Play-on-quote du jour

 

L’amour physique est sans issue. – Serge Gainsbourg

L’amour cybernétique l’est encore plus. – Anthony Weiner

CAD: Know thy levels…

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Play-on-quote du jour

“Everybody has a plan until they get punched in the face.”
— Mike Tyson 

“Everybody has a plan, that’s why I don’t make any.”
— The Market

Season’s GR€€D-ings ahead?

It’s this time of the year again when fund managers are under pressure to meet their year-end targets. 2010 will be morose? Perhaps but in the meantime, it’s still 2009 and I do not think worries about next year will stop this market from moving higher. The über-dollar liquidity provided by the Fed must find its way somewhere. Seasonality is definitely on our side as well. The following S&P500 historical chart clearly shows how bullish the last 6 weeks of a year usually are.

As everyone who has been trading the market this year knows, the dollar index is highly inversely correlated with the stock market. A rising market should then take the dollar down further. Here again, seasonality is on our side The following chart shows that we are entering a very weak period for the greenback.

Based on Fed policy, seasonality and market correlation, I think it is an excellent risk/reward to be positioned short dollar. Since the Euro makes about 57% of the dollar index, it would seem natural to expect the EUR/USD to gain some ground in the next weeks. The following charts identify a potential target for the pair. Note that I am not particularly bullish on the Euro itself. This would mainly be a play on dollar weakness. Nevertheless the identified target area (1.52-1.54) is a good price magnet since it is the next key level if we break above 1.50.

EUR/USD chart here

Oil isn’t historically bullish at the end of the year but Fed liquidity could inflate its value just like it has inflated gold in the last few weeks. Looking at oil from a technical perspective, we can see a bullish flag formation which, provided a scenario of inflating assets, could take us well into the $90s before year end.

As Forex traders know, a bullish US stock market combined with rising commodity prices are very favorable conditions for the Canadian dollar. The only caveat here would be disappointing Canadian economic figures. A look at the USD/CAD chart shows an interesting target for year-end right about the current low of the year at 1.02

Remember that currencies tend to over/under extend their PPP by about 20%. From a fundamental perspective, the Euro is already above its PPP which according to the IMF is about 1.25 if I remember correctly. The Canadian dollar is probably less over-valued. The important thing here is that timing is everything. I am of the opinion that the Euro will weaken as soon as the Fed starts signaling the end of its extra-loose policy. In the meantime, I am playing the dollar on the downside. 2010 is sooo next year.

Note: This post was written on Monday, November 23rd.

Three interesting dollar shorts

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My view on the dollar

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How I will trade the FOMC

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Trichet trying to engineer a soft landing

This image is taken from the animated film “Up“ chosen to open the Cannes film festival this year.  An excellent housing bubble allegory.

The Fed’s Maginot Line

Yesterday’s FOMC meeting didn’t specify any new treasuries buying programmes. Bond traders now have the green light to try and blitz across the Fed’s Maginot line to the reflation zone shown on the CBOT treasury index chart. The line represents a 10 year note yield of about 3.1%. I am of the opinion that it is too early in the recovery cycle for this eventual incursion to be long lasting.

 

The key to the US recovery still is the real estate market and the latest Case-Shiller failed to show a forming bottom. Mortgages are mainly linked to the 5,7 & 10 year yields, higher yields mean more foreclosures and higher costs for borrowers. Furthermore, the latest weekly US employment continuing claims are getting uglier. There is no chance of a housing market bottom until the employment figures start improving.

In order to help housing while the employment numbers are dire, I suspect the Obama administration will ask the Treasury to shift the deficit financing burden into the longer term bonds market. This would result in a steepening of the yield curve and with the Fed’s attention on the short end, the long end yields would be allowed to rise to more realistic market values. The cost of financing the debt would effectively be increased and pushed further down the road. It isn’t the ideal solution of course but it is the only one I can see working for now.

May Day Addendum: Another option to keep USTs yields under control would be to halt the S&P500 buy programs. These programs have been keeping the index from retracing in the last two weeks. While I understand that a higher market is good for the banks balance sheets, they are also pushing yields higher. Perhaps we will see this not so “invisible hand” disappear next week after the  banks stress tests are released. 

Flag Day Addendum: We are now clearly in the reflation zone. The 10 year treasury yield is close to 4%. It is too early to tell if this uptrend will continue and what the impact on the recovery will be. One thing is clear though, the banks balance sheets won’t be impacted by the increased foreclosures and mortgage refinancing problems because the FASB ruling doesn’t require them to mark their toxic assets to market anymore. Eventually, the banks will have to deal with them. In the meantime, I am of the opinion that they will be more or less like zombies until a workable solution is found. 

Play-on-quote du jour

We are all in the gutter, but some of us are looking at the stars.
- Oscar Wilde

 

We are all under the kumo, but some of us are looking at the BRICs.
- Mrs Watanabe