Forex Market Commentary
Overall global confidence in the US Fed is waning.
Emerging markets were buoyant today on the back of the safe and secure knowledge that they can borrow in US credit markets at virtually non-existent interest rates. But overall European and US equities reflect the general loss of confidence ebbing away in drips and drabs. Yes; the main argument of the US Fed is that lower energy prices is holding down inflationary pressure. Nevertheless, it's a pretty poor argument in saving graces every time Wall street CEO's start swooning with anxiety attack at the prospect of 25 basis points more to pay on their debts. Election years do not like to ruffle the feathers of those that fill the campaign coffers. The Fed should price according to what the bond traders perceive as the demand and supply equilibrium point of a Treasury product. Instead, we have a situation where the US central bank decides what is the applicable interest rate and not the free capital markets making that decision on determining the market price for credit. The history of economics is littered with more failed government interventions than successful free market rate determinations. That the US Fed continues to ignore what every major economist is pointing out in allowing the credit market to rise freely and unfettered smacks of political over-bearing; for if interest rates are artificially 25 basis points lower than where the real price of credit is trading then the equities market becomes distorted and currency values become even more distorted; hence the volatility today as measured by VIX where traders are trying to gauge between the artificial and real value.
Coming to our macroeconomics perspective of the global economy; the 4 main pillars of this study being - The USD, by virtue of being the 'international' currency of global choice, the 'Euro' being the second most trade-able currency, crude oil as a barometer of economic activity and gold as an economic store of value; let's take a quick look at whats going on in equities and fixed income where investors anticipate corporate earnings and forward levels of interest rate to give us a broad sweep and understanding of the markets and how they work as a whole.
In summary, starting with equities, we are pretty much flat all round as investors are losing faith in corporate earnings for the near future:
Asia:
Nikkei 225 18,070.21 - 362.06 (- 1.96%)
SSE Composite 3,097.92 + 11.86 (+ 0.38%)
Hang Seng 21,920.83 + 66.20 (+ 0.30%)
Europe:
DAX 9,916.16 - 313.42 (- 3.06%)
CAC 40 4,535.85 - 119.29 (- 2.56%)
USA:
Dow 16,384.58 - 290.16 (- 1.74%)
With fixed income markets overall we are witnessing the pervasive mood for higher Treasury and Bund prices due to weakening commodity markets caused by dwindling manufacturing demand in turn caused by dropping consumer confidence. In speaking of macro-economics deflationary investment climates are dreadful and the Euro rates with QE undergoing are in serious risk of hitting zero and negative interest rates. With the US, Japan and EU at zero per cent interest rates this current bout of deflation becomes the most serious threat to the global economy since its opposite phenomenon of rampant inflation in the 1970's caused by the twin OPEC crude oil price shocks. At the heart of the global deflationary problem is the Saudi price war that saw crude oil fall from $100 to $30. Deflation is crippling in the sense that rising prices do not encourage entrepreneurs to risk capital allocation for the production of goods and services. Deflation is just as serious as rampant inflation.
Fixed Income Markets:
US Federal Reserve - +0.25%
ECB Base rate 0.050 %
Chinese interest rate PBC China 4.60 %
Japanese interest rate (BoJ) 0.10 %
Now, in understanding the backdrop of falling equities markets and softening credit markets we turn to the 2 major global currencies being the US Dollar and Euro currency. EUR/ USD stands at the 1.13 mark ever coming closer to the 50% retracement of the 1.34 - 1.05 move of the pair engineered last year by hedge funds shorting the pair in favor of the USD. However with interest rate fundamentals divergent the current rise in the EUR favor is only at the expense of the current issues of woe in US equities markets and investors this week bid Bund and Gold. Bullion finds a new shine as traders despair of the Fed's inability to make a move in the credit markets and crude oil maintains it's gusto on the back of regional fears in the ME with Syria at the epicenter of a new paradigm shift at play.
Important moving averages to note are:
USDX below the 50 day m.at 96.2.
EUR/ USD above 50 day m.a at 1.12
Crude Oil WTI below 50 day m.a. at 46
Gold above 50 day m.a. at 1110
US - 30 DAY FED FUND at 50 day m.a. at 99.83
US - 10 YEAR T-NOTES above 50 day m.a at 127
In speaking of moving averages; markets are not rational and daily price action volatile, but in the longer run trader expectation and negative sentiment can be collectively summed up through the 50 day moving average. Always look to support and resistance band lines as the key to understanding in the long and short term where prices are converging. Professional technical traders use 50 day and 200 day medium and slow moving averages as fundamental cornerstones for interpreting the direction of price action.
USDX
US Dollar
95.153 +0.617 +0.79%
Support 93.569 Resistance 96.249
Forward 1 year - 95.534s.
95.153 +0.617 +0.79%
Support 93.569 Resistance 96.249
Forward 1 year - 95.534s.
EUR/USD
1.13080 -0.00950 -0.83%
Support 1.11853 Resistance 1.15673
Forward 1 year - 1.14840s.
1.13080 -0.00950 -0.83%
Support 1.11853 Resistance 1.15673
Forward 1 year - 1.14840s.
Crude Oil WTI
45.24 -1.96 -4.16%
Support 42.53 Resistance 48.11
Forward 1 year - 50.46s.
Forward 1 year - 50.46s.
Gold
1139.085 +8.070 +0.71%
Forward 1 year - 1,138.1s.
Pieter Bergli - DeLoren Trust Holdings
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