A Drowsy Look at the Yen and the Downgrade

Today, someone at Moody’s got too trigger happy after cutting European sovereigns like tofu. Although that immediately caused shock in the yen markets, drawing a 50, 60 pip black bar, I was surprised how the market reacted. It may have been on the radiant heat caused by the drop in industrial production in April, or the report that came right before which was Cabinet Secretary Yosano confirming both parties in the Diet will issue bonds to help with reconstruction.

Other than bringing to light that the yen is overvalued right now, whoever at Moody’s was missing a few things.

First, Japan can still print its own money. And that, more or less is exactly what they need right now. The yen is not a safe haven currency per se, accounting for less than 10% of the world’s forex reserves, but it is a deflationary currency as well. Other than funds repatriation and carry trades reversal, undoubtedly a good part of investors are using the Yen as a inflation hedge that is slightly growing, but oh-so-much more liquid than the “popular” anti-inflationary asset-gold.

Also, most Japan’s bonds are actually held by the domestic populace. Didn’t get the data, but most of them are, by institutions and the general public. That’s why CDS stayed at 56 even though the yen fluctuated back and forth. The Japanese bond market is this way because of the low yields, even though debt/GDP is over 220% at least count, held down by a stagnating economy and thus low central bank lending rates. Even so, Japan has the printing press, and although Shirakawa hates using it and neither does anyone in the independent BoJ, they do realize that it is a way to bring the Japanese economy back.

But the true fear is that yields will be gradually pushed up, and if Japanese yields go up before the US, the USDJPY may go lower according to the golden correlation that has held for about 2 years. Noda, Shirakawa and especially Kan knows that.

I’ve also read somewhere that there are merits to the Yen becoming the next reserve currency, but I forgot the disadvantages, mostly because Japan is still an export economy or something… I slept at 6 this morning after watching the Hangover II and I’m frying.

Yeah, someone at Moody’s probably got margin called. But deal with it and shut your face. All 3 of my mcs were caused by USDJPY trades, on both sides. Cut the account from 800 to 400 too 200, but at least I didn’t lose anything… and learned a huge lesson x3 in forex trading.

If anyone is looking at USDJPY, there is a range forming from 80-82. In fact, the next time it hits any of these, I’m going to put a small order in and ride it to the other end. Overall, I’m still bullish on the dollar, especially against the yen. May put a bigger order in if it hits 80 again. After all, the current PM, when he was Economic Minister or something of the like said he would prefer it to be at 95.

And he’s not the only person saying it. NZ, AU, and quite a few others are also pointing out a strong national currency isn’t exactly the best for their economies.

Whoever is making these ratings decision at Moody’s, please evolve and keep it to yourself. Yeah, I’m bitter, but that’s because my AUD just swung $24 and I’m still off 40c. At least I get rolls. But definitely watching the weaker than expected GDP tomorrow. However, watching base and industrial metals.

To the best of good buys. Off to bed…

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chaar siiu baao

at 00:50 in the morning allll rigghhhh

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Playing with our food

It’s interesting why so many kids play with their food before eating it. Freud said something about that and an innate desire for the child to play with his waste. But that’s what Freud thinks.

Not too long ago (Thursday) I asked why the New Zealand dollar was so strong, even though it was not nearly as endowed with natural resources as Aussieland. I wondered if it had to do with it as a “cheaper” vehicle compared to the Australian dollar, like the relationship with silver and gold that silver dealers try to hawk. My friend agreed, but brought up the point that although Australia had the minerals, New Zealand had soft commodities. At that time, the terminal was showing an awesome animation (in a moving typography kind of way) about diary products and futures over the past few years, and a (kind of ominous) upwards arrow with “Chinese Consumption” written above it. And my good friend’s chart of dairy futures-NZDUSD showed a 3 month leading trend, not unlike that of cocoa/GBP.

Although China is in no way close to being Aotearoa’s main trading partner, China’s trade with NZ is very much a one ingredient animal. With little else to take, China wants food. And with the exception of Kazakhstan and a few other CIS nations, New Zealand can be considered Asia’s breadbasket – or more accurately, meatbasket of Asia. Although many would think China would have the most cattle and sheep out of any country in the world, Australia and NZ have one of the highest. As of 2008/9, Australia’s cattle to human ratio was 1.38, while NZ’s was 2.24. Aus’s sheep to human was 3.61 while the Cloud Island had a whopping 7.9. Comparatively, America’s was roughly .32 and some number lower because the FAO doesn’t give it for free.

To analyze this for forex usage, I’m going to forget about Australia for a bit. Although it is a formidable challenge, New Zealand, as Finance Minister Bill English said last week is “riding the China-Australia train.” The Aussie economy lives off its minerals, and has quite enough food to take care of themselves.

To keep it simple and get onto the analysis, China wants food. There are 1.3 billion people, and quite a lot of them are hungry for meat and cheese. Even worse, they have the money. *My dad just bought a Volkswagen Jetta for the equivalent of USD 52k – isn’t that a good Mercedes here?*

Today’s NZ trade data was released, confirming a record surplus of 1.113 billion kiwis. Driving that was what little copper and aluminum they had, but most surprisingly those soft commodities that was the lifeline of Aote’s export industry – dairy, wool paper products and foodstuffs. Although exports to China and Australia fell slightly due to the (now) historic high of the Rutherfords, to be bucked by a Japanese recovery-driven increase, the sheer level of food to China was still impressive, comprising around 23% of total exports to China.

Export breakdown for April

So there is a link between food prices and NZD strength. Although the US is the largest exporter of food, the currency is cut with too many other things (industries, safe haven, QE, etc etc) to clearly show that correlation. That’s why the Kiwi is labeled as a commodity currency, no matter how soft. Given NZ’s advantage in the Asia area and large surplus of meat and cheese – what the Chinese can’t get enough of right now – look at yesterday’s post for Chinese food inflation – the Red Dragon can very likely ask the Hobbit for more. That advantage in soft commods is what characterizes New Zealand the most (like industrial metals for AU, PGMs for ZA and oil/energy for CA). Plus, it is right next to China, and traders understand that although the RMB is not tradeable, bets of China’s growth can always be made with the polymer currencies (interestingly, Hong Kong too).

However, will this rally last? The AUD has dropped 3c from its high, though commodities are inching back towards their pre-May Day highs. There is a sudden influx of long positions on the NZDUSD, some cannibalizing from AUDUSD. After all, this is still a currency, and the plaything of the NZ Treasury and the RBNZ. PM Key has a few good plans – one of which is bring the budget and balance back to surplus by 2016. But the risk that New Zealand runs is if the New Zealand dollar is too strong, especially against the Australian dollar, there may be a risk of the industries and manufacturing being shuttered. Although commodity exports will nominally gain due to the price increase, a too-quick gain of the NZD will wipe those gains, and still leave a weakened manufacturing.

Also quite puzzling, FM English, as of last week, has changed his rhetoric from “A strong NZD creates headwinds for the domestic economy” to openly saying “China has long been buying NZ bonds” to a clear bullish statement about the “China-Australia train.” What has prompted this quick change of heart? hmm… after all, the PM Key was a forex trader.

What seems to be the NZD’s 1.1000? There are no clear signs right now. Let’s just hope the train doesn’t stop. For China’s sake too.

NZ April Trade data here from Tatauranga Aotearos (Statistics NZ)

To the best of good buys.

1 Week NZDUSD

Current position: Short cable (entered) at 1.65020, target 1.62000

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Does the European Debt Crisis Still Matter?

It seems like the market has reached a point of fatigue with regards to the Greek situation. The easiest situation would be of course for Greece to “restructure” or have lenders receive a haircut. Of course, this will be not just detrimental, but fatal to the Eurozone and Großdeutschland’s political dream of creating perhaps the first actually working European single currency (unlike the Latin Monetary Union or the Scandinavian Monetary Union.)

And that’s why instead of using that rhetoric of “restricting” we have “profiling” and “bailouts” to “support and Germany is at the forefront of throwing everything they have at Greece and now the other peripherals.

But the start of the crisis was early 2010 with the first Greek austerity measures. Since then, central banks, markets, and now even absolutely useless rating agencies are joining the fray, bringing confusion, risk, and a whole lot of volatility into the Euro. And the Euro’s not feeling well.

But 2 years later, is the market becoming fatigued? The Euro right now is 1.4200 or so against the buck which is only a bit off from its pre-recession high in the late 2009 when easy injections into the system restored confidence – and gave people reasons to believe the housing crisis was only a blip on the radar. The Euro dropped in mid-2010 when more news hit the wires and the press started to blow out the story.

Yes, that followed fundamentals – but the question now is whether or not the Greek crisis (and Portuguese, Irish, maybe Spanish and even Belgian or Dutch) still matter to investors, or will the rhetoric of Merkel and co. keep those fears at bay.

Maybe the Euro will become a new dollar. Maybe it will end the rout of the LMU.

Here’s a breakdown of major political events in the peripheries since 2010, and a chart.

 

Weekly chart with some bits of the recession

2010 Feb 02        GR          First round of austerity outlined – including raise on fuel taxes

2010 Feb 03        GR          EU/EP endorses Greek plans to raise taxes and cut spending

2010 Feb 03        ES           Spain heightens deficit to 9.8% of GDP in 2010, decreasing to 3% in 2013

2010 Feb 09        GR          The powerhouse mentions “loan guarantees” to calm default fears

2010 Feb 11        GR          Reports leaders have forged deal to help Greece deal with crisis

2010 Feb 15        GR          Greece demand to show balanced budget or face tax demands

2010 Feb 17        ES           Spain sells EUR 5 billion in bonds at 5.7% – jitters haven’t hit Spain yet

2010 Feb 23        GR          Fitch downgrades major banks to BBB, outlook negative

 

2010 Mar 03       GR          New austerity plan announced, may yield EUR 4.8 billion savings

2010 Mar 04       GR          Civil unrest starts protesting cuts

2010 Mar 04       GR          Trichet promises Greece would not need IMF support

2010 Mar 08       PT           New budget includes array of cuts, caps and tax increases

2010 Mar 16       GR          S&P holds Greek bond ratings at BBB+, says no need lower

2010 Mar 18       GR          Papandreou asks EU for “standby loans,” prefer EU to IMF

2010 Mar 24       PT           Fitch drops Portuguese bonds to AA-, warns caution

 

2010 Apr 06        GR          Greek government 2 year debts hit 7.1% record

2010 Apr 09        GR          Fitch cuts Greek debt to BBB-, outlook still negative

2010 Apr 22        GR          Eurostat says government deficit in 2009 was wider, at 13.6% GDP

2010 Apr 22        GR          Moody’s is late to the part by lowering bonds from A3 to A2

2010 Apr 23        GR          Greece asks for aid from the EU and IMF (EUR 45 Billion bailout)

2010 Apr 27        GR          S&P cuts Greek debt to junk levels

2010 Apr 27        PT           S&P cuts Portuguese bonds to A-

2010 Apr 29        GR          Government agrees to further EUR 23 billion to get bailout

 

2010 May 01       GR          Deal reached for EU bailout mechanism, EFSF comes into shape

2010 May 05       EU          EURUSD hits 1 year+ low at 1.235 levels

2010 May 07       GR          German lower house approves ~EUR 22 billion loan to Greece

2010 May 10       EU          EFSF sets aside EUR 750 billion for bailouts

2010 May 21       ES           Banco de Espana takes over CajaSur – cajas targeted

2010 May 29       ES           Fitch lowers Spanish debt rating to AA+

 

2010 Jun 17         EU          Stress tests planned for all Eurozone banks

 

2010 Jul 19          IE            Moody’s drops Ireland’s credit rating on debt, to Aa2

2010 Jul 23          EU          Stress tests released, show 5 Spanish banks need more capital

 

2010 Sep 30        IE            Government reports collapse of banking sector will be devastating

 

2010 Oct 18        EU          DE, FR say permanent bailout fund can cost bondholders

2010 Oct 26        IE            Government says austerity of EUR 15 billion over 4 years needed

 

2010 Nov 21       IE            Ireland says it has applied for an EU and IMF bailout

2010 Nov 22       IE            Political cracks seen as citizens lose confidence, election proposed

2010 Nov 24       IE            EUR 15 billion austerity over 4 years outlined

2010 Nov 28       IE            Ireland receives EUR 67.5 billion bailout

2010 Nov 29       EU          Euro ends stronger, though drew lower for early part of week

 

2011 Mar 07       GR          Moody’s lowers credit rating to Ba1 from B1

2011 Mar 11       EU          Leaders agree to plan out permanent EUR 500 billion fund starting 2013

2011 Mar 24       PT           Fitch lowers rating to A-

2011 Mar 29       PT           S&P lowers rating to BBB-

2011 Mar 29       GR          S&P lowers rating to BB-

2011 Mar 31       GR          S&P, Fitch keep cutting like Walmart, markets ignore peanut gallery

2011 Apr 18        PT           EUR 80 billion announced

May wasn’t that big, although the key word that has developed was “re-profiling” – basically extending Greece’s problem rather than paying it off. Furthermore, some shoots are showing as the Greek government agrees to sell some of their assets – including stakes in national companies, though this is not enough to even pay back their borrowing

And just today, reports are coming in that Greece has missed fiscal targets set by bondholders including other Eurozone nations and the ECB, although the government (what else can they say?) has fervently denied it.

Of course, news has died down, coming into the summer months as investors shift their focus to the US as the last round of QEII purchases and related actions are due to end June 9^th. There are concerns the US economy might slow, but that hasn’t made sense in the markets as the Euro has gradually strengthened. Yet, the end of QEII and the direct increase in rates are still unclear, and from the way the US economy is at, might take up to a year, while Trichet has been repeated stamping his German-made “price stability” jackboot into the face of the peripheries.

And we know Germany will try to do everything to preserve this financial project to preserve its political dreams. The risks of a Greek default, although possible is still quite slim because once again, this is a country, and the shock of one country going belly-up will certainly take the wind out of investors. It’s not really a question of if right now, but more how long can Greece be dragged along the asphalt?

I personally think the Euro has no reason to be this strong right now against the dollar given all its inherent risks. But the only real reason for its strength is due to its higher yields and even higher yield expectations. German manufacturing and industry has been lower (or slower growing) for the past two reported months, and France is still stagnant. With politics spilling over into economics, future bailouts and “relief” would be even harder. In the coming summer months, consumption might drop further.

Also, I wouldn’t bet too much against a later-year US recovery. Barry wants to get elected and although he got BL, he can’t go on that momentum forever.

But maybe not China. Chinese demand for whatever heavy German machinery and technology has to offer has been bouying its economy, and in a way replacing the demand that would have otherwise come from the United States. Not forecasting a bubble popping – but PBoC Governor Zhou Xiaochuan has repeatedly stated they might raise reserve requirements and interest again (two or three times) to slow inflation. Industrial profits, although still at an amazing 29% over 3m, has dropped from the previous ~36%.

And the PBoC always looks at overall, especially food prices as energy is subsidized somewhat. Here’s the latest report in over 50 large cities. Around a 3% increase in the price of pork and almost 12% in napa cabbage (which has been one of the fastest rising foods in China)? I bet the PBoC is watching.

And when is the 2^nd series of Euros coming out? They said early 2011! Why haven’t I seen any designs?

Also, what is this? China looking to buy EUR, NZD, AUD denominated bonds? Sure, that’s developing a market, but if the big panda really enters the room that way, the USD might be doomed.

But we are the biggest economy in the world. nah, I think I’m going to listen to interest rates instead.

Entry buy USDJPY at 81.20, then 80.80.

Entry sell EURUSD at 1.4550.

To the best of good buys.

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HIGNFY S41E07

Bill Bailey. All right.

Part 1

Part 2

*ppft* *ppft* *ppft*

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红油「爆」腰

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Back to classics

owned by kraft, made by hershey’s. mmmmm inefficencies

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“We have hereby concluded it’s because of the apocalypse”

1% flash-rally isolated in the Swiss franc? No explanation at all? Absolutely the worst thing a trader can face… or the best, depending on what position he took.

Good thing I was out of the franc market, except in banknotes, which is always good because you don’t get margin called.

Oh well, good way to end the week. Closed the positions, readying up for the next.

After scrambling for a good 30 minutes combing every source we can find, we concluded this was because of the apocalypse while the support and sales team were been bombarded by people who got MC’d because of that move.

Also, interesting read here.

To the best of good buys.

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? risk aversion + Dollar weakness = strong yen

That last yen buy at near 82 was a bit too soon – today’s weaker than expected 2nd prelim US GDP report 1Q (1.8% v 2.2%) should have been clear because of late drop in manufacturing in industry during March and April. Nevertheless, the motive for this trade again is for June 9th and beyond, though the US could be weaker again in the near-term summer months.

Today’s mixed risk aversion comes from the metals markets, though equities markets are struggling to gain as well, holding onto .3% blackness. Correcting from recent gains is silver, dragging with it its yellow brother. Base metals have also wiped their early intrasession gains.

So why yen? I think it’s because of fears the US economy may slow down further, naturally causing unwinding of carry, but more due to a weak dollar as the prime candidate to avoiding risk in the US is selling the USDJPY pair.That drop was when the GDP was reported.

2 Hours

All in all, channel has been broken in the 2hr, head and shoulders forming in the daily. Should have a limit near my purchase and get into higher yielding positions, but I think investors will factor in June 9th earlier than execution. After all, they should be forward looking.

To the best of good buys.

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D-fly top at 236 fib?

mmm… would like to buy one lot… especially from the recent trend of dollar strength and the dramatic decline of the dollar this morning. arghhh going to hold off because this may be a double bottom forming at the 000….

Nokkie 2 hr

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