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Posts Tagged ‘U.S. Dollar Index’

May 15, 2010: Market Week in Review

Posted by Larry Doyle on May 15th, 2010 6:12 AM |

The European Union, the European Central Bank, and the International Monetary Fund (and the Fed, as well, although they don’t want to truly highlight it) provide $960 billion in backstops for the Euro-zone and what happens? The Euro ends the week lower by 3%!! Ladies and gentlemen, that is nothing more than a major “F&%@ Y#& on behalf of global investors to the aforementioned central banks and government entities.

Think there is tension in Euroland, and specifically between France and Germany? As The UK-based Telegraph reports, President Nicolas Sarkozy ‘Threatened to Pull France Out of Euro’:

President Nicolas Sarkozy slammed his fist on the table and threatened to pull France out of the euro at a meeting of European leaders deciding Greece’s aid package last Friday, according to Spain’s El Pais newspaper.

The last time there was this kind of tension between these countries, guess who was coming ashore at Normandy? (more…)

Global Confidence Rollercoaster Hits Downdraft

Posted by Larry Doyle on February 10th, 2010 8:28 AM |

Rollercoaster…..!!!

I used the analogy of this amusement ride yesterday to describe our global economy and markets. A day at Six Flags seems far more appealing than the continued twists and turns of our global economy. Today, the riders on our global economic rollercoaster indicate they see further downward motion with hard twists and turns ahead. Bloomberg surveyed close to 2,500 ‘riders’ the first week in February and reports, Global Confidence Ebbs on Concern Budget Gaps Will Hurt Rebound:

Confidence in the world economy dropped in February on concern worsening government finances in some European nations will derail the global recovery, according to a Bloomberg survey of users on six continents.

The Bloomberg Professional Global Confidence Index dropped to 54.9 from 66.6 in January, when the reading was at the highest level since the series began two years ago.

What drove the 20% decline in this reading? In one man’s opinion: (more…)

Why Is the Market Selling Off?

Posted by Larry Doyle on January 28th, 2010 12:04 PM |

What is driving the market lower?

I thought the economy was starting to improve. Didn’t the Federal Reserve indicate as much just yesterday? Do you believe them? While we could debate the depth of integrity embedded in many statements that emanate from Washington, let’s focus on what we do know and see happening. In the process, we will be better positioned to most effectively navigate our economic landscape and the markets.

So, back to the initial question: what’s driving the markets lower? I see a confluence of reasons reflected in some dramatic price action. These reasons include: (more…)

What’s the Market Telling Us?

Posted by Larry Doyle on December 11th, 2009 9:38 AM |

In the face of generally positive economic news the last two days, (Retail Sales this morning rose 1.3% and the improving Trade Deficit), the price action in the market is very interesting. What is it telling us? Let’s navigate.

With the U.S. Dollar Index having firmed over the last week, money does not appear to be coming out of the equity markets. The major equity averages are up anywhere from .5 to 2.5% on the month. What market segments are feeling the bulk of the pain? Government bonds and commodities, primarily oil and gold.

Interest rates on U.S. government bonds have continued to move higher as Treasury supply this week has not been well received. With rates on 10yr U.S. Treasurys higher by .35% over the last ten days, it would appear that market participants continue to believe the Fed will be forced to raise rates or make other moves to lessen the support and stimulus provided to the economy.

If rates are to move higher, our dollar should find support  . . . and it is, as the U.S. Dollar Index remains above the 76.00 level. While dollar strength had been a harbinger of general weakness across almost all risk-based asset classes, the commodity sector is bearing the brunt of the pain currently.

The DJ-UBS Commodity Index has declined by 2.5% on the month led lower primarily by oil (down approximately 10% on the month) and gold (down 4% on the month).

Add it all up and what does it mean? If our domestic economy is in fact stabilizing, then the public at large and investors will compel the Grand Old Man, that is Uncle Sam, to back away from continuing to provide stimulus. As that occurs, the market may begin to normalize to levels at which private investors care to put money to work. At this juncture, investors are saying interest rates are not attractive at current levels. As interest rates rise, that may actually temper an economic rebound, especially in housing.

So be it. It is not realistic for market participants “to have their cake and eat it too.”

LD

November 14, 2009: Month to Date Market Review

Posted by Larry Doyle on November 14th, 2009 7:32 AM |

Do as I say, not as I do. Why? What do I mean?

The markets in general and equities in particular were once again supported by talk rather than actual economic actions. Who was talking? What were they saying? Very simply, communication from G-20 ministers last weekend indicated strong support for ongoing fiscal stimulus. That talk drove the equity markets 2% higher on Monday of this week. On the heels of that, during the midweek we experienced Fed-speak once again indicating a strong likelihood of keeping rates at very low levels for an extended period. Markets immediately reacted by once again ratcheting higher.

I have never been fully inspired by talkers versus doers, but these are unique times . . . so let’s collectively navigate the economic landscape. If you have any questions, please do not hesitate to ask.

ECONOMIC DATA

Economic reports and developments are carrying less and less weight currently. Why? Fed policies are not going to change. That comfort level has solidified the case for those who have sold and continue to sell the U.S. dollar short and use the proceeds to buy risk-based assets, primarily equities. That said, I am compelled to report significant data as I view my mission in helping people navigate the economic landscape, not strictly trade the markets.

Of note this week, the Federal Housing Administration is likely in need of an imminent bailout from Uncle Sam as defaults on FHA-insured loans show no signs of diminishing. This potential bailout has been discounted by FHA officials ad nauseam. They have no credibility.

The University of Michigan Survey of  Consumer Confidence plummeted to a level of 66% from 70. Consensus opinion had this survey bouncing back toward 72%. With no legitimate bounce or improvement in the housing or labor markets, I do not know why the survey would improve.

Let’s move along to market performance. The figures I provide are the weekly close and the month-to-date returns on a percentage basis: (more…)

Dollar Carry Trade ‘Still’ Drives Global Equity Markets

Posted by Larry Doyle on November 9th, 2009 3:10 PM |

Has anything truly changed in our economy or markets over the last two months? Market analysts would attempt to gain credibility by overanalyzing each and every piece of data that comes along, but the very simple fact is that little has truly changed since I wrote “Dollar Carry Trade Drives Global Equity Markets” on September 16, 2009.

With the equity markets making new highs for the year, I am not so foolish as to ‘fight the Fed’ or ‘fight the tape’ while fully appreciating that the foundation of our markets and economy remain extremely fragile. In that spirit, what is driving the market ever higher? I resubmit my post mentioned above:

All aboard!!

As the U.S. Dollar Index makes new lows, equities make new highs and the momentum continues. Where is the ‘juice’ coming from? Is this cash that had previously exited the market now reentering? Is this people who had gone short now being forced to cover? Is this ‘new’ money finding value? Is this a pickup in short term day trading? The answer to all of these questions is yes, albeit to varying degrees. However, the most widely held belief for the rally in the market is the dollar ‘carry trade.’

I highlighted this trade last week in my September 12: Month to Date Review of the Markets. On that day, I wrote about the U.S. dollar: (more…)

October 24, 2009: Month to Date Market Review

Posted by Larry Doyle on October 24th, 2009 7:32 AM |

Did the market merely take a breather this week or is the ‘little engine that could’ getting tired? Are we distinguishing the winners from the laggards? Are the cracks in our economic foundation repairing or are some just too large to hold back the flow of red ink, i.e. embedded losses? Perhaps we are experiencing all of the above as we continue our journey along the new and varied trails of our economy. Let’s review the major economic statistics for the week, along with the month to date returns across a wide array of market segments.

I thank you for reading my work, and now let’s collectively ‘navigate the economic landscape,’ the mission of Sense on Cents. If you have any questions, please do not hesitate to ask.

ECONOMIC DATA

I largely discount positive news on the housing front as I view them largely manipulated by Uncle Sam while delinquencies, defaults, and foreclosures move ever higher. This may be an oversight on my part, but so be it.

Aside from that, I believe the most meaningful news this week was the GDP report from the UK. Please see my Friday morning commentary highlighting how the UK remains mired in recession.

Let’s move along to market performance. The figures I provide are the weekly close and the month-to-date returns on a percentage basis:

U.S. DOLLAR

$/Yen: 92.08 versus 89.68, +2.7%
Euro/Dollar: 1.500 versus 1.4635, +2.5%
U.S. Dollar Index: 75.44 versus 76.72, -1.7%

Commentary: the overall U.S. Dollar Index declined marginally this week. The dollar has improved versus the Japanese yen, but remains decidedly weak versus the Euro. The U.S. Dollar Index did break below 75.00 at one point early Friday. The correlation between the U.S. Dollar Index and the equity markets remains quite high. Both markets ended the week close to unchanged. Have too many people bought equities and commodities while having sold the U.S. greenback? I have been asking that question for the last month so no reason to stop now. The biggest impact of the weak dollar is seen in the commodity markets and long term interest rates. Commodities continue to trade with a firm tone while interest rates move higher.

I reiterate my comment from previous weeks: while I think Washington is not disappointed in a relatively weak dollar, although they should be (“Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade. On this topic, please read “Brazil Wants A ‘Real’ity Check.”

COMMODITIES

Oil: $79.65/barrel versus $70.39, +13.1% REMAINS VERY FIRM
Gold: $1055/oz. versus $1008.2, +4.6%
DJ-UBS Commodity Index: 137.32 versus 127.683, +7.5%

Commentary: I repeat from last week, unless you grow your own crops or have your own source of energy, you should expect to get increasingly squeezed as prices at the supermarket and gas station are likely to head higher. While Washington will not address this development, these price moves are directly correlated with Washington’s weak dollar policy. The banks and others able to borrow cheap money for trading and investing benefit from the weak dollar. American consumers and savers get stuck with the bill.

The  Baltic Dry Index once again moved higher and got back above the 3000 level. Is the improvement in the non-Japan Asian economic bloc for real? Certainly the economies in Europe and North American remain decidedly challenged.

I continue to believe these commodity tea leaves are an indication of inflationary expectations in these ‘inputs,’ while we encounter deflationary pressures in wages and real estate. (more…)

Fed Doves Promoting More Socialized Housing

Posted by Larry Doyle on October 14th, 2009 4:17 PM |

Could the S in USA be changing from ‘states’ to ‘socialist?’ Maybe that is overly aggressive, but why do I ask?

If the markets are an indication of an incipient rebound in economic health, then why would certain Federal Reserve governors want to increase the Fed’s quantitative easing program? Is that accurate? Is the Fed actually looking to inject even more capital and liquidity into our housing market over and above the $1.25 trillion commitment they have already made? Recall that the Fed informed the markets that it would extend the current purchase program of MBS (mortgage-backed securities) until the end of the 1st quarter 2010, while not increasing the dollar commitment.

Also recall that there had been an increase in Fed-speak by certain Fed representatives (Kevin Warsh, Thomas Hoenig) about the need for an increase in rates ‘sooner rather than later,’ along with the need for a defined exit plan by the Fed from its massive injection of liquidity into the markets.

Well, take those comments with a large grain of salt. Why? Today we learn that there are ‘doves‘ within the Fed who believe the Fed should commit even more money to support our housing market. Bloomberg provides insights on this topic by writing, Fed Says Some Officials Were Open to Buying More MBS:

Some Federal Reserve policy makers were open last month to boosting the central bank’s $1.25 trillion mortgage-backed securities purchase program to stimulate the economy amid concerns the recovery may fade.

“Some members thought that an increase in the maximum amount of the committee’s purchases of agency MBS could help to reduce economic slack more quickly,” according to minutes of the Federal Open Market Committee’s Sept. 22-23 meeting released today in Washington. One member said the improvement in the outlook could warrant a reduction in purchases, the minutes said, without identifying the policy maker.

Having read and reviewed more Fed statements  than I care to remember, each and every word in a Fed statement is very carefully chosen. Why? The Fed is attempting to manage market expectations. The fact that the Fed chose to release these comments about mortgage purchases is an indication that the Fed will not only keep the liquidity spigot on for an ‘extended’ period but also may increase the flow of liquidity into the economy via increased purchases of mortgage securities. What does that mean? They view the economy as still having real weakness, especially in housing. And what does that mean? Little concern of inflation in general and likely deflationary pressures within housing.

To fight the deflationary pressures, the Fed will continue to pump liquidity. Are there any costs to this increased liquidity? The equity markets are rallying so it must be good. Well, not so fast. Actually, the costs are in the form of ongoing weakness in the dollar. The U.S. Dollar Index moved lower by another .65%  today.

When you truly look at the economy and the markets, think of things in terms of purchasing power. The dollar is now down approximately 7% on the year. I would encourage people to more actively assess the value of the dollar in terms of asset returns and incorporate that into the cost of products.

Those dollar weighted returns and dollar weighted costs in the context of a global market and global economy are truly the proper perspective.

LD

Dollar Carry Trade Drives Global Equity Markets

Posted by Larry Doyle on September 16th, 2009 2:18 PM |

All aboard!!

As the U.S. Dollar Index makes new lows, equities make new highs and the momentum continues. Where is the ‘juice’ coming from? Is this cash that had previously exited the market now reentering? Is this people who had gone short now being forced to cover? Is this ‘new’ money finding value? Is this a pickup in short term day trading? The answer to all of these questions is yes, albeit to varying degrees. However, the most widely held belief for the rally in the market is the dollar ‘carry trade.’

I highlighted this trade last week in my September 12: Month to Date Review of the Markets. On that day, I wrote about the U.S. dollar:

Commentary: The decline in the value of the U.S. greenback by approximately 2% reminds me of the overused Wall Street phrase, ‘squeal like a pig…’

The fact is Big Ben Bernanke is not only funding the domestic economy with the Fed Funds rate at 0-.25%, he is also funding the spike in a number of markets around the world. How so? Investors around the world have entered and, given this week’s price action, continue to enter into the ‘positive carry‘ trade in which they borrow U.S. dollars to purchase higher risk assets.

This ‘positive carry’ trade was fed by the Japanese yen throughout the ’90s given the exceptionally low rates in that country.

Make no mistake, though, this ‘positive carry’ trade is nothing more than implementing leverage. Do not confuse leverage with brains when a market is rising because as I said the other day, leverage is death when that bull becomes a bear. As I think of market developments, I am convinced that this ultimate unwind of leverage trades currently being implemented is Jeff Gundlach’s reasoning for being bullish on the dollar. How will this work? Investors will look to exit their risk based investments (emerging market stocks and the like) and buy back the dollars which they have borrowed. In the process, the dollar may rally significantly. The timing of this unwind is the critical question.

This morning, the Financial Times weighs in with Dollar Lays Claim to Being Top Carry Trade Currency:

For years, the yen was the currency of choice to fund international carry trades. But is the dollar starting to take its place?

Analysts say negligible US interest rates, its quantitative easing measures and little sign that the country is set to withdraw from its ultra-loose monetary policy anytime soon leaves it in a similar position to Japan at the start of the decade.

“This puts the dollar in exactly the same position as the yen back in 2001 and makes it naturally attractive as a carry trade funding currency,” says Simon Derrick at Bank of New York Mellon. “The dollar is the new yen.”

The carry trade strategy, in which low-yielding currencies are sold to finance the purchase of riskier, higher-yielding assets, was widely used in the years prior to the eruption of the financial crisis.

The FT further adds,

Speculative positioning data seem to back up the shift against the dollar, revealing the extent of recent deterioration in dollar sentiment.

According to figures from the Chicago Mercantile Exchange, which are often used as a proxy for hedge fund activity, aggregate bets against the dollar versus the euro, yen, Swiss franc, sterling and the Australian, New Zealand and Canadian dollars last week rose to their highest levels since July 2008, when the dollar hit a record low against the euro.

Is utilizing the dollar for funding purposes a harmless risk-free trade? Anything but. A weak dollar impacts all dollar-denominated assets and dollar-denominated transactions.

For those entering into these transactions, a sharp reversal in the dollar or in the assets being purchased can lead to tremendous losses. For now, though, traders, hedge funds, and speculators the world over are selling dollars to put this dollar carry trade on . . . in size!

What do our ‘wizards in Washington’ have to say about the plummeting dollar? You can hear a pin drop.

LD






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