Staying Constructive on Commodities and Their Currencies!

Let's face it, commodities have de-coupled from the USD and supply/demand relationship due primarily to one reason - liquidity. If the global economy is not going to do better, commodities will do well because central bankers will continue to run printing presses. If the global economy is going to sustain the recovery, commodities will also do well because demand for things such as oil and cotton will go up. Most importantly, the charts agree! The Aussie has recouped most of the decline against the dollar since the latest correction while the dollar index (DXY) has gone up primarily due to weakness in the Euro and the Pound. Even though the Canadian dollar and the New Zealand dollar have lagged behind the Aussie, their respective charts have shown pockets of strength and look ready to move higher. Politicians have to realize that printing money does not enrich countries and it will continue to destroy the purchasing power of consumers in the U.S. and the developed nations in Europe through currency devaluation. Therefore, I am recommending buying the commodity currencies against the USD, EUR and GBP and buying commodities such as copper and sugar. On the other hand, I continue to believe that the dollar, being the "tallest midget in the room," will strengthen against the Euro and the Pound as the greenback benefits from the debt crisis.

"King Dollar" For Now...

As written in one of my previous posts, I thought the USD would break the symmetrical triangle and head lower, but instead it has managed to stay within it and moved up. This is why I have turned very bullish on the dollar in the short term, and I believe the rally still has legs. The greenback has been so strong that it has even gained against the Japanese yen. In the meantime, sovereign debt, especially on the longer end, has continued to sell off as worries regarding the European debt crisis intensified. Ireland officially received its bailout package today, yet the euro weakened once again. This is classic "good news, bad price action!" In terms of equities, the Nikkei, led by higher USD/JPY, and the S&P, benefitting from a stronger dollar, have outperformed stocks in Europe and emerging markets.

What can you expect in the short term? Unfortunately, I believe the trend should continue as the "King Dollar" is poised to strengthen further against its counterparts while equities in Japan and the U.S. will continue to outperform as risk aversion and carry trade reversal continue to unfold. Therefore, I am buying the dollar and selling everything else. As a pair trade, I recommend selling short Europe and emerging markets while buying Japan and U.S. as hedges.

Things Have Been Moving Counter-Trend Lately, What Should You Do?

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.

Just Quickly Reiterating What I Wrote About Chinese Stocks 6 Months Ago

Since July 5th, Chinese stocks are up ~30%!

Date: Wed, 19 May 2010 19:13:38 -0400

few reasons why im bullish....

M2 money growth of 25% last year means inflation is coming, if not HYPER inflation

now let's see where they can put their money

real estate = negative, because they have already OVERdone it
deposits = negative, real interest rate will be negative given record low interest rates
gold = slightly positive, but chinese are already largest owner of gold, so you can argue this is sorta OVERowned as well
stocks = positive since inflation is good for stocks in general, some money out of real estate will flow into consumer industry, plus chinese love to pick bottom, and like it or not, the stock market is about 60% below peak in '07

anyways i was bored, but i do expect chinese stocks to be much higher from current levels by yearend

What's Next For The U.S. Dollar? I Believe It's Going Lower!

The dollar index suggests that the greenback is currently trading at a very critical point where a big move either way will determine the next 10 points. Treasury Secretary Tim Geithner today rejected the theory that the government is trying to devalue the dollar, saying that "it is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity, to (be) competitive." From my experience, when government officials start making statements to support their currency, the currency normally heads lower because the market loves to punish verbal interventions. On the other hand, the "Obummer" administration actually wants a weaker currency as politicians continue to believe that a weaker dollar will benefit exports. The truth is that this country simply does not manufacture enough to benefit from the dollar devaluation.

From a technical perspective, the USD/CHF cross has always had a close resemblance to the dollar index, and the pair has broken down from the symmetrical triangle, and therefore, I am expecting a similar outcome for the dollar index. If you agree with my analysis, I believe EUR/USD and AUD/USD remain the best bets.

QE II Is Next For Other Usual Suspects!

The Fed has successfully achieved its objectives with the QE II program, which was aimed to support the markets (both equities and bonds) while devaluing the U.S. dollar. However, every country in the world needs a weaker currency in order to protect their exports and sustain the economic recovery, therefore, I believe the developed countries will most likely find reasons to ease more and the emerging markets, facing inflationary pressure, will logically increase taxes on capital inflows to limit currency gains. For example, Brazil last week doubled its foreign capital inflow tax rate to 4% from 2% to curb Real's strength, and I expect other developing countries to take similar measures. What do all these ultimately mean? I believe it will be excessive inflation and real assets such as commodities, and yes, even real estate (especially in distressed markets such as the U.S. and Japan) will fare very well in the next few years. This is the worst time to hoard cash as investors because your savings will be eroded by all the cheap money. This is why I think all assets will continue to do well in the short term, including equities, bonds, commodities, and real estate. On the currencies front, given all the liquidity, I expect commodity currencies' strength to continue as investors chase yields.

Protectionism To Further Constrain Global Growth?

Washington just did it again! A currency bill was passed in the House today which seeks to impose trade sanctions against countries who manipulate their currencies... They are obviously targeting China, and the bill is deemed voter-friendly as the election is around the corner. What does this mean? This is just an anecdote of the "de-globalization" which has taken place following the financial crisis. As you may already know, globalization contributed to the above-trend growth seen in the past three decades during which financial and human capital were allocated more efficiently, leading to increased growth. However, developed countries are facing high employment in the aftermath of the credit bubble, politicians are being pressured to create jobs anyway they can, which is unfortunately counter-productive. Therefore, we are entering a period in which growth is going to be below-trend, negatively impacted by regulation, protectionism and aging population.