Running just to stand still

Morning!

So we have had countless stimulus packages in various flavours in various countries and the end result is anemic growth almost everywhere apart from the UK which is apparantly still contracting. This is just a re-run of the events that took place in Japan in the 90's. Admittedly, goodness knows what things would be like if there was no stimulus at all. In any case what we do know is that Japan had periods of positive gdp AND a relatively strong labour market and they still suffered massive asset price deflation. By the way anyone who wants a good big picture view of the potential for deflation should read Roger Bootle's series of three books; The death of inflation, Money for nothing and his most recent one, The trouble with markets.

The way to solve the problem of excessive debt is not to issue more. The obvious thing to do is to pay it back? This is exactly what happened in Japan. Private debt was, and is, being paid back. This is why banks are not lending and businesses on the whole are not borrowing. I believe Mervyn King was right when he said some months ago at an inflation report press conference that in the short run we have to do the complete opposite of what is right for the economy in the long run. So in the short run excess government spending has been the appropriate economic medicine to avoid armageddon. There is a possibility that governments can stimulate their respective economies back to their pre crisis highs and perhaps beyond but without an increase in lending it seems unlikley this will occur. As I have mentioned in a post from months ago I think the Nikkei is a great roadmap for what may happen in the Anglo Saxon world. Every time there is a rise in optimism and equities rise, the smart people get out, learn from their mistakes and return to a more balanced approach to investing. This process repeats many times and eventually the system is cleansed. It is essentially what Mervyn King was talking about but it will probably need to happen many times because it is simply too dangerous to let all economic agents fail, that need to fail, all in one go. Thus it is done in stages as per the Nikkei chart over the last 20 years.

It is my belief that we are going to experience at least one more credit contractionary phase. As a proportion of outstanding debt, USD denominated debt is the largest. If folk start scrambling to get the money back that they have lent out, the end result is a monumental USD rally that comes from out of the blue. USD sentiment is near an all time low. Note, that when the USD rallied following the collapse of lehman it reached a point at which 98% of USD speculators were bullish USD. Guess what? That was the point to sell USD (around March 09). Now we are at a point where about 3% of speculators are bullish USD. In my mind it is a reasonable place to build small long USD positions.

Take a look at the NZDUSD chart above. It is one of the few USD pairs that has broken below trend-line support and I believe is one that should be sold aggressively on pullbacks towards .7450. Unfortunately I do not have access to my normal charting package so I am trying out an alternative. Let's just say that the false break higher that occured on 21 October followed by the breach of the support of a rising daily wedge and then the major trend-line support off the lows from March/April is an early warning sign of probable further losses. As always, good luck if you have a go.

Pastures new

Dear all,

I just wanted to let my faithful readers now that I have been away for a while as I started a new job a month ago(doing the same thing). I hope to return to the blog shortly. I remain a dollar bull in the short run for those who are still interested. Will be back soon.

Good article via The Big Picture from Barrons

Good perspective on the jobs outlook in the US:

http://www.ritholtz.com/blog/2009/10/the-more-you-dig-into-the-numbers-the-worse-they-get/

Great insight from Pimco's El-Erian

A great article in last weeks FT from the joint CIO of Pimco:

http://www.ft.com/cms/s/0/1551b95e-ac59-11de-a754-00144feabdc0.html

AUDUSD - Closes below .8700 for the third week in a row.

As can be seen in the (weekly) chart above AUDUSD has once again finished the week below the .8700 extension target. In doing so on Friday, it also attempted to break below the wedge support that I have highlighted. A break below this support will be bearish.

I appreciate that I am focusing on the one currency that has a central bank that is supposedly going to raise rates. However, what evidence have we had in the last few weeks that there is a case for rate rises? Ok, domestically the Aussie economy may be printing stats that are mildly bullish. If only Australia was able to exist in isolation that would be fine. As far as I am concerned stats coming out of other regions have been those that suggest a double dip, particularly Chicago PMI and NFP in theUS (including the 800K downward revision). Now if the the Anglo Saxon world is possibly going to experience a double dip recession what does that say for the demand for Chinese goods and then in turn for Aussie output (commodities)? No country can survive in isolation and there is no such thing as decoupling. I therefore think that there is a risk that even if the RBA raises rates that they will have to stop after one, and what the forward market is pricing in will be scaled back. The Aussie is a play on global growth and I don't see that being too rampant. For me the best risk reward is in a disappointment from the RBA, which may best be reflected via an options play. That is down to individual risk tolerance. Good luck.

USD Index - Falling wedge. A potential false break lower

As can be seen in the weekly chart above, the USD index has been forming a falling wedge which broke to the downside over the last 3 weeks. Interim support has been found,pushing back into the wedge and now needs to be maintained in order to leave a bullish false break lower. Failure to hold here will likely lead to a break towards last years low at 70.698. However, if maintained and a break of the wedge resistance is achieved, this will confirm the false break lower and will be a signal of USD strength ahead.

So, we are at a pivotal point in the market. Will the USD strengthen and likely take equity markets down with it, or are we about to see an extension of recent weakness in the USD associated with further strength in already overvalued equities? I know which camp I am in. Is a larger multi-month/year reversal pattern forming here? What say you?

GBPUSD - How weakness in GBPUSD effects EURGBP

The reversal pattern that I mentioned in my post below has now been triggered. I think we are heading to the 1.5300 region initially. If and when we get there I think it will be perfectly feasible that 1.3500 will be mentioned again by so called experts. Prices make opinions, not the other way round.

One thing to note here is that when cable is weak, EURGBP tends to rise. I think there is every chance that we head back to .9805 in EURGBP and possibly higher. In saying this I assume that there are no balance sheet surprises out of the Eurozone banking system and that Eurozone investement grade credit spreads do not deteriorate relative to their UK equivalents. So ask yourself this; if EURGBP heads to parity, where does that leave cable? Above is a chart of Cable with EURGBP below it, so that you can see the general inverse relationship. Periods where this is not the case are short lived.

I am certain that the Eurozone banking system is in a complete mess, but for some reason Mr Market has decided to ignore this. Maybe if trade begins to contract again and Germany feels the pain this will resurface, but in the meantime there is no point arguing with the market as this has the potential to be an explosive one. A good article about global money supply which ties in with growth and debt deflation can be read here. Enjoy!

NZDUSD - Meets extension target and leaves a possible false break higher

As can be seen in the chart above NZDUSD just like AUDUSD has hit a major extension target and in doing so has broken through the resistance of a rising channel. This may have left a false break higher. I now favour a return to the .6900 region and potentially lower. One step at a time. The false break higher will be confirmed on a break below .6900. This kind of set up, if triggered, typically leads to sharp losses.

EURAUD - Follow up chart

Following on from my post below, here is the chart. As can be seen the pair has hit a major extension target and is also exhibiting a multi week bullish divergence. Coupled with AUDUSD having hit a major extension target I would favour a bounce higher towards 1.8098 over the coming weeks. As before, below 1.6587 weakens bulls.

AUDUSD - Possible false break higher.

Well, all I can do is repeat what I mentioned in the update below about USD sentiment. I feel the same way about the AUD as I did when I wrote an earlier post in terms of my conviction and intuition, except this time I have the inclination to be a bear. As some of you may have gathered I am a natural contrarian. AUDUSD has hit a major extension level at .8700 and has formed a rising wedge, which on a weekly chart has been broken to the upside. This break has failed to gain momentum and has also failed to close above .8700 on a weekly basis. All I can say is watch this one and also NZDUSD. These commodity currencies have gone a long way in a short time. If the global economy does not come roaring back then these currencies are going to get trounced. Couple this with the fact that EURAUD is technically set up for a recovery (more on that later) and GBPAUD has hit a 20 year low, this is one currency that needs to take a breather. Look out to see if AUDUSD leaves a false break higher next week. If so, this could be an early indication that there will be swift losses ahead. In my opinion any further rises beyond the .8700 region will just make the eventual fall even more tasty then it is currently set up to be.