GBPJPY - Does a major exporting nation mired with deflation deserve one of the worlds strongest currencies?

GBPJPY is a pair that I have been following for some time as the structure is very clear and a major extension target near 120.00 has been hit recently. On a fundamental basis, the news from the Japanaese economy has been relentlessly dire, yet the nation has a mighty strong currency. I follow the Yen index and there are signs of a turn, but nothing concrete. There is scope for a double bottom in USDJPY, but that has yet to be confirmed. I will post a chart for those who are interested in my next post. You can make up your own minds. Basically, you have an oversold currency, sterling, versus the darling of the currency market the Yen. Japan as an export driven nation, has experienced a massive contraction in GDP recently and this loss of demand and credit is leading to deflationary pressures again, see :

http://uk.reuters.com/article/stocksAndSharesNews/idUKLNE51B02V20090212

Thus as strange as it may sound a somewhat controversial trade could be a winner; going long GBPJPY. The recent false break out a falling wedge to 118.78 followed by a sharp recovery is bullish. I would suggest going long GBPJPY for a rebound to the 158.00 region. Entry should be around 126.00 close to the 61.8% retrace of the initial recovery from 118.78 with a stop under the low at 118.78.

A repeated theme on this blog has been the role of exchange rates to stoke GDP. Consumption is dead largely due to deleveraging. Investment will pick up slowly once the saving rates pick up in any economy. We are left with government spending and net exports. Given that the Japanese have tried various forms of fiscal expansion over the last 15+ years, and that they are a major exporting nation, one of the few ways to assist the economy would be via a weakened exchange rate versus most other curencies. It's the race to who can have the weakest currency! On your marks, get set, .....................

AUDUSD - One to watch

AUDUSD has been beaten over the last 9 months as a play on global deleveraging and a contraction in global demand has been deemed negative for the core of the Aussie economy; raw materials. As alluded to in my post below trade continues regardless and will just go from crazy mad (driven by leverage) to more normal levels as consumers and corporations continue to deleverage.

Although I am currently of the view that this process of balance sheet repair will take much longer than a few months, I do believe that there is scope for two way movement in markets, hence my short squeeze view in equities and a potential bounce for the Aussie. I do however reserve the right to change my mind as data changes over time!

So although I am not convinced we have seen a major low in the S&P 500 yet I do think that there may be a tradeable bounce in equities down the pipeline. In this scenario Aussie may fair better than many expect. The only element of the trade idea that bugs me is that the USD index as shown in my post http://you-buy-the-high-i-sell-the-low.blogspot.com/2009/01/usd-index-chart-will-reversal-pattern.html , continues to look menacing and makes me think that a test of the neckline is still possible before the dollar weakens. This has already dented my NZD trade idea.

My warning to readers is that maybe this is just one to watch, but it is exhibiting some good signals for an eventual swing higher. See chart above for some positive signs. Click on chart for larger image.

Baltic Dry freight Index - Possible recovery

Firstly take a look at the following: http://www.bloomberg.com/apps/cbuilder?ticker1=BDIY%3AIND . There does appear to be a minor recovery in this dry freight shipping index, and as a result we have seen a turn around in the AUD and to a degree in equities.

The huge amount of leverage that has been unwound on a global scale led to a sharp dip in demand for dry freight containers as large capital intensive projects were abandoned. It would seem obvious that trade will not end, but going forward may just have to return to more subdued levels that are consistent with consumers and corporations that are paying down debt. This does not mean that container ships will never sail again, just fewer of them. Maybe folk will wait for their fridges to break before buying a new one. You get where I'm going....

It is worth noting this turnaround in the index as it may also signal some kind of rational behaviour is returning to the market place. Although I am not convinced that we have seen a short term bottom in equities, the price action is interesting and I do believe that there is scope for a short squeeze higher in equities, hence my piece on AUDUSD which will follow shortly. In any case food for thought.

EURGBP - Update, and trading recommendation

As per my posting below ( http://you-buy-the-high-i-sell-the-low.blogspot.com/2009/01/eurgbp-potential-lower-high-in-place-at.html) the expected break of trendline support off .7806 and .8844 has taken place. Examining short term structure, which is not detailed in the chart above, there is scope for today's fall to end close to .8820. If this does take place, then there is a possibility of a three legged correction and a return to the .9000 region. If however .8804 is broken to the downside, a bear flag will be triggered with the associated target lower. There is a reasonable chance of a return back to the .9000+ region hence the trade which is detailed in the chart above. Click on chart for a larger image.

I continue to think that sterling has a great deal of negativity priced in. In the balance sheet recession that we are in it is vital to have the flexibility to implement expansionary fiscal policy, as and when it is needed, (providing the debt capital markets don't punish you too severely for doing so). Given that members of the Eurozone are subject to the budget constraints set out in the Maastricht treaty this could turn out to be yet another item to add to the growing list of negatives for the Euro going forward.

AUDNZD - Trading recommendation

Using a daily time frame and taking into consideration the structure present in the market since the low at 1.1655, a reasonable point of entry for longs would be around the 1.2350 region (close to the 38.2% retrace of the 1.1655-1.2800 uptrend). Stops should be placed under 1.2200. Click on the chart for a larger image and further reasoning. Good luck.

AUDNZD - Big picture update with a new monthly candle

For those of you who do not have access to OHLC data I thought it might be useful to provide an update of the chart that first featured in; http://you-buy-the-high-i-sell-the-low.blogspot.com/2008/11/audnzd-history-and-outlook.html . As you can see we are approaching the monthly wedge resistance which comes in at about 1.2915. A break of 2008's high at 1.2970 would thus also lead to a break out of the wedge.

It seems that my expectation of a swift move higher has been proved wrong, but an attempt on the wedge resistance is still expected and indeed favoured by the technical structure. I will post a more short term chart and trade idea shortly.

EURGBP - Potential lower high in place at .9520

Those of you who have been watching EURGBP will have noted it's failure to push substantially higher than the 61.8% retrace of the .9805 - .8833 fall and it's failure to close above that particular retrace level reaching .9520 on 26 January. The weakness since then has now fallen below the 61.8% retrace of the .8833 - .9520 rise! (Hope I haven't lost you). This increases the probability of a push through trendline support off .7806/.8844. A push under this trendline, which is this writer's favoured outcome, would target .8833/.8844 initially, then .8548/.8233 and in my best case scenario outcome, .7947 is possible (see the above chart for details). I give my fundamental reasoning for this trade in

- http://you-buy-the-high-i-sell-the-low.blogspot.com/2009/01/eurgbp-weakness-likely-to-continue.html

and:

- http://you-buy-the-high-i-sell-the-low.blogspot.com/2008/12/from-sweats-to-shivers-eurgbp-one-to.html

so apologies for the highly technical approach now. Click on the image for a larger and clearer picture. I have a GBPJPY idea brewing so perhaps more on that tomorrow. Good luck.

AUDNZD - Building for a break higher and possibly out of the monthly wedge

Long suffering readers of this blog may be fed up with AUDNZD, but I can tell you that now is time to get very interested indeed. We recently met 1.2620 a major extension of the recovery seen since 1.1655. 1.2620 has since been left behind with a minimal retrace. With the RBNZ cutting by 150 basis points yesterday, I belive that the structure I pointed out in http://you-buy-the-high-i-sell-the-low.blogspot.com/2009/01/nzdusd-event-risk-may-extend-negative.html is even more likely to pan out. If AUDUSD maintains a degree of strength which it has so far (I have been watching it all day), then there is every chance that we get a significant extension higher perhaps towards 1.3180/1.4170 as detailed in one of my first posts (http://you-buy-the-high-i-sell-the-low.blogspot.com/2008/11/audnzd-history-and-outlook.html). This would mark the break out of the monthly wedge which is also detailed in the history and outlook post. If that does take place we could potentially have much more of the same to come. We are at a crucial juncture for AUDNZD. It either maintains its twenty year wedge range, or as the AUD now yields more than the NZD it finally makes a break for it and does the decent thing. Here's hopeing for a violent extension and break out higher. There is likely to be a battle by the wedge resistance but it will be stop city just above it. Lets hope those stops are triggered.

Alternatively we see a more substantial retrace, but that is not my favoured outcome due to the failure to stop for breath at 1.2620, but either way it's got to have a go at the wedge this time, surely!

By the way for those not aware, by clicking on the chart above you can view a larger image and stand a chance of reading the text!

A Good Read - The Holy Grail of Macroeconomics ; Lessons from Japan's Great Recession

A book I have been reading recently is a good example of how conventional wisdom can be challenged. The auther Richard Koo puts forward a very compelling arguement based on his observations of corporate Japan, about how corporate psychology changes in the aftermath of a bubble bursting. In essence one of the major assumptions of macroeconomics, that of profit maximization by the private sector is challenged. Evidence seems to suggest that they turn to debt minimization as opposed to profit maximization. Definitely gives the reader plenty to consider, and if anything is a potentially great example of behavioural finance. Here is the amazon link for those that might be interested: http://www.amazon.co.uk/Holy-Grail-Macroeconomics-Lessons-Recession/dp/0470823879/ref=sr_1_1?ie=UTF8&s=books&qid=1233259091&sr=8-1

If you do read it let me know what you think in the comments section.

An AUDNZD update should be with you shortly!

A new deal or a continuation of the bear?

I was looking at the Dow Jones chart after watching a documentary on the 1929 stock market crash and thought about what Franklin Roosevelt must have been faced with back in 1933. He followed the Republican Herbert Hoover, and adopted an economy in total disarray. Sound familiar? Well, look at what happened to the Dow Jones after the FDR inauguration:

So what will happen in 2009?