Forex Market Commentary
The Global financial system is falling apart at the seams. This simply cannot go on. While China and Japan and Europe languish The US has to carry the burden of the whole world and this situation cannot last thanks largely to the ineptitude of several key central bankers and policy makers round the globe.
In February 2016 Fed Chair Yellen agreed to stabilize the price of the US Dollar understanding that the risk of global deflation could be easily imported into the US bond markets. But over the last year in acknowledging a strong Dollar policy the major trading counter-parts have not been able to reflate their economies and now the US is at breaking point; particularly as 90% of global debt is denominated in USD. Quite simply put; should US bond yields start descending because of increasing demand then the trigger for global deflation will become more than just an anxiety we do not want to entertain. asset deflation is like quick sand. Look at the recent economic story of Japan and look what's going on in Europe and potentially China too. The negative bond yield trap must be avoided by the US at all costs.
This week on the economic front; the US saw a week of mixed economic data. Initial weekly jobless claims surged upwards to a 14-month high to 290,000 and that confirms that pace of hiring has slowed down. But on a positive note US retail sales jump 1.3% in April and marks the biggest gain in a year. So all not so bad on the US domestic front. but on the international front woeful data in Europe and Japan and the slowest loan growth rate in China continues to pressure the US fed into this massive juggling act of encouraging domestic growth in balance with the need to reflate the entire world. This is not tenable anymore.
The USDX refuses to go down quite simply because the central banks of Europe, Japan and China are not prepared to see their currencies appreciate against the USD at this moment in time. Moreover the US bond markets are at an all tim high and money keeps pouring into USD denominated debt. US equities have come under severe pressure this week with investors dissatisfied with performance which has pressurized the SP 500 to slip under the 50 day moving average at close for the first time in months. However, the sell off in US equities does not translate into a sell off in the USD because investors are simply getting out of equities and piling into bonds in an massive asset changing act.
Please turn to Bloomberg - global bond yields
http://www.bloomberg.com/markets/rates-bonds
In my global macro analysis the major barometers I am look at for 2016 are as follows:
US Dollar - 94.612 +0.449 +0.58% - The global base currency. Global demand for US equities and fixed income products will always keep the Dollar bid at every dip since funds cannot find a better yield/ dividend mix around the globe in other markets. Large bank bids at the 92 are insurmountable.
Please turn to Bloomberg - global bond yields
http://www.bloomberg.com/markets/rates-bonds
In my global macro analysis the major barometers I am look at for 2016 are as follows:
US Dollar - 94.612 +0.449 +0.58% - The global base currency. Global demand for US equities and fixed income products will always keep the Dollar bid at every dip since funds cannot find a better yield/ dividend mix around the globe in other markets. Large bank bids at the 92 are insurmountable.
EUR/USD - 1.131400 -0.005370 -0.47% - The 2nd liquid currency. The ECB does not want the Euro to climb above the 1.15 and so a the market is seeing less volatility this year in a narrow sideways trading action between 1.15 and 1.10. Smart traders would short the spikes. Shorts in play at 1.15.
GBP/USD British Pound 1.435930 -0.006695 -0.46% - The 3rd liquid currency. GBP is under alot of pressure with Brexit fears mounting. The BoE steps in and supports the stay campaign as several big guns like Sir John Major and even the IMF managing director Christine Lagarde weigh in voicing their concerns on Brexit. I am neutral but looking at shorts near the 1.50 mark.
US 10 yr T-Note 130.968750 +0.375000 +0.29%. Traders are neutral but getting increasingly nervous of the high prices looking more and more top heavy the last couple of weeks. I am starting to look at shorts along the yield curve expecting the 10 and 30 year bond yields to come under pressure on the basis that Europe, Japan and China will see growth this coming summer
Dow 17535.32 -185.18 -1.05% - The body for US equities. Institutional investors increasingly nervous and shifting into the US bonds. I am neutral and not initiating shorts yet. Traditionally there's a saying in the USA - sell in May and go away - and so we should keep an eye out for further selling pressure. However the VIX is pointing to a sideways trading channel ahead.
SP 500 2046.61 -17.50 -0.85% - The core engine for US equities. 20 points down on the week in slow grinding action down. Notably price action closes below the 50 day moving average today and that is alarming. But the VIX and implied volatility is telling us to calm down and the main reason why I am not shorting this market. Neutral is best at the moment.
VIX 15.90 - 0.68 + 4.3% - The volatility of US stock options. The VIX is relatively unchanged this week. Now this is very important because options traders are not pricing in a big down side move. i will be watching options prices very carefully for changes in implied volatility. Forward volatility seems to show that US equities prices are still consolidating in a narrow channel for the remainder of Q2 around the 50 day moving average of the SP500. There is no panic at the moment.
Crude Oil WTI - 47.07 -0.38 -0.81% - a barometer of world trade. This week the IEA handed us a cshock by indicating to us that the glut in stockpiles of crude is now reducing. This seems even the more incredible since global output has not declined and has remained at maximum capacity this last one year. On top of that global demand, particularly in the US and China as slowed down and so with the supply - demand gap traders are scratching their heads now on this latest IEA report. Neutral at the moment until we can see how this plays out in the market in the coming week
Gold - 1273.250 +6.390 +0.50% - A hedge against inflation. Gold as well as other commodities fares well when the USD declines in price. The last 2 months has given plenty of room for commodity investors to pile into gold and crude oil for a speculative long. But with global central bankers in agreement that the USD needs to stabilize this year it is becoming more unlikely that we will see rapid price appreciation and depreciation of the market. The USDX has demonstrated massive resilience at the 93 mark. Once again I am short bullion at 1300 as the global bullion market lacks fundamentals to support a price drive unless USDX sinks to the 90 level where we would then see a push to the 1300 become feasible.
Always use your own better judgment before listening to sensationalist journalism. Today is a prime illustration of how global fund managers think in terms of global interest rates before determining the value of a currency in the search for superior bond and equities yield.
Gold - 1273.250 +6.390 +0.50% - A hedge against inflation. Gold as well as other commodities fares well when the USD declines in price. The last 2 months has given plenty of room for commodity investors to pile into gold and crude oil for a speculative long. But with global central bankers in agreement that the USD needs to stabilize this year it is becoming more unlikely that we will see rapid price appreciation and depreciation of the market. The USDX has demonstrated massive resilience at the 93 mark. Once again I am short bullion at 1300 as the global bullion market lacks fundamentals to support a price drive unless USDX sinks to the 90 level where we would then see a push to the 1300 become feasible.
Always use your own better judgment before listening to sensationalist journalism. Today is a prime illustration of how global fund managers think in terms of global interest rates before determining the value of a currency in the search for superior bond and equities yield.
Pieter Bergli - Trader X16
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