Weekly Outlook as of September 13, 2009 (09/13/09)

by Henry Liu on September 13, 2009

Hello everyone:

Another seemingly quiet week has gone by but the market has not failed to surprise us yet again… The biggest news last week was not the rate decisions nor the lack of high-impact trend changing news releases, but the apparent endless strength of the Japanese Yen under the new ruling party, which managed to push the USD/JPY close to the 90.00 handle, approaching that yearly low level of 87.00…

And it is not a surprise to see that USD also suffered some heavy losses last week with every major currency breaking to new levels against it. U.S. Dollar Index dropped to 76.45 for the week, making new lows for the year once again…

Let’s take a quick look at how the market was last week:

EUR gained 2.0% against USD
GBP gained 1.5% against USD
CAD gained 0.5% against USD
AUD gained 1.5% against USD
NZD gained 3.0% against USD
CHF gained 2.0% against USD
JPY gained 2.5% against USD

It was a complete landslide of USD weakness across the board… with NZD and JPY being the biggest winners of the week.

I guess the burning question that is on your mind is probably where the heck USD heading?

Well, I think the overall fundamental for the USD is sound. The outlook for the U.S. economy is stabilizing, the Equity Markets are making record gains, and consumer confidences are probably at the highest levels in the past 12+ months… But because of the risk appetite sentiment, with USD’s yield sitting at a pitiful 0.25%, investors both here and abroad are just not interested in holding onto the dollar… instead; high yield currencies such as the African Rand and Brazilian Real have posted record gains against the USD…

As stated by Jessica Hoversen, exchange analysts at MF Global Ltd., last week’s libor rate for the USD is sitting at 0.31% while the JPY is at 0.38%, so in essence, USD has become the “New Carry Currency” of the world, taking the place of JPY…

With USDJPY breaking the 92 level and gaining momentum downward, it is uncertain where the support will be, but it may not be a bad thing for global economy or currency traders… market will have to consolidate first before true recovery takes place; as far as USD is concerned, it is clear that we won’t see a total and sudden collapse of it, but maybe a slow and gradual decline until the employment numbers recovers, followed by the housing sector, then the economy as a whole… But unless Bernanke starts to tighten the Interest rate (hiking), USD may remain as the “new carry currency” for a while, because it makes sense to borrow USD to buy other high-yield currencies with minimal risk.

Major Currency Fundamental Outlook Order:

AUD – Excellent Outlook due to its economy and strong ties with China. Possible range by the end of 2009 is over 0.9000

CAD – Good Outlook Commodity based currency; however, government may intervene to keep it from rising…

CHF – SNB doing a great job keeping this currency neutral.

JPY – It is unclear what DPJ (Democratic Party of Japan) will do now that USDJPY is at 90.00 level… if JPY is left unchecked, Japanese economy will be hurt due to the high cost of exports… Imagine even Sony PS3 or Toyota Camry won’t be able to make a profit… it’s inconceivable!!!!

NZD – Not a good fundamental outlook and overvalued as it is… but may still benefit from risk appetite sentiment and strong AUD. Governor Bollard explicitly stated that NZD/USD should be at 0.6200 area, and it is over 0.7000… so go figure.

EUR – Like in highschool, the jocks (Germany and France) are getting all the attention, but with the rule of European affirmative action, either all graduates or all fails, Euro Zone will probably escape a total collapse, barely… I’ll keep my fingers crossed.

GBP – UK is probably the worst of the worst out of the G8. But because of the heavy devaluation last year, GBP may still have a fighting chance, as long as risk appetite reigns.

Let’s take a look at how the US Equity traded:

DJIA gained 1.7% (9605.21)
S&P 500 gained 2.6% (1042.73)
NASDAQ gained 3.1% (2080.90)

I guess it is more likely now to see the market recover in a slow by steady manner as most analysts agree… The major volatility index have diminished as the market is no longer uncertain over the future… although some volatility may still be expected, I think it is safe to assume the heavy capitulation moves are probably a thing in the past…

Let’s take a look at each individual currency:

United States (Neutral) Current Interest Rate 0.25%

USD remains weak although its fundamental outlook is improving daily. I expect to see ranged trading for USD since there will be no catastrophic collapse of the greenback. We might even see some strength returning as part of the ebbs and flow of the currency market… but overall USD should remain range-bound against all majors in this new range… remember, it is usually when everyone expects USD to collapse for it to make a huge rebound… it usually never fails.

Euro Zone (Neutral) Current Interest Rate 1.00%

Trichet was rather bearish in his press conference a couple of weeks ago… EURO remains bearish, but since it is the default currency of the Forex market, USD weakness will automatically translate to EUR strength…

Direction of the Euro will be determined by USD and risk sentiment… but I do expect to see EUR/USD remain range bound.

United Kingdom (Neutral to Bearish) Current Interest Rate 0.50%

Sterling broke new highs against the USD but unable to maintain its gains against all other majors. It remains weak as the GBP/JPY is testing the 150 psychological handle. Should the 150 be breached with conviction, expect to see GBP/JPY retest recent 3 months lows. In the meantime, risk appetite may have forgotten GBP except in the case of GBP/USD…

Canada (Neutral) Current Interest Rate 0.25%

CAD starts to yield as the 1.0800 handle proved to be magnetic for the USD/CAD pair. Should USD/CAD find support at this area, we could see 1.1000 being the next target.

Regardless of its fundamental Outlook, it is not to Canada’s interest to see USD/CAD at the current level. 1.1500 ~ 1.2000 for the USD/CAD will be much more comfortable.

Australia (Neutral to Bullish) Current Interest Rate 3.00%

AUD/USD remains a steady gainer against other currencies. Overall outlook is LONG on AUD/JPY and AUD/USD; however with the market trading at the current level, my advice is to wait for a significant dip the get in… right now is not a good entry unless driven by some fundamental reason.

New Zealand (Neutral to Uncertain) Current Interest Rate 2.50%

NZD is gaining on the back of risk appetite sentiment. Not really knowing where it is heading to because of the conflict between its real value and the current value. It seems like a great currency pair if you concentrate on it, but with the spread and low liquidity, I rather trade pairs such as the GBP/JPY or even the AUD/JPY instead.

Japan (Neutral) Current Interest Rate 0.10%

The 90.00 is the next support for USD/JPY… with no clear direction from the ruling party of Japan, traders are testing the limits… Should 90 be taken out, expect 87.00, should 90.00 hold, then expect market to trade above the 93.00 for the time being.

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I haven’t seen the market at this level for quite some time. It is almost like before the sub-prime bust, where the market is driven fundamentals and supply and demand… It almost brings tears in my eyes…

However, at risk of sounding like a broken record, market is still uncertain, and my overall long-term view on the USD has changed from BULL to NEUTRAL. I would be getting out on my long-term trades and sit on the sideline for the time being, until a clear trend emerges.

In the meantime, concentrate on the news and the aftermath of the news… I think if one thing out of Forex trading we can count on, it gotta be News Trading.

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Weekly Outlook as of September 13, 2009 (09/13/09)

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