Euro has tanked, dollar has gone up, yen has weakened, stocks have corrected while long-term bonds have continued to fall! What in the world is going on? On the currencies front, I am currently neutral on both the euro and the dollar while feeling slightly bearish in regards to the yen. I remain a bull in stocks and short-term bonds while having a negative bias towards long-term bonds. Why? While the EUR/USD cross has been under severe duress lately, the bottom of the rising channel has held up. On the other hand, the dollar index was able to sneak back into the symmetrical triangle after briefly penetrating it following the announcement of the larger-than-expected QE2 program. I currently have no positions in either the euro or the dollar as I am staying on the sidelines waiting for more clarity. However, the yen seems to have found a short-term bottom as all major yen pairs have moved up recently. For instance, USD/JPY has risen to a 5-week high after today's rally before stalling at the 50-day MA.
Fundamentally, while the PIIGS remain a risk to the ongoing global economic recovery, I do think there is enough liquidity in the markets to sustain the rally in most assets since central banks globally have pumped trillions of dollars in their respective financial systems. In the U.S., economic data has been surprising on the upside and confirming that while the recovery has been slow, double-dip is unlikely. Assets in emerging markets will continue to do well due to the size of the QE2 program. However, risk in the LT bonds has increased given higher inflation expectations as a result of massive stimuli.
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