political angle - this coming Jul26-27, there's a planned meeting between the Chinese and the American, between Geithner and his Chinese counterpart... as usual the talk will cover everything under the sun including how good the "dimsim" taste in NY and/or the recent Masterchef finale on TV Australia...

But most important of all, it's the value of US$ and the American policy of a "Strong US$" that the Chinese is interested in, due to their outsized exposure in the US$ and their on going support of the US$.

Let's put it simply - without the Chinese support of the US$, the American economic recovery will collapse overnight. It's this simple and that's probably why one can expect Geithner would utilise all his charm and assurance, to the Chinese, again emphasising that a strong US$ is in everyone's interest including the Chinese'; something the Chinese knew of course but to them Chinese the thrill of raising their concern is proving to be so much fun that they just don't seem to be getting tired of it... and of course there's another hidden message in all these friendly banters and reminder in this kind of get together - that is, the Chinese want the American to know without a shred of doubt that they, the Chinese have theirs, the American's ball in their hand.

"... so please sing some soothing song to us one more time? Ok? Be nice to us! "

What a lovely couple.

So what would be the result? Or outcome? Nothing much really. The American will reiterate their policy of a strong us$ (note the small case) whilst the Chinese will repeat their singsong policy of keeping their RMB stable by sticking to a narrow band of exchange rate to the US$.

in practical term to the currency traders, that would mean watch your stop loss at round July 26 onward. It's getting too easy to make money in forex these few days, hence watch your back coz there's always a calm before the storm.

Or easy money before you lose your capital?

Dig? And caveat emptor, 'tis just one man's view.

 

[MRC & Co]

I'm with you there haunting.

I am looking towards a short USD + short US equities trade.

The assumption, that the current correlation would assume short both (depending on beta, perhaps a ratio spread with more multiples of short USD, a rather neutral strategy in a risk taking environment), but a correlation breakdown, would see a collapsing USD, met with falling equity prices.

 

[haunting]

MRC,

Hmm, I am not so sure if it is a good idea to short the US equity with its strong breakout yesterday. The breakout in the NASDAQ comp a few days ago was quite conclusive and is now gaining momentum - this spells a few things: a) the risk appetite in equity is back in the US; b) the excess liquidity due to QE and sidelined all these while is beginning to flow into the equity side; c) the equity could have been over discounted and/or underpriced/undervalued that with the combination of a and b, the market could very well rally for quite a while...

Just need more thought about the market over there.

With regard to the US$, it seems to have a bounce last night, that could mean the currency traders are paying attention to the talk (I supposed). From memory, the US$ bounced almost on cue in their (the Chinese and the American) previous meeting. This time since the Chinese hoard of US$ has increased to 2.3trn, the risk of any fallout would be much greater, so, there's every chance that "someone" (is the PPT still around?) will have to work harder to make sure the US$ does not decline any further.

Also here's another consideration - the availability of the US$ for international trade. Due to the change in behaviour of the US consumers, instead of spending they now are eager savers like everyone else, this effectively has a direct result in absorbing/reducing the amount of US$ being recirculated into the system - with the recent development in the US and the rallying equity market, the signs are showing the credit freeze has been broken, this could mean the easing of QE will be the next focus of the Feds and the US Treasury, coupled with the strong saving pattern, the long term US$ trend is one of strength and rising value; which my guess again on those really big long term currency speculators like Soros, would be a case of slow accumulation from now on.

This is one scenario not many currency traders are aware, the latency or the hidden strength of the US$.

Cheers.

 

[MRC & Co]

Yeh some good points there Haunting.

I'm not sure the rise in stocks has any relevence that the credit freeze is over, I would say the biggest sign of such a scenario would be the underlying velocity of money, which is not increasing to the extent it should be.

Moreover, with such a scenario, I would say the Fed is unlikely to raise rates as quick as what are being priced in. I think Euro is more likely to mop up the excess liquidity beforehand (a bond spread), but this could create a Japanese type scenario.

However, the focus towards higher rates of savings, the meeting between China and US (the fact the USD held up last night) really makes me think twice about my idea. Particulalry, as you say, the fact the PPT will step into the fray.

One reason I was so bearish USD, was not only the chart pattern looked weak, but Geithner has been running around the globe lately talking of it's defence, Bernanke saying the same, yet it was still being sold off.

A situation to watch closely I think.

 

[MRC & Co]

Also wonder how much the NASDAQ will be halted by the Microsoft earnings.

 

[haunting]

I was relating credit freeze to QE, US$ and international trades earlier... don't think I have said it has a direct relationship with rising stock market, have I?

 

[haunting]

NASDAQ and M$FT? Probably will be clearer after July, I think.

Also, I believe the current US market rally is relatively weak on fundamental. If I have to give an answer I would attribute that to the loose and easy credit still splashing around by the Feds through QE. One of the major contributor to GS's profit was "trading", through trading for themselves and trading for their clients. Easy money... and many analysts are saying they can't repeat this performance in the next few quarters because the markets had changed since. Without this easy profit, the question naturally will be "what and how are they going to make the number next time?"

Msft's result probably tells a lot more on the real economy and likewise Amazon's. In many ways their performance reflects the change in their respective market place. The growth market in IT, Net based commerce is in the Far East with China leading the charge where Amazon, Google and Msft are not the market leaders. Piracy is probably Msft's biggest competitor, one it has to work on with the various regional govt.

 

[MRC & Co]

With the recent development in the US and the rallying equity market, the signs are showing the credit freeze has been broken

Sorry, this part sounded like a relationship between stocks and credit freeze to me.

Also, credit and liquidity are different beasts IMO. Liquidity was meant to get credit flowing again, has it happened at a real economy level? I don't think so (velocity of money is still far too low). In this aspect, I think the rally is well liquidity driven, but that credit is still very tight. Resulting in a continued overcapacity, a hard ask for an inflation push and ultimately, a longer duration of liquidity in the system in the US.

I know a few IBs and funds are positioned for this rally to hit 1000-1020, so a false break through 1000 and a subsequent sharp pullback makes sense to me (though I will also be looking for selling pressure to come online beforehand as these firms begin to pre-empt eachother).

 

[haunting]

Oh I see... my bad English. "the rallying equity market"=fear, I was implying the fear, the sentiment side of the market, has receded. Yep I agree with your point on liquidity and credit, it should be more appropriately liquidity instead of credit, I was using the two terms too loosely or too interchangeably, sorry. Based on the responses from Bernanke in the recent congressional hearing, and the "hint" on some kind of deadline by end of this year, my suspicion is he is preparing the politicians for this eventuality. I am quite willing to bet on this.

Also, I have a good look at the US charts this afternoon and in my view I wouldn't want to conclude the indices are all clear to rally higher, they are moving into areas of strong resistance which will be quite some tests for the bulls. I am holding a wait and see posture. There's no need to rush at this point. The relatively low volume of the recent rally is less than convincing, this is another negative for the bulls, they need to put more money into their campaign.

 

[MRC & Co]

Yeh, the rally is on low volume, but I think a lot of that is simply to do with summer in the North.

The odd part of this rally to me, is any lack of selling pressure, when we approached the former high at 957, nobody, absolutely nobody came in to defend it, not even profit taking, it was just sitting there, ominously waiting for the buying to start again to just take it straight up.

So I think any added volume (even in up bars), may be some hidden selling pressure.

Agree with you though, in a wait and see posture.

Interesting comment on Bernanke hinting at an end of year deadline to reign in liquidity (I had not read or heard this). Thx.

 

[haunting]

Others' opinion...

Currencies: Left to their own devices, the USD is still unable to shake off its relationship with stocks. Generally, USD weakens when stocks rise because it loses its safe haven status on an increase in risk appetite. Generally, Asian currencies benefit from capital inflows while higher interest rates buoy non-USD major currencies. Ironically, this keeps the market bearish on USD whenever US data or corporate earnings post upside surprises. Under the circumstances, market can only be comfortable about buying dollars if risk-taking gives way to risk aversion, that is, stocks start falling again. That’s why equities keep a close eye on fiscal and monetary policies in the world’s two main economies ”” the US for stability, and China for growth.

What must change for the USD to rise with US stocks again? Guess the US must become an investment destination. The last time the US trade and current account deficits narrowed this meaningfully was in the late 1980s. Back then, Japan agreed to become the world’s main growth engine and went on a buying spree. Today, it is China that the world looks to for growth. Given the deficits in G7 economies, China’s reserve diversification policies can be counterproductive to these countries’ recovery efforts. Instead of accumulating reserves, China will need to step up overseas investments if it wants to maintain its basically stable yuan policy. This brings us to an interesting possibility. Now that US equities have surpassed the year’s high amidst improving US data, will China become like Japan and consider acquisitions in the US going forward? Instead of “lending to the US”, will China now move towards “owning US”. This would not only help to circumvent, but also give a new dimension to the “buy America” clause. Food for thought.

 

[haunting]

And Greg Peel's piece from FnArena...

When The Debtor Met The Creditor

The GFC has clearly relieved the immediate problem. US consumer demand has collapsed and so China's export industry has collapsed. The trade imbalance has subsequently begun to correct and China has even been forced to depreciate its currency against the dollar after several years of quiet appreciation.

But it is not a rebalancing which is favouring either side. China's exports to the US are down 15% but so are its imports from the US. Rebalancing would imply a reversal of flow rather than just a shut-up shop. The US consumer has put away his wallet but the Chinese consumer has not taken up the slack. Chinese domestic economic stimulus still has to see a flow-through to the man on the street. On that basis, Geithner will be pleading with China, Standard Chartered assumes, for it to continue rebalancing efforts while it can rather than waiting in the hope of a fresh improvement in exports.

Rebalancing is not just about the two currencies themselves. There are other factors underlying what the exchange rate represents. The exchange rate had appreciated 20% from 2005 until the GFC hit in earnest, but now it has slipped again. Economists suggest another 20% appreciation is needed. One way to encourage a more realistic balance is for China to further reform its interest rate system.

While China's post-GFC stimulus policy has been to make credit to business as feely available as possible, there is a huge disparity between the borrowing rate and the deposit rate. Standard Charted suggests deposit rates are set too low as a de facto tax on people saving rather than spending and borrowing rates are set too high in some cases in order to keep control over credit growth. China has recognised a need to reign in this imbalance of its own and allow the market more control over rate levels. But moves to loosen the ties would result in inefficient banks hitting the wall. That rate gap makes up 80% of some banks' profits and clearly only more efficient banks will survive a big cut to the spread. Can Beijing afford such a policy?

** for some reason, many smart people don't seem to comprehend this very simple fact, that is, the Chinese economy whilst is large, it's still a very immature one comparing with the more advanced economies from the West. What this means in practical term is it is highly unrealistic to expect the Chinese consumers to take up the slack left by the American - it simply could not happen, even if the Chinese would like to oblige the world.

Asking a boy to do a man's job would mean one thing - a big time stuff up both for the Chinese (expect political upheaval and social unrest for example) and "his" trading partners. The Chinese are smarter than to listen to the desperate words of Geithner and others.

Like it or not, the USA will have to live through the recession and wean off all her excesses built up through the past and rebuild their household balance sheet, there's no two ways about. It will be painful but with half of the journey out of the way, it probably is more productive they get on with it than expecting the Chinese to play to their tune, since everyone has his/her own self interest to look after - it doesn't make sense for the Chinese to risk all they have built in the last 10 years for the sake of the American, just so they don't have to do it tough!

 

[MRC & Co]

Yep, both very interesting articles.

Cheers.