* Consolidation setting in, but continue to favor USD
* Commodity rebound is a bounce to sell on
* Status check: The US vs. the Rest
* Key data and events to watch next week

The USD made fresh new highs early in this past week, but was unable to sustain the gains and a consolidation phase appears to be setting in. The economic fundamentals largely supported those moves, with European data largely coming in steadier than expected and US data presenting worrisome elevated jobless claims, weaker housing and a larger than expected drop in the index of leading indicators (mainly due to the drop in building permits). We know the US housing sector remains mired in weakness and that the new homes segment is the weakest of this weak sector, so there should be no surprises. The jury is still out on the reliability of weekly jobless data due to extensions to unemployment eligibility passed in early July. But we also already know that the US labor market was soft, just not as bad as in prior downturns on a population adjusted basis.  Full text »

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* The USD surge is for real
* The great global growth slowdown is just getting started
* Don’t bet against the US consumer
* Key data and events to watch next week

Last week’s USD break higher has been confirmed by further gains this past week, while pullbacks have been exceptionally minimal. The speed and size of the move caught many in the market off guard, and while many analysts have already started with the ‘too far, too fast’ routine, I would argue further direct USD gains are in store. Precisely because the USD rebound was so fast and large, many asset managers missed the move and have been anxiously waiting for some pullback on which to buy USD. That the pullbacks of the last two weeks have been so minimal and so short-lived (rarely more than 4 hours) is evidence that institutional investors and asset managers are being forced to go to market and buy USD on strength/sell EUR on weakness. Normally, that dynamic tends to create more instability– new positions are opened at disadvantageous price levels and are ripe to get whipsawed.  Full text »

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* Is the USD rally for real?
* Fundamental and technical arguments for a move back into the range
* Strategy outlook
* Key data and events to watch next week

The very sudden and very explosive USD rally has many believing that this is finally it for the buck, the move higher we’ve all been waiting for. That said, the speed at which this happened still has us cautious about a short-term reversal. EURUSD fell out of bed in last 24 hours, plunging to a recent low of 1.5005 after touching a high near 1.5505 moments after Trichet’s hawkish inflation comments hit the tapes. The selling that followed was fast and furious as the market took Trichet’s subsequent remarks on the weakening Euro-zone economy as confirmation that the central bank will be hard-pressed to raise rates further — despite the fact that their only mandate is to keep inflation in check. Indeed, the futures market is now pricing in odds of ECB rate CUTS into 1Q 2009. The sharp move leaves EURUSD in “no man’s land”, below the recent range of 1.5290/1.5930 but above the previous November-March range of 1.4310/1.4980. While the fundamentals of deteriorating European growth and a stabilizing US economy augur for further weakness in EURUSD, we would be cautious about further acceleration in USD gains until we break back below 1.4980/70.  Full text »

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* It’s official: The US economy is ‘less crappy’ than the rest of the G7
* A breakthrough for solar/fuel cell technology
* Central bank decisions next week: Fed, RBA, ECB & BOE
* Key data and events to watch next week

To use a technical economic term, the US economic outlook is decidedly ‘less crappy’ than the rest of the other G7 economies. In last week’s report, Jake Oubina provided readers with a concise recap of recent data that pointed to stabilization in the US contrasted with a rapid deterioration in economic data elsewhere, but especially in the UK and Western Europe. This past week saw that pattern continue for the US and the data from across the Atlantic actually deteriorated even more substantially. I won’t go into all the data points here, but I will note US 2Q GDP came in just shy of 2% annualized (and is likely to be revised slightly higher based on positive revisions to other 2Q data) and that the July NFP job loss was less than expected. I’m not suggesting the US has turned the corner toward strength, but it’s clearly stabilizing and fears of recession are, or should be, continuing to fade. Compare that to the dismal data stream coming out of Europe and the UK, which led the largest US investment house to change its UK forecast today to a recession in 2H 2008, and I continue to look for the USD to perform better against the other major currencies. Perhaps the easiest way to think about it is not as a ‘buy the USD story’, but as a ’sell EUR, GBP, CHF, AUD and NZD’ story.  Full text »

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* USD strengthens across the board; looking for more to come
* EUR/USD & USD/JPY price levels to watch
* Outlook continues to stabilize in US while deteriorating elsewhere
* Key data and events to watch next week

The USD recovered broadly against other major currencies this week as the GSE panic subsided further and oil and other commodity prices continued their sharp retreat. US 2Q bank earnings reports also came in generally better than expected, though many firms still reported significant losses and write downs, but left the impression that financial sector hemorrhaging is nearing an end. Non-financial firms’ 2Q earnings reports were also generally better than expected, reinforcing the notion that US firms are well-positioned to weather the current economic storm, with attendant positive implications for the US economic outlook.  Full text »

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* The panic lifts and the USD survives
* Oil weakens and a top is evident
* Euro strength pinching Eurozone growth
* Key data and events to watch next week

This time last week the world as we knew it seemed to be on the verge of collapse. The GSE’s were under assault, the US financial system was looking into the abyss and the USD was being punished as a result. As I suggested last week, however, US officials stepped up to the plate and organized a backstop for the GSE’s, raising the implicit Federal guarantee to its most explicit level yet. The SEC also imposed restrictions on short-selling of GSE shares and their rebound has been almost as spectacular as their sell-off. Overall financial sector stocks have also had a stunning rebound as balance sheet woes finally appear to be coming to an end. While losses were still registered for the 2Q, the key take-away is that there is not much left for many of these firms to keep writing down. The US Congress still needs to act on the GSE plans put forward by the Fed and Treasury, and while the devil may be in the details, I am confident that the Congress will pass the essential core of Treasury’s plan sometime next week and I look for markets to breathe another sigh of relief.  Full text »

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* Market crisis or mass hysteria?
* Intervention risks mounting
* The US outlook is actually stabilizing
* Key data and events to watch next week

As Bart Simpson might say: “Ay Carumba!” As shareholders of certain GSE’s might say: “Mommy.” This past week started out with the USD on the mend and oil and other commodity prices dropping sharply only to turnaround mid-week and see the USD plunge to near all time lows and oil prices surge to new record highs. The causes for the sudden shifts are as unrelated as they are sudden, and, I believe unjustified. But this is the state of the world we live in now: doom and gloom pervades, and panic is just a step away. The US dollar’s woes stem largely from a flight out of US assets over fears that key GSE (government sponsored enterprises) mortgage lenders are on the verge of collapse. Oil’s surge is attributed to heightened tensions between Iran and Israel, with a fair amount of rumor and subterfuge behind those tensions. In both cases, mass hysteria seems to have got the better of markets and this is cause to treat the price movements with suspicion. From a trading perspective, however, market hysteria frequently overwhelms facts in the short-run and traders are strongly urged not to stand in the way of a panicked mob. Instead, wait for signs in price movements that the moves are reversing.  Full text »

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* The post ECB/NFP dollar rally looks overdone
* ECB hikes as expected, but was it a one and done?
* US employment data were much worse than expected
* Key data and events to watch next week

In one fell swoop the greenback managed to reverse what was shaping up to be a terrible week, on the back of an NFP number that was seen as in line with expectations and an ECB seemingly on hold following the 25 bps increase. EUR/USD opened the week near 1.5790 and looked poised to break through 1.5800 in earnest, a level it had not closed above since late April. Even the 1.6000 area seemed within reach as EUR/USD crossed above 1.5900 just ahead of the simultaneous ECB press statement/US NFP release. It was not to be, however, as the NFP report was deemed to be in line with consensus (we argue it was worse below) while Trichet was interpreted as telling the market that the ECB is on hold. EUR/USD shot down quickly following Trichet’s comments and was sitting more than 200 pips lower at 1.5690 just hours later. Given other market developments we believe this move was likely overdone.  Full text »

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* The post ECB/NFP dollar rally looks overdone
* ECB hikes as expected, but was it a one and done?
* US employment data were much worse than expected
* Key data and events to watch next week

In one fell swoop the greenback managed to reverse what was shaping up to be a terrible week, on the back of an NFP number that was seen as in line with expectations and an ECB seemingly on hold following the 25 bps increase. EUR/USD opened the week near 1.5790 and looked poised to break through 1.5800 in earnest, a level it had not closed above since late April. Even the 1.6000 area seemed within reach as EUR/USD crossed above 1.5900 just ahead of the simultaneous ECB press statement/US NFP release. It was not to be, however, as the NFP report was deemed to be in line with consensus (we argue it was worse below) while Trichet was interpreted as telling the market that the ECB is on hold. EUR/USD shot down quickly following Trichet’s comments and was sitting more than 200 pips lower at 1.5690 just hours later. Given other market developments we believe this move was likely overdone.  Full text »

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* Back to the brink-again
* The Fed disappoints, but signals only one direction
* Month/quarter-end promise heightened volatility; ECB and NFP to boot
* Key data and events to watch next week

The world as we know it would seem to be coming to an end. Oil prices have risen through the $140/bbl level, stock indexes globally are trading at or below their lows for the year (no small feat), and the USD is on the verge of collapsing. And yet, the feeling of panic that accompanied the last visit to the edge of the abyss does not seem as much in evidence. Instead, this time around the aura seems to be one of resignation and helplessness. Of the two episodes, the current one seems more ominous in the sense that solutions seem less available. Key central banks have already largely exhausted their ability to provide monetary stimulus and are now constrained by runaway inflationary pressures. The financial sector, having assured markets a few months ago that the worst was behind them (I cautioned readers on April 18 “Don’t buy it”), are back under the gun and financial system stability is being threatened anew. Central bankers have cautioned that additional bailouts are less likely and this raises the prospect of more severe financial sector stresses than before. Consumers globally are being pummeled by rising food and energy prices against a backdrop of slowing economic growth and restricted credit. If there is any light at the end of this tunnel, it seems very far off and likely a mirage.  Full text »

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