Forex Market Commentary
This is the 5th time now the USDX just wouldn't die!
Ever since Fed Chair Yellen started making overtures to the US equities market conducting a dramatic U-turn over the US Fed's intention of hiking rates 4 times this year, no matter how many times she talk the Dollar down it just would not die. The Fed is in an awkward position; to allow the US equities markets to go up it must sink the Dollar officially but in sinking the Dollar by speech so far investors keep piling back in whenever the Dollar is relatively cheap to buy US equities and so the Dollar just cannot sink! Initially on 15 Jan 2016 the USDX was at 99.52 and so a couple of speeches later we had the USDX fall 6% to 93.62 and the US equities markets recovered much of the losses wiped out by the Jan 16 equities swoon. Gold bulls loving the drop in the dollar piled into the shiny stuff and tried very hard to push the price to 1,300 but it didn't happen and today once more USDX climbs back to the 95 perch in spite of every effort to bring that Dollar down.
Value is relative. If a Giacometti sale causes a stampede it is because the market perceives the value as such. There is no hard and fast rule to say that the price per share should be 10, 20 or 100 times earnings. Therefore, in terms of opportunity cost the market weighs the Giacometti over the lesser in the manner of copy and determines the bid range with no quantifiable law. It's mind-boggling, yes, but that's reality: value is relative.
Once again the answer = The US yield/ dividend potential makes the Dollar the most attractive investment currency.
1. US bonds - Positive bond yields: with 10 and 30 year being the most lucrative for a buy and hold where else would investors park their money? Euro and Japanese rates? Are you kidding me? Just take a look at US Treasury auction subscriptions and compare it to the demand for other Euro and Japanese bond products.
2. US equities - Dividends allure: even if earnings on US equities are down some 11% in Q1 and even if prices seem way over, still for international fund managers what is the alternative prospect of making money other than in the US equities earnings reports and subsequent dividend payment Just look at the S&P 500 grinding and grinding it's way up relentlessly day after day, higher high, higher low. What's the opportunity cost of holding a Euro corporate equity in a depreciating currency when there are more attractive investment options at the moment?
And Yes you do need to buy US Dollars to pay for US bonds and equities.
Last week the IMF reduced it's forecast on the global economy for the 4th time in the last 12 months. The IMF cut it's out look on the USA from 2.6% GNP to 2.4%. But put that into perspective compared to the IMF growth forecast for Japan at 0.5%, Europe forecast at 1.5% and the UK at 1.9%. Global growth is seen at 3.5% for 2016 and 3.4% for 2017. So the US is not so bad after all. Yes it's slowing down but it carried the world on it's shoulders during the China crisis last year. why does the USA have to soak in all the currency devaluations of other currencies and receive their imports to the cost of the US economy? The Euro zone needs a cheaper Euro, China needs a cheaper Yuan and all because of the need to export to the primary target market - the USA. So the Dollar just keeps driving up. Thus within the context of global macro-economics where would a fund manager like to lock up his money for a year? Even if US equities are now at a whopping price-to-earnings ratio of 22, still the penchant for investment in the US equities market go on unabated. Asset bubble? Value is relative; and I can assure you that after the next 2-3 weeks of sideways trending the S & P will keep on grinding relentlessly as the wind down on Euro and Japanese and Emerging market stocks begins to unfold. Dow 6000? My foot! If the Dow drops an instant 2000 points during the coming Brexit crisis you can be guaranteed of a a fast reversal and 50% retracement within a week as hedge funds dive in to grab slices of fair value so that the grinding power of the S & P can carry on relentlessly till the end of 2016. In a masterpiece creation the class of 2016 earnings at 22 times earnings and down 10% could easily end up at 30 and 40 times earnings without the slightest dent in the level of the bid. The US equities markets are not like China in the present and Japan in the 90's. There is no hard and fast principle where earnings should stand and with half the world stuck in the doldrums of course they're going to try to lock into some USD and bid bonds and equities in US markets.
In my global macro analysis the major barometers I am look at for 2016 are as follows:
US Dollar - 95.116 +0.465 +0.60% - the global base currency (hedge funds are buying at every dip)
Value is relative. If a Giacometti sale causes a stampede it is because the market perceives the value as such. There is no hard and fast rule to say that the price per share should be 10, 20 or 100 times earnings. Therefore, in terms of opportunity cost the market weighs the Giacometti over the lesser in the manner of copy and determines the bid range with no quantifiable law. It's mind-boggling, yes, but that's reality: value is relative.
Once again the answer = The US yield/ dividend potential makes the Dollar the most attractive investment currency.
1. US bonds - Positive bond yields: with 10 and 30 year being the most lucrative for a buy and hold where else would investors park their money? Euro and Japanese rates? Are you kidding me? Just take a look at US Treasury auction subscriptions and compare it to the demand for other Euro and Japanese bond products.
2. US equities - Dividends allure: even if earnings on US equities are down some 11% in Q1 and even if prices seem way over, still for international fund managers what is the alternative prospect of making money other than in the US equities earnings reports and subsequent dividend payment Just look at the S&P 500 grinding and grinding it's way up relentlessly day after day, higher high, higher low. What's the opportunity cost of holding a Euro corporate equity in a depreciating currency when there are more attractive investment options at the moment?
And Yes you do need to buy US Dollars to pay for US bonds and equities.
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Last week the IMF reduced it's forecast on the global economy for the 4th time in the last 12 months. The IMF cut it's out look on the USA from 2.6% GNP to 2.4%. But put that into perspective compared to the IMF growth forecast for Japan at 0.5%, Europe forecast at 1.5% and the UK at 1.9%. Global growth is seen at 3.5% for 2016 and 3.4% for 2017. So the US is not so bad after all. Yes it's slowing down but it carried the world on it's shoulders during the China crisis last year. why does the USA have to soak in all the currency devaluations of other currencies and receive their imports to the cost of the US economy? The Euro zone needs a cheaper Euro, China needs a cheaper Yuan and all because of the need to export to the primary target market - the USA. So the Dollar just keeps driving up. Thus within the context of global macro-economics where would a fund manager like to lock up his money for a year? Even if US equities are now at a whopping price-to-earnings ratio of 22, still the penchant for investment in the US equities market go on unabated. Asset bubble? Value is relative; and I can assure you that after the next 2-3 weeks of sideways trending the S & P will keep on grinding relentlessly as the wind down on Euro and Japanese and Emerging market stocks begins to unfold. Dow 6000? My foot! If the Dow drops an instant 2000 points during the coming Brexit crisis you can be guaranteed of a a fast reversal and 50% retracement within a week as hedge funds dive in to grab slices of fair value so that the grinding power of the S & P can carry on relentlessly till the end of 2016. In a masterpiece creation the class of 2016 earnings at 22 times earnings and down 10% could easily end up at 30 and 40 times earnings without the slightest dent in the level of the bid. The US equities markets are not like China in the present and Japan in the 90's. There is no hard and fast principle where earnings should stand and with half the world stuck in the doldrums of course they're going to try to lock into some USD and bid bonds and equities in US markets.
In my global macro analysis the major barometers I am look at for 2016 are as follows:
US Dollar - 95.116 +0.465 +0.60% - the global base currency (hedge funds are buying at every dip)
EUR/USD - 1.12230 -0.00720 -0.64% - the 2nd liquid currency
(hedge funds are shorting at every spike)
(hedge funds are shorting at every spike)
GBP/USD British Pound 1.440335 +0.007175 +0.50% - the 3rd liquid currency
(hedge funds are shorting at every spike)
30 DAY FED FUND May 99.580 0.000 0.00% the basis for US rates
(hedge funds are shorting at every spike)
DJI 18003.75 +21.23 +0.12% the body for US equities
(hedge funds are buying at every dip)
S & P 500 2091.58 +0.10 0.00% the core engine for US equities
(hedge funds are buying at every dip)
VIX 16.20 + 0.57 - 3.43% - the volatility of US stock options
30 DAY FED FUND May 99.580 0.000 0.00% the basis for US rates
(hedge funds are shorting at every spike)
DJI 18003.75 +21.23 +0.12% the body for US equities
(hedge funds are buying at every dip)
S & P 500 2091.58 +0.10 0.00% the core engine for US equities
(hedge funds are buying at every dip)
VIX 16.20 + 0.57 - 3.43% - the volatility of US stock options
Crude Oil WTI - 43.74 +0.56 +1.29% - a barometer of world trade
(hedge funds are shorting at every spike)
Gold - 1232.555 -13.655 -1.10% - a hedge against inflation
(hedge funds are shorting at every spike)
Summary Review for small traders -
Always take expert opinion with a pinch of salt. Perfect illustration would be what happened with the gold market. Whilst many writers screamed about Gold 1,500 the reality was that gold couldn't even pierce the 1280, did a double top, and for technicians among us, set off classic alarm bells to confirm a down trend is now in place to 1050 at least for the moment. If the global economy is slowing down according to the IMF then the actual physical demand for commercial use of gold will slow down so where is the rational for gold to climb above 1280?
Same could be said with those writers crying out for a Dow 6000 or Dow 10,000. Ok Google was mixed, Apple to come on monday but those earnings, although lower than last year, are still the lifeblood of global investors with every international pension fund, insurance giant and banking group praying for the Dow to climb higher and higher. Not to mention that the US electorate will not forgive officials should US pensions lose rapid value in an election year. So every major fundamental investor wants US equities to stable and so our prospect remains for a neutral profit taking over the next 2 weeks with sideways trending and increasing price volatility instead of the prospect of a massive drop. Even if there was a panic and the market dropped you can certainly see any drop quickly be snapped up by hungry investors who would just love every opportunity of a drop to pile in and take a long position in US equities. hence the stubborn refusal of the USD to roll over and play dead.
In this context now understand the Euro. there is no way ECB officials are ever going to allow the EUR/ USD to climb to 1.20. Forget what some chartists are saying. With economic growth at an IMF forecast of 1.5% the ECB is going to do everything to support it's export sector and the export sector needs a lower value Euro to compete on the international stage for finished goods. Apart from the explosive Brexit potential the EUR/USD is set to trade in a narrowing trading sideways trading range this year 1.05 - 1.18.
Crude Oil, apart from Russia and Saudi looking friendly and apart from labor problems in Iran, with the current storage glut of crude oil and tepid demand there is no fundamental justification from crude oil WTI cash futures to go over 45 USD.
2015 was all about the story of the EUR/USD short play, crude oil short play and gold short play in massive volumes. But those stories have run their course and exhausted their potential. We're still going to see strong resistance and shorts in play but this year there is a brand new focus for the hedge fund traders to make some real money.
2016 is all about the US equities market around which the value of the USD will be derived and subsequently the demand for other currencies. Every time the USDX sinks to 94 investors just pile back in to buy USD to buy more US equities to fuel the Dow. so 2016 is all about the S & P 500. Just take notice how the S & P 500 did not sink on friday market close which sets up an interesting sideways volatility for the 2 weeks ahead and hedge funds will be looking for any dip to pour back in. Hedge funds will be looking to exploit dips in USD to make equity, equity futures and options trades to exploit the arbitrage whenever USD dips.
(hedge funds are shorting at every spike)
Gold - 1232.555 -13.655 -1.10% - a hedge against inflation
(hedge funds are shorting at every spike)
Summary Review for small traders -
Always take expert opinion with a pinch of salt. Perfect illustration would be what happened with the gold market. Whilst many writers screamed about Gold 1,500 the reality was that gold couldn't even pierce the 1280, did a double top, and for technicians among us, set off classic alarm bells to confirm a down trend is now in place to 1050 at least for the moment. If the global economy is slowing down according to the IMF then the actual physical demand for commercial use of gold will slow down so where is the rational for gold to climb above 1280?
Same could be said with those writers crying out for a Dow 6000 or Dow 10,000. Ok Google was mixed, Apple to come on monday but those earnings, although lower than last year, are still the lifeblood of global investors with every international pension fund, insurance giant and banking group praying for the Dow to climb higher and higher. Not to mention that the US electorate will not forgive officials should US pensions lose rapid value in an election year. So every major fundamental investor wants US equities to stable and so our prospect remains for a neutral profit taking over the next 2 weeks with sideways trending and increasing price volatility instead of the prospect of a massive drop. Even if there was a panic and the market dropped you can certainly see any drop quickly be snapped up by hungry investors who would just love every opportunity of a drop to pile in and take a long position in US equities. hence the stubborn refusal of the USD to roll over and play dead.
In this context now understand the Euro. there is no way ECB officials are ever going to allow the EUR/ USD to climb to 1.20. Forget what some chartists are saying. With economic growth at an IMF forecast of 1.5% the ECB is going to do everything to support it's export sector and the export sector needs a lower value Euro to compete on the international stage for finished goods. Apart from the explosive Brexit potential the EUR/USD is set to trade in a narrowing trading sideways trading range this year 1.05 - 1.18.
Crude Oil, apart from Russia and Saudi looking friendly and apart from labor problems in Iran, with the current storage glut of crude oil and tepid demand there is no fundamental justification from crude oil WTI cash futures to go over 45 USD.
2015 was all about the story of the EUR/USD short play, crude oil short play and gold short play in massive volumes. But those stories have run their course and exhausted their potential. We're still going to see strong resistance and shorts in play but this year there is a brand new focus for the hedge fund traders to make some real money.
2016 is all about the US equities market around which the value of the USD will be derived and subsequently the demand for other currencies. Every time the USDX sinks to 94 investors just pile back in to buy USD to buy more US equities to fuel the Dow. so 2016 is all about the S & P 500. Just take notice how the S & P 500 did not sink on friday market close which sets up an interesting sideways volatility for the 2 weeks ahead and hedge funds will be looking for any dip to pour back in. Hedge funds will be looking to exploit dips in USD to make equity, equity futures and options trades to exploit the arbitrage whenever USD dips.
Pieter Bergli - Trader X16
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