The Canadian dollar (CAD)is taking the biggest hit today as Bank of Canada policy-makers held rates steady at .25%. There has been a lot of speculation that Canada may need to raise rates sooner than later, causing the Loonie to return to its one year highs vs. the greenback. It’s off -1.5% vs. AUD, -1.63% vs. JPY, -1.79% vs. EUR, -2.05% vs. USD. As you can see, a bad day for the Loonie.
But a good day for Bank of Canada policy-makers. They have stepped up their own rhetoric to try to talk-down the strength of the Canadian dollar. They issued a warning that recent Canadian dollar strength will “more than offset” any recent signs of economic growth. As the Loonie has been approaching parity (1=1) with the US dollar, it appears that the BOC wants to halt that progress any way possible.
Will their efforts work? Stay tuned!
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Today’s top gainer is the NZD, the New Zealand kiwi, up 2.2% vs. USD, 1.8% vs. JPY, and 1.68% vs. EUR. This comes on the back of recent gains in both gold and oil up today to 1058 and 79 respectively. Also, helping the gains was Helicopter Ben, who again today re-iterated that accommodative monetary policy will be pursued for “an extended period”.
This means its game on for the commodity currencies, who benefit from the carry trade as investors seek out higher yielding currencies. As a result, both the Aussie and the Kiwi have traded to 14-month highs, back to the levels pre-credit crisis collapse which sent investors back to the US dollar in a flight to safety.
As confidence rises here in the US, (a rising stock market will do that- recent history be damned), investors will seek out more “risk” and move to the currencies that will benefit from strong commodities prices and higher interest rates.
Let’s take a look at a daily chart of Kiwi vs. US dollar (NZD/USD) (click chart to enlarge)
While this chart is a trend followers dream, its always difficult to jump in as it may seem close to a top. I usually like to wait for a pullback or for a sideways move (consolidation) before attempting to initiate a new trade, although I’m not certain that I will get one.
But for now, it looks like Bernanke is going to continue to get away with his “strong dollar policy” as the US dollar continues to tank against all currencies (except maybe the Yen- but that’s another discussion). If US stock earnings continue to “surprise” (meaning beat analyst low-ball expectations) and commodity prices hold up, expect Bernanke to sit idly by and do nothing as the US dollar continues to get crushed.
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The CBOE Volatility Index, otherwise known as “the Vix”, is commonly referred to as the fear index as it measures the market’s expectation of volatility using S&P 500 index options.Generally speaking, the value of the Vix at any given moment is the amount that the market thinks the S&P 500 can rise or fall over the next 30 days.
While the Vix (VXX, VXZ) can measure uncertainty over market gains or losses, it is typically associated with bear markets, as investor psychology tends to worsen when the market is falling as opposed to rising.To see proof of this, look no further back to October of 2008 when the stock markets were collapsing during the height of the credit crisis.It was at that point that the Vix reached its highest levels by far, and justifiably so.
Since that time, the equities markets have rebounded from their March lows, and the Vix has returned “to earth” from its stratospheric levels of last October.But has it come back too far?Is this Vix telling us that we’ve now returned to reasonable levels of uncertainty, and that market conditions have stabilized? (click chart to enlarge)
There are two major reasons why the equity market should be more “fearful” than it is right now.
“Strong Dollar Policy”.In what has become somewhat of a running joke, the Fed’s stance that the U.S. has a strong dollar policy despite having record low interest rates, quantitative easing programs which probably should show negative interest rates were it possible, and ballooning deficits is the greatest threat to market stability.
This joke might actually be funny, were it not so serious.Increased calls from China, Russia, et al. for a new world reserve currency haven’t phased Bernanke in the least.Should you be worried when the equity markets don’t appear to be?Absolutely.Especially when you see headlines like this one.
One of the reasons why the equity markets seem to be shrugging off this news is because a weak dollar has been good for the equity and commodity markets.A quick look at this chart shows the inverse correlation between the US dollar (UUP) and the S&P 500 Index (SPY). (click chart to enlarge)
A lot is made about the safe-haven status of the US dollar and the inverse correlation it has with stocks and commodities.When the economy is seemingly doing well, risk-takers look to sell dollars and buy higher-yielding, riskier currencies to earn interest.This is more commonly known as a “carry trade” and I described it in an article last week.
The carry trade is a very easy way to make money and it was formerly only available to sophisticated investors.Now, you can participate from the privacy of your own home!The basic premise behind the carry trade is that you want to borrow a low-yielding currency and invest in a higher-yielding currency.You make the difference in interest.Sounds better than putting your cash in a bank savings account, doesn’t it?
*Do you know what one of the lowest yielding currencies is right now?That’s right, it’s the US dollar!
And this is likely to continue for some time.If the dollar is going to continue to decline, it doesn’t sound very safe at all, does it?Here are a few reasons why the dollar decline will continue and why you should be concerned.
1.The United Nations at their most recent meeting asserts the role of the US dollar should be reduced as the world’s reserve currency.While this is “nothing new”, this time it may be different.If the dollar continues to fall then alternate solutions may be sought.
In a continuation of Friday’s move out of the US dollar as signs of improved economic conditions are improving, EUR/USD is experiencing a nice move to the upside. Positive comments from ECB President Trichet and the notes out of the G-20 meeting are giving investors confidence that recovery is underway and therefore investors are selling dollars.
The top gainers on the morning are the Swiss franc (+1.14%) and the Euro (+1.01%). Look for this uptrend to continue as risk takers seek higher-yielding currencies.
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Well I’m not certain this is “great” news but the US “only” lost 216K jobs, better than the analysts expectation of 225K. The unemployment rate has risen to 9.7%, a 26-year high. So far this AM, the equity markets are positive as of this writing as the number of job losses each month is decreasing more slowly, a possible sign that the economy is recovering.
More importantly, it means that the flight to safety trade is off and the risk appetite trade is on this morning. The commodity currencies (AUD, NZD, and CAD) seem to be doing well against the Japanese Yen (JPY) and US dollar (USD), with CAD/JPY as the mornings largest gainer (+1.14%).
This could be good news for equity bulls and dollar bears, as the lack of a significant deviation from the expected means that investors and traders feel that the economy may be recovering and we could be headed for inflation down the road, which is clearly the Fed’s intention.
Check back later to see how these trades are doing!
It looks like the flight to safety trade is in full effect today, with the Japanese Yen crosses and US Dollar leading the way, especially against the commodity currencies (AUD, CAD, and NZD). The US equity markets are down today but hopes are that the “September Effect” is not upon the equities markets. The September Effect says that historically this month has been the worst month for US stocks.
Because of the correlations between the equities and currency markets, this could mean gains for the Japanese Yen and US Dollar. It looks like AUD/USD was not able to close above resistance at .845 and we could be in for a double-top reversal at that level.
So keep your eyes on the US stock market, because if the September Effect does take hold, then it could be a wild ride for the commodity currencies.
Just wanted to post a quick update on this trade that triggered yesterday. We actually closed out a portion at 1.6175, for a 175 pip gain. This pair is the biggest loser of the day so far (-1.04%), so it appears that other traders may have recognized the H&S pattern as well. The reason we closed a portion was because of the doji that occurred on the 5-minute chart, and the stochastic cross that occurred as well. See chart (click to enlarge)
While this trade started out as a pattern on the daily chart, we chose to drop down to the 5-minute chart to manage the trade as our first profit target was hit. Our trailing stop for the rest of the position is now at 1.6275, which is just above the most recent area of resistance, and also represents a 75 pip gain. So basically this is now a risk free trade!
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