How to loose in forex and stocks with out trying… watch your portfolio!

Same long painful costly story, earnings are mixed, US foreclosures continue to rise. But, Greenspan is happy to give his recommendations and calls for tighter regulation of financial (wow-a tad late, but a necessity). I am sure Bernanke inherited this mess! Thank you, but no thanks! Perhaps some one has another book for sale….

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies, in a ‘whippy’ trading range.

FX Heatmap October 23rd, 2008

It’s the same story, different day, and seems to be a race to the bottom for some equities. Hit a bid and tell them you will see them down there, the ‘old man’s approach to making money’. There seems to be a race to be the first country to default (Argentina, Iceland and Pakistan). I am sure you will get tight odds on Pakistan, but it’s still a 3-horse race. The pull of the big dollar continues to register new highs. The markets are positioning themselves for deeper interest rate cuts (at the moment the AUD dollar remains an anomaly). The US is to host a ‘financial crisis summit’ next month for all G20 members. For the markets I believe it can not come quick enough to at least provide some stability. For now, stability has giving investors the opportunity to sell toxic assets on upticks.

The US$ currently is higher against the EUR -0.15%, CHF -0.25% and lower against GBP +0.33% and JPY +0.02%. The commodity currencies are weaker this morning, CAD -0.19% and AUD -0.76%. The loonie dropped to its lowest level in 3-years yesterday, as commodities including crude oil fell, coupled with investor speculation that the BOC will need to extend interest-rate cuts (2.25%) in the face of slowing economic growth. Since yesterday, it has depreciated 3%. Earlier this week Governor Carney reduced overnight borrowing costs by 25bp (2.25%), less than the market had anticipated, but added that it will probably need to act again to fend off the effects of a credit crisis and global recession. The loonie weakened for a 4th straight day as commodity prices remained under pressure as it extended last weeks trading range. Yesterday’s data showed that the entire overall decline in retail sales occurred in volume terms as price effects had little influence on the numbers. The dollar volume of sales was down -0.3% in Aug. vs. July, and the volume of sales that adjusts for price effects was also down -0.3%. With real-retail sales falling in May, June and Aug., would suggest that consumers will again be a drag on 3rd Q GDP numbers. Despite the fact that analysts expected consumers to act positively to higher commodity prices, the reverse has become the norm. Canadians have responded to higher commodity prices by curtailing their discretionary spending. This does not bode well for the retailer at Christmas. Retail sales’ excluding autos was also down -0.3%, as new car dealer sales were down -1.2% on the month, and -8.2% y/y. The BOC justified their less aggressive move in the context of how much action that has been taken since its last meeting (75 bps) and the cumulative cut in rates since Dec (225 bps). Their new GDP forecasts for this and next year is +0.6%, which is to rise to +3.4% in 2010. Expect core-inflation to be below 2% until 2010. The BOC stands ready to take further action: ‘some further monetary stimulus will likely be required’. But given the less decisive move yesterday, expect the market to price for 25bp increments going forward. The trend remains your friend; do not expect to find resistance from investors, who continue to better buyers on pull back.

One expects the AUD to underperform in recessionary times, and last night the currency finally delivered and eased vs. JPY and the greenback as tumbling equities and commodity prices prompted investors to dump higher-yielding assets. Despite a stronger inflation report earlier in the week giving the currency some support, one can expect investors to be better sellers on rallies (0.6692).

RBNZ yesterday cut its O/N lending rate by a record 1% point to 6.5% and indicate d further reductions to limit damage from the worldwide financial crisis and a slump in the global economy (0.5938).

Crude is higher O/N ($67.31 up +56c). Crude prices remain under pressure as the greenback climbed to new yearly highs vs. the EUR, thus reducing the appeal of commodities as a currency hedge. Also, the fears of a weakening global fuel demand outweighing the prospects of a production cut by OPEC has contributed to the price decline. The market waits for OPEC’s meeting this Friday, where it is expected to cut output to halt the 50% slide in prices since the beginning of the summer. Last week with oil penetrating the psychological $70 a barrel level convinced OPEC to bring forward its extraordinary meeting to be held in Vienna. It is anticipated that they may pare production by 1m to 2m barrels a day in stages to stabilize prices. But, they are in a tight corner; they cannot contribute to further economic decline and all members will be hard pressed to agree on what production cuts. The fear or Iran and Venezuela opting out of any consensus vote remains strong, thus splitting the group. Earlier in the week traders and investors had been getting ahead of this, but the strength of the ‘big dollar’ has quickly pared any advancements. OPEC is panicking as commodity prices have tumbled on growth concerns, retreating from the highs archived in July ($147.27). They still produce over 40% of the world’s oil. This weeks EIA report showed that crude oil stocks rose +3.18m barrels to 311.4m, w/w, and again another bearish weekly. The market was expecting an increase of +2.6m barrels. Analysts continue to aggressively pare their future price estimates, down from $90 to a year end price of $60. Sluggish demand continues to be the catalyst for rising inventories. Last week OPEC cut its world demand forecast for 2009, because of ‘dramatically worsening’ conditions in the financial markets, the adjusted levels were cut for next year by -450k barrels or -0.5% to 87.21m barrels a day. The IEA has also indicated that it foresees growth advancing at its slowest pace in 15-years as global economies slip into a recession. OPEC President Chakib Khelil said that the ‘ideal’ price for crude is between $70 and $90 a barrel. Gold remains under pressure as the greenback continues to dominate the FX market ($750). Gold declined once again to a new 1-month low as the big dollar rallied vs. the EUR and global equities declined, thus reducing the demand of the ‘yellow metal’ as an alternative investment strategy.

The Nikkei closed 8,460 down -213. The DAX index in Europe was at 4,451 down -79; the FTSE (UK) currently is 4,007 down -33. The early call for the open of key US indices is higher. The 10-year Treasury yields eased 6bp yesterday (3.62%) and are little changed O/N. Treasuries remain better bid as a plunge in emerging-market assets and expectations of a worsening global slowdown has boosted demand for the safety of US debt. With lending rates continuing to ease, traders are now focusing on next weeks Fed meeting. Earlier in the week traders had increased their bets that the Fed would cut interest rates to revive the economy, similar to that of other major countries. With global equities remaining under pressure they are pushing investors towards another safer alternative. Futures contracts show a 100% chance that the Fed will cut its O/N 1.5% target rate by 25bp at the Oct. 29th meeting.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell