Short the Dollar-Long the Dow

This week saw the first ECB rate hike since 2008, with a 25bps rise. Gold at a new high of $1475, Silver hitting $40 an ounce, EUR/USD 14460, GBP/USD 16381.

NOTE the red candle with the dollar breaking 75. I dont know much, but I know that this is BEARISH, and I would be looking fo rthe dolalr to go down at least another 2-3% this week alone, and look for a retest of 70 on the index by June.

There has been speculation over whether, with improving US economic indicators, QE2 would be wound up earlier before June. I would contend that it is unlikely. And even if it were, would only provide a momentary bounce to the dollar.
While the dynamic remains sell dollar, buy dow, this will hold til the Fed begins rate increases I think.

With Q1 earnings set to come out, this will likely be the next up move for the Dow.
Market moves affect external reality, whether this move is true, or a false premise, seems this commodities bull market is set to march on.

Quotes:
Dow 12378
FTSE 6036
EUR/USD 14458
GBP/USD 16378
Crude 113
USD/JPY 8488
US 2yr 0.75
US 10 Yr 3.625
US Dollar index 74.85

Trades:

1)With Q1 earnings on the horizon, I think it is again more liekly fo rhte dow to outperform the ftse (which has seen significant resistance around 6000).

Long the Dow at 12378, Stop 12000, Target 13000

2)Short the Dollar Index at 74.85, stop at 76, Target 73

US Dollar update

Quotes:

FTSE 100 6003
Dow 12227
GBP/USD 16263
Gold 1412
US 2 Yr 0.68
US 10 Yr 3.43
Crude oil 96.87
US Dollar index 76.88



Middle east riots, Libya, Egypt, we saw gold carry from 1350 all the way back up to 1410, where it is now. But nobody bought the dollar? The traditional safe haven. In 2009, even a whisper of korea launching test missiles would have given the dolar a 1.5% one day rally..But why then, now, does nobody want the dollar..

Conventional arguements go along the lines of, the market fears US intervention in the middle east, which is likely to be bearish for the dollar (i.e. more money spending etc). Really? I don't believe that..

US Unemployment rate has come down to 9%, economic indicators have been performing reasonably well, Q1 corporate earnings outperformed (as they have been doing right through this bull market since March 2009). But, who, which trader, would be confident of buying the dollar, now, on the possibility that the market, will being to price in rate increases before QE2 is over (i.e. before the June schedule is complete). There may be some of course, but the value play would be closer to the time, and when there is a key change in the trend of the dollar (i.e. break a critical resistance level).

As I had mentioned in my previous blogs, I was waiting to see what the DYNAMIC would be. From March 2009-Nov 2009 (the core of the early stages of the rally) with the dow touching 10,000 the dollar had continued to be sold, as the Dow was bought.
As much, or more as any other analysis I could provide, on GDP, deficits, to me this was, and remains key. Let us make no mistake about it, even through the dollar bullish period from 95-97 (the Asian crisis, and funds flowing out of the overheated tiger economies into the outperforming US markets), and the Dow rallying with the dollar into 2002, to reach a decad ehigh of 120. Let us make no mistake about it, the US Dollar has been in a bear market for 30 years, coincidentally, along side the decline in inflation index levels, and the 30 yr bull market in US treasuries. So far this year, the dollar weakening has been supportive of the Dow, with the Dow currently at 12300, and the Dollar index at around 76.90. However there have also been occasions with economic indicators beating expectations causing the dollar to rally also. So there is a chance the dollar could rally with the dow in the future. However I dont think the correlation is likely to be strong as of yet.

Generally one could consider that as the fed funds rate has been in a "discrete" downward trend as one could say, thus the interest rate appeal of the Dollar has been decreasing along with this.



With Trichet, talking the talk, about meeting inflation targets in the eurozone (as there records would show), they even raised rates in early 2008! The market has begun to price in earlier rate increases in the eurozone, as well as in Britain (as I had mentioned in earlier posts, with CPI contuing to beat the 2% target, and registering at 4% for January 2011).

Now while it is true that the US dollar maintains its bullish trend, from My 2008, when the index reached a low of around 70, and proceeded to make higher lows, we are now at a critical point, on the trend line support, whereby a move lower, is likely to negate this bull market trend, and would be a clear indication, for an entry point to go short the dollar.

Aside from this, however, there is short term resistance on eur/usd at 1.40, and GBP/USD at 1.63, and upcoming debt refinancing in the eurozone which could cause a sudden burst in bearish Eurozone news, and be dollar positive.

However I would contend that since the Euro reached its lows of 1.19 in June 2010, with fears over Greece defaulting, since then with news of Ireland and so on, the market has become used to it, and the Euro held even 1.29 in Novemeber 2010. I would be looking at the possibility that these events will be opportunities to sell the dollar, at least before QE2 has come to an end in June. And then we will talk of the possiblities of the US Dollar bull market, and even then only enter positions, when it breaks above 80, and looks to challenge higher.

Trade recommendations:
As far as the Dow I am looking for a close above 12300 to signal its continuation to 12700. However with potential Eurozone news to come in March, and non farm pay rolls on friday, I would be looking to see how it plays out, before getting into the market.

1) Short Eur/USD, Long GBP/USD. I think that the potential for rate increases in the UK are higher, given CPI coming in at 4%, and likely to continue to beat expectations. Although voting member Sentance is soon to step down, I still think that the market will continue to perceive BOE rate rises being necessary (although personally I reckon they will do their best to hold on, and down play CPI as much as they can, maybe next month they'll attribute some of it to abnormally high oil prices).
Also form a technical perspective the risk reward ratio looks good, EUR/USD has resistance at 1.4, and also there is potentially bearish debt refinancing news to come in the coming weeks. GBP/USD a close above 1.63 would be indicative of a potential move to 1.67.

Buy GBP/USD if @ 16300 Stop 16100 Target 16700
Sell EUR/USD @ approx 13813 Stop 14050 Target 13450

Quick update

NFP weaker than expected at 100k jobs added, Dow
sold off, currently at 11639.

Market looks technically weaker like it wants to
retest 11400's.

Dollar sold off on result , but regained
strength after weaker than expected Euro Zone
data.

Eur/Usd at 12912 at present.

Alcoa earnings due today. Key will be to
see what dynamic is, whether the dollar moves
with the Dow or regains the stronger negative
correlation seen after qe2 began to be priced in.

NFP-Stay long the dow-Time to Buy the Dollar again?

Once again, a brief post.

Quotes:
Dow 11697
EUR/USD 12999
GBP/USD 15467
USD Index 80.85
Crude 8814
US 2Yr 0.66
US 10Yr
Gold 1371

Key resistance for EUR/USD 1295, having just broken 13000, the common reaction, everyone goes short, and it pops back, same as in November. However having already tested 12990 in Nov, a strong NFP, and continuing fears over the Eurozone situation, with yields on Spanish, Irish and Portuguese bonds rising, it seems the odds favour a break below 12950, initially to 12750, and then long awaited retest of 1.25 from earlier in 2010.


Consensus for NFP is 150K added. Even significant underperformance of this result, say 50K added, any sell off in the dow (a sell off of more than 75 points is unlikely in my opinion), however any sell off such that the Dow does not break below 11300 is a buy, with earnings season due to start (and in my opinion once again likely to outperform estimates.

Potential risks are that the ratio of bulls to bears at present is significantly high, which usually does call for a pullback, however with Q4 earnings on the horizon, I must remain bullish.

Seeing the Dollars reaction to NFP, a break of th eindex above 81, is likely to be a buy, I would start to accumulate, and if the Dollar does continue to rally with the dow into earnings season, then I would take this as a significant indication of the trend to continue into the year, and look to add to my position.

I see the potential for Gold to be shorted into this result, to target 1330 by close, as many who placed longs in the 1400 region earlier this week, will be forced to close out their positions as the dollar rallies.

Stay long

FTSE 6011
Dow 11676
Eurusd 13398

Ok firstly let me apologize for the brevity of this post.


Markets opened well today ftse up over 100 pts.

Trades:

long ftse at 6011 stop 5770 target 6400
duration 2-3 weeks

exit conditions: eurozone debt news takes prominence.
Although this is unlikely with earnings set to come out
and beat estimates in my opinion.

What I'm looking for:

seems the dollar will be sold as traders long the
dow, looking for eurusd to break above 13500 for
confirmation. Cable at 15600 pending performance today
may be looking for 16000.

Yield curve: will be looking for the curve to steepen as inflation
expectations rise, while short end up to 2yr yields to move up less
as supported by fed buying.

Usd/jpy may be a good technical long to support a short
eur/usd position.

2011-Long the Dow

US 2 Yr yields today reached 0.75. Seems the market is inclined to follow the footsteps of the QE1 trade, stocks up, treasuries down? And what of the Dollar? Will the dollar be sold as the Dow is bought?

Quotes:


Dow 11562
FTSE 5973
GBP/USD 15364
EUR/USD 13106
Gold 1405
Silver 30.23
Crude 9125
US 10 YR 3.49
US 2 YR 0.75
USD/JPY 83.74
USD Index 80.4


Treasury auctions today attracted the weakest demand in 6 months, with a bid to cover ratio of 2.61. So are Treasury's a buy or a sell right now? Depends on your timeframe. From what I have read it seems likely that in March, with $700 Billion of debt willl require restructuring from the likes of Portugal, Spain, and Belgium, so the typical buy treasury's safe haven scenario as we have seen with Greece and Ireland is likely to play out again. I think it unlikely that the 2010 lows reached by the 10yr and 2 yr alike would be likely to be breached.
Further bad came from US home prices declining more than expected.

Ok so I have been trying to figure out whether it's inflation or deflation, whether the 20 yr bull market in bonds has come to an end? And having read extensively over the arguements on either side. Here are my findings;

The central tenet of the deflation arguement, in the US, is that there is 54 Trillion USD of outstanding debt, the ratio private sector debt to GDP is at record levels. The arguement is that the sheer weight of this debt, and the addition of private sector deleveraging, and the destruction it has on money supply (i.e. the lack of additional loan creation which increases the supply via fractional reserve banking) means deflation will be the driving force.

Now this is a strong arguement, one that has some similarities to the Japanese deflation era (however the savins rate in Japan is much higher, and also the population demographic is rather different), and despite years of money printing/quanttiative easing Japan has not managed to escape these "deflationary" forces.

The premise of the arguement for inflation, is essentially unprovable, in quantitative means. It's more of a proof by historical reference, whereby the majority of times money has been printed to such an extent, when the economy recovered, money veolcity picked up, the excess reserves flowed out, and inflation soared. As you can see with commodities reaching record highs, gold at $1400, Silver at $30, the market does not believe Ben Bernanke will be able to act accordingly to put inflation back into it's place. Given the oustanding debt and weak housing market, does he have the capacity to raise rates?

Neither of these arguement's really governs my outlook. Essentially my base case for 2011 is that the Dow will continue to rise. Corporate earnings will continue to outperform, and beat estimates. This is a bull market, and the consensus that inflation, or deflation, Bernanke will continue to print to accomodate the market, means, in my opinion, that the Dow is likely to continue to trend upwards and perhaps even make new highs in 2011.

Given this, and given the nature of the market dynamic in 2009, I think it is likely that traders will stick to a similar script of yields moving higher. Eurozone issues are likely to provide opportunities to buy into the Dow and to sell treasuries as risk comes back in after the moments of panic. Now, what of the Dollar?

Surely it is too early, even with earnings season coming up, and the likelihood of the Dow to conintue upwards to 12,000, surely it is too soon for the market to price in interest rate increases (by the Fed). I would be observant of how in the ocming weeks the dollar trades, with respect to the rising Dow, to decide at which point it is favourable to begin longing the dollar as part of a possible move up to 90 and beyond, on the dollar index. However, with Eurozone issues likely to take a backstage as earnings news comes in, we will have to see whether the dollar will be rallying with the dow, or selling off with it to observe what the correct trade will be.

US Dollar!!

Quotes:
FTSE 5668
Dow 11020
EUR/USD 13485
GBP/USD 15879
Gold 1339
Silver 25.37
Crude 83.11
Xstrata

Everyone was bearish on the Dollar.I myself was beginning to think it was over for the dollar?! The technicals set themselves up, as the dollar held its support trend line from december 2009, then came better than expected economic indicators, worse than expected earnings from Cisco last week (bringing the dow lower), markets fearing another rate rise by China to curb inflation, fears over Irish debt repayments, a revision of outstanding Greek Debt. What more could you want for reasons to buy the Dollar?
So I bought the Powershares DB US Dollar Fund on Friday (and added to the position today), and today shorted Eur/USD (at 13513) and GBP/USD (at 15901) as shown above.

Having reached my anticipated level of 0.36% yield on the US 2 Yr, from my prior recommendation, I will be looking to see how the 2 yr trades, yield currently at 0.5%, and will be monitoring it for the possibility of further long positions.

Mervyn King has revised up forecasted CPI for mid 2011 to reach 3.5%, before later falling back to the 2% target, with remaining slack of high unemployment to be the driver of this. Regardless, I see the Pound as a strong currency, with our fiscal austerity measures, and CPI above what most economists anticipated, indicates the recovery in Britain is stronger than in the US, and potential for interest rate rises to be priced in by the market at some stage next year, are higher (not that I think those rate rises will come). So why am I short? Well, with the Euro crisis taking centre stage again, market sentiment is likely to favour the Dollar, and despite the UK being likley to maintain its credit rating, and not be too greatly affected by Bank holdings of Irish Debt (this year at least), fears of contagion due to trade relations and proximity are likely to take hold.

I am short the Pound in the short term, to target 1.55, and perhaps lower. However will most likely look to go long at osme point in 2011.

Trade Ideas

existing positions:

EUR/USD

I am contuing to hold my short EUR/USD position, to target 13400 in the short term (this week), and 13000 thereafter. Ideally I am looking to hold til 1.2 within the next couple of months.

Short EUR/USD 13513 Stop 13613 Target 1.34 in next 2 days, 13000 in next 2 weeks.

Stop is tight as risks are Ireland accepting a bailout, and market suddenly short covering, taking it to 1.38 and so on. However I would look to take on a new hsort position at this point most probably.

GBP/USD; short at 15901, Stop 16001, Target 15700 in the coming week, 15500 beyond.

Powershares DB US Dollar Fund; Opening 2270, stop 2230. Taget 2600.

Potential new trades:

1)What else? I am looking to go short the Dow, to target 10700, and the Ftse to target 5300. However I think there is the risk of sharp reversal in the Dow back to 11200 zone, given the trend of US indicators outperforming, and possible decoupling from the Eurozone news as well as divergence from the negative correlation with the Dollar, so it would have to be a close below 11,00. I have decided against it for now, however if the right expected risk/ reward presents itself, it may be a good opportunity.

2) gold at 1338, taken a beating since closing below 1370 on Friday with fears of the slowdown in China (with rate rises) and the upturn in the dollar affecting all commodities. Silver down from its high of $30, trading at $25.37 currently.

Potential trade;

Short Silver 24.90, stop 25.20, target 24.00
To combine with a small long position in Gold (as despite dollar strength, and bearish technicals, upside in gold is possibleon safe haven buying from EuroFears, perhaps that is why it traded back up from 1330, to 1340 in the latter part of the US market)

Long Gold at what I expect would be around 1320, 20 point stop, let it run as long as the Silver position is open. Good profit taking opportunites would be 1350-1360.

3)Long USD/JPY, having broken out of its wedge, and broken the 50 day moving average. USD/JPY at 8330 does look to be targeting 8500/8600. However the move up has not been as sharp as I would like, so I am keeping it on my wathclist for now.

4) xstrata at 13.11, a possible short if it breaks 13, to target 12, and possibly beyond to 11.50. to hedge myself against an upturn in commodities, and also play the fears in the Eurozone, I would combine this with a long gold position.

Short XTA at 12.97, Stop at 13.14, target 12
Long Gold 1339, Stop at 1315, Target 1350

I would weight the short Xta as twice the size of the gold position however, as I find the the probability of the gold rally less likely at this stage I feel.