Although equities are still falling across the globe, the outperformance of US stocks versus Eurozone (S&P 500 dropped by 14% since the start of the year compared to 26% in the case of the EURO STOXX) and EM equities is clear evidence that the international financial community is re-allocating assets into the US and the USD is behaving as a safe haven for the first time since September 11. The US authorities have slashed interest rates, injected liquidity, bailed out Bear Stearns and now Fannie Mae and Freddie Mac and are increasingly gaining credibility from the financial world for actively working their way out of the crisis. A lot of market players have been scratching their heads as they have been surprised by the strength of the USD upmove but the fact remains that the greenback is back again!
And it was another USD week, with EUR/USD hitting its lowest level in 11 months. With a number of major economies moving closer to recession, and with equity markets on the retreat, US names were the notable sellers of various currencies versus the USD. The US FOMC released its minutes, where the majority of the Fed directors noted that “stress in financial markets and the ongoing housing contraction were likely to damp economic growth further in the near-term” and saw appreciable downside risk to growth. The ECB the BOE and the BOC all left rates unchanged, while the RBA cut by 25bps to 7% as expected. ECB’s Trichet remarks were the main drag on Euro and European equities as he continued on the same path of “price stability” and he showed no intent to help the real economy recover. Instead the ECB decided to tighten the money supply even more by increasing the 'haircut' on qualifying collateral to avoid being 'exploited' by financial institutions hurt by the credit crisis.
Hedge fund research reported that Hedge funds are having the worst performance in a decade. Ospraie Management, one of the biggest players in commodities said last week that they were closing down their largest fund after significant losses, while there was market talk that other big hedge funds being still long oil, commodities and euros, are getting huge margin calls and we suspect we will get a lot of news in the coming days that more hedge funds are going bust.
The US 'hurricane season' was also in the spotlight, and as Gustav was away, Hanna and Ike were still active but being downgraded. This has seen the oil price trading from as high as $117.25 to as low as $105.13 on Monday while gold spent most of the week trading around $800.
LOOKING AHEAD
We are one week away from the next FOMC meeting and the US data calendar is pretty light for this week. On Tuesday July pending home sales should fall by 1% after June’s surprise 5.3% rise and July wholesale inventories should rise by 0.5%. On Thursday the market expects an increase in July's trade deficit to $58.5bn while we expect a decline in August import prices to 3%. Friday sees the release of August retail (expected flat) where we expect a 0.8% fall in August producer price index. Later on Friday we also expect a rise in the preliminary September Michigan consumer sentiment index to 67 from 63.0.
In Europe ECB’s Trichet will testify on Wednesday before the European Parliamentary Committee on Economic and Monetary Affairs and everyone expects that he will continue on the same “price stability” mantra. GBP traders will focus on the Treasury Committee Hearing while PPI, RICS, Production and Inflation expectations are expected to continue pointing towards recession in the UK. The August RICS house price survey is expected to stay close to -84% in July and manufacturing output is expected to fall by 0.2% following June’s 0.5% fall. On Thursday the August Inflation Report will draw most of our attention with a lot of members expected to attend to give an indication as to the future path of UK interest rates.
STRATEGY
ECB’s president Trichet was the catalyst last week and after his press conference on Thursday, one more EURUSD important support (the year’s low at 1.4365) was broken. Not long ago the ECB’s hawkish stance would have send the EUR much higher, but it didn’t happened on Thursday, instead the market is concentrating on the cyclical divergence between the Eurozone and the US and even though the EURUSD rate differential has in fact increased, the USD continues to sprint against the EUR. The market is also cheering the US active policy towards the crisis while on the other hand is increasingly worried about the ECB’s hawkish stance. European data continue coming worse than expected and there are reports that some European countries are already in recession. Moreover, news that the US government have taken over Fannie Mae and Freddie Mac have been received with applause from the international investor community and it looks as though the development will be good for the dollar in the medium term as it gives the necessary assurance to the markets that the US government is still doing its best to come out of the crisis. All in all we expect a lot of volatility for the rest of the month but as the downtrend on EURUSD and GBPUSD is gaining momentum we are inclined to stay short on both pairs and use any intraday sharp corrections as selling opportunities. The break of the years low on a weekly close is targeting the long term trendline support at 1.3900-1.4000 while first resistance comes at 1.4430 (Monday’s intraday high).
Disclaimer
This research report or summary has been prepared by TFI PCL from information believed to be reliable. Such information has not been independently verified and no guarantee, representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. This report is provided for information purposes only. Nothing in this report should be considered to constitute investment advice. It is not intended, and should not be considered, as an offer, invitation, solicitation or recommendation to buy or sell any of the financial instruments described herein. TFI PCL accepts no liability whatsoever for any direct or consequential loss arising from the use of this document or its contents.
