Brave New World

Daily Feeds 17/09/2009

China will be a bigger bubble than Japan – Pragmatic Capitalist

Pound to Drop to Euro Parity, Dollar to Reach 85 Yen, Says BNP– Bloomberg

UK retail sales show signs of stagnating– FT

Housing starts in US climb to 9 month high– Bloomberg

September’s here 01/09/2009

The first day back after the summer break for European traders has heralded some interesting moves in the currency markets. With a notable gap opening up in opinion over prospects for global economic recovery direction in FX over the summer been sporadic,with most currencies trading in narrow, though volatile, ranges. Despite seemingly positive economic data from Asia, Europe and the US, the markets took on a distinctively negative tone towards the end of the day, with the USD gaining against all currency pairs, bar the JPY, in European afternoon trading. The AUD has been particularly hard hit, following the announcement by the RBA that rates would remain on hold for the foreseeable future; a disappointment to Aussie bulls who were expecting a more hawkish statement. Better than expected Chinese PMI figures helped boost equity markets in Asia and, initially, Europe, as did figures showing a drop in German unemployment. The first chink in the armour began with UK worse than expected manufacturing figures in the form of the PMI index, which reversed an early morning rally in Cable to 1.6377. The pair fell throughout the day to a low of 1.6111, before staging a late recovery. Despite yet more data from the US- ISM data showing the fastest 2 month growth in US manufacturing since 1983 and much better than expected July pending home sales growth- the market was spooked by increased concerns about the health of the banking sector and worries about the continued weakness of the American consumer. The USD benefitted from its safe haven status, with equity markets, bond yields and energy prices all suffering.

September is a nervous month for investors, with a reputation for being the worst monthly performer for the year. This year the nervousness is even greater as equity markets have ratcheted up ever more impressive gains over the summer and many economists- most notably those from Goldman Sachs and Morgan Stanley- are now talking about a world-wide V- shaped recovery. Other investors, and to be fair central bankers, are not so sure. In any case the first day of September has not disappointed in causing heart flutters.

Redeker-Dollar faces tough ride until summer 27/05/2009

BNP’s Redeker warns about implications for dollar of rising long dated bond yields and demand for further QE measures in US. Also highlights the implications of deleveraging on the economy, which the equity market seems to be ignoring at the moment.

Equity market rallies on ‘hope’ 26/05/2009

Equity markets have been given a boost with US consumer confidence data showing its highest reading since September last year. But most of the rise is accounted for in the expectations component: 72.3 from 51.0 prior. The present situation has increased to 28.9 from 25.5; still below the January level. So hope wins the day. The current the Case-Shiller Index shows that housing remains in an shocking state. House prices declined 18.7% y/y in March, versus the 18.4% market expectation and the 18.6% fall in the year to February. Meanwhile the $40bn Treasury auction- the bid to cover ratio is 2.94, versus the 3 month average of 2.69. 

The US Dollar has been on a rollercoaster ride today giving back all of the gains made against most currencies earlier in European trading. Better than expected Durable Goods figures on Thursday and GDP figures on Friday should lead to a further sell-off in the Dollar as investors look to take advantage of the reflation trade towards riskier assets. Two further Treasury auctions on Wednesday and Thursday hold some event risk, although if they prove as successful as today, the sell-0ff witnessed last week should not be repeated. The issue of US creditworthiness will not have gone away, but it will be a background consideration for the time being in the FX market.

The Shock to the System 26/05/2009

The FT’s Gideon Rachman points out the potentially dramatic change to the British standard of living over the next few years, which British politicians are trying to conceal from the volatile British electorate.

The end of the USD reserve status? 22/05/2009

The US Dollar is under relentless pressure in the morning of European trading. EURUSD was trading up to 1.3975 level just before 8am, GBPUSD touched just below the 1.5900 level- a level last seen in November 2008, and AUDUSD earlier touched 0.78240 a level last seen in October 2008. The JPY also benefitted from USD weakness, trading down to 93.86 following comments from the Japanese Finance Minister, who said that he was not considering FX intervention. With little in the way of data later today and a long weekend ahead for the UK and US, position squaring and poor liquidity should bring heightened volatility, with a chance of a USD bounce. However, longer term the run on the USD may have started.

The market rally is in its eleventh week and in many respects the last week has seen the greatest level of confidence that conditions are returning to normal. This is witnessed in the steady rise in commodities, an improvement in funding conditions- with TED spreads back to pre-August 2007 levels- and the return to beta currencies in the FX market. Equity markets have had a rocky week but the growing conviction that, given the 35% rise in the S&P since March, we have passed the bottom has led real money investors out of the safety of the US dollar. Other, emerging market, regions around the world appear to be bouncing back quicker than the US, increasing demand for their assets. There has also been much chatter from the Chinese about the future of the US Dollar and its reserve currency status. Earlier this week the FT reported that Brazil and China are working to use their own currencies in trade transactions rather than the USD. The icing on the cake came yesterday when S&P downgrading its view of the UK from Stable to Negative, warning that there was a 1 in 3 chance of having its AAA status downgraded. The UK and US are entering into the same level of fiscal deficit, both are undertaking a massive expansion in debt as a percentage of GDP and both have similar overreliance on the consumer and housing, supports to the economy that are no longer there. Although the UK is a much smaller country and has none of the reserve currency status privileges the US currently enjoys there are serious long term concerns about the level of US debt. This combined with the geopolitical move among emerging market economies to move away from the dollar, and the benign climate, encouraging central banks and investors to move out of dollars, could trigger a run on the dollar. Treasury Secretary Geithner has restated the commitment to a ‘strong dollar’. It is difficult to see what measures he can take to demonstrate this at the moment.