By: Kevin Sollitt
Last week’s theme (Is Risk Appetite Really There?) recommended consolidation by taking profits on existing positions & also accounted for risk aversion ahead of potentially weak Kiwi data, NFP and of course today’s FOMC announcement.
We saw awful data where we suspected that vindicated these views and added to the recent trend since we began contributing to DailyForex in June 2010 of recommending consecutive trades that, if held, would have reached between a one and five percent profit margin on a weekly basis.
Last week we suggested liquidating long NOK at 5.96 & initiating short NZD at 0.7350, legging into long GBP/NZD on a pullback in cable at around 1.55 if possible.
Frankly, after digesting today’s FOMC minutes we are hard-pressed to recommend buying USD against any currency and would therefore suggest legging into this cross at the current market (1.58) or just squaring the short NZD position (0.72).
The Fed seems to be in a corner with no place to hide with a 2-year note yield at 0.5% arguably exposing failed policies from previous years that can only seemingly be paid for by a dilution in the Dollar’s external value, or quite simply a weaker currency, if asset purchases are to continue.
It was all very well following the crowd when it came to buying USD on anemic economic data based purely on sentiment but the game is changing around us, with Europe back from the brink and the US yet to emerge victorious from its downturn. Fundamentally then, the day of reckoning seems to be here evidenced in part by fresh lows in USD/JPY.
Some Elliot Wave theorists are calling for this pair to test 65.
To be sure, the Greenback is not alone in being on the ropes; for example the UK has similar problems to the US but is not only breaching its inflation target meaning a rate rise is nearer than markets expect but is also reaching out to India, Japan & China to develop mutually favourable terms of trade.
The global village is tight on credit yet countries like China, India, Japan and UK plc are open for business-perhaps a new economic order is already upon us, albeit stealth-like in nature and driven by trade.
Behind the headlines of the UK going to the dogs are high level negotiations and deals taking place that we suspect will eradicate the UK fiscal deficits and leave currency markets with little ultimate choice but to reward today’s actions in the future.
As far as the Fed, as we feared Mr. Bernanke has yet to convince markets that recovery is imminent due to an unconvincing backdrop of stubbornly high unemployment (the rate did not rise because long-term jobless were ineligible to be counted as unemployed), falling home values and slowing consumer spending.
Add to these potential USD negatives that China is looking to buy Japanese securities instead of US Treasurys and another reason to sell Dollars rears its ugly head to the surface.
Last month we recommended a long NOK position based on its higher interest rates & sovereign ratings than the UK, US & most EU states, followed by a liquidation of this exposure last week for a 5 pct gain.
Due to today’s confirmation by the Fed that rates will remain low amid an uncertain economic outlook for some time to come, we reiterate our bullish call on NOK and would not be surprised to see the Norges Bank hint at or actually raise rates as soon as this month from the present level of two percent due to domestic growth/stability-decision on Wednesday August 11.
We suggest initiating short 50% USD/NOK at current market 6.06, layer-in a further 25% at 6.13 and another 25% at 6.22 with a stop above 6.28, objective of a minimum 2:1 and trail stop down every 400 pips.