Forex Market Update- QE3, JPM, and the Speculation
It seems as though QE3 speculation is driving risk higher at the moment, after a tough overnight session for these assets on the back of the JPM debacle. Just why traders are so hopeful the Fed will act after the BOE held steady in its bond purchases is a mystery. Yet some of the world’s biggest money managers are positioned in MBS in anticipation of a June Fed launch; including PIMCO. Of course, this may simply be short-covering. After all, the US Dollar Index is on the verge of a big breakout higher from a technical standpoint and traders may be using these rallies to sell longs in stocks, oil and gold that they’ve been stuck in. We hate to lump gold in with the “risk trade” but that’s how it has been trading this month.
Chinese CPI on deck
The latest Chinese CPI figure is due at the bottom of the hour, just 15 minutes from now. Economists expect to see the inflation figure fall from 3.6% to 3.4%. Such a cooling in inflation could allow the PBOC to cut rates further and they may help to prop up the “risk trade” which sold off sharply this week and some of last. Any reading at 3.6% or higher should add fuel to the fire, but nothing in this market is sure to always turn out as expected. We closed USD/JPY long earlier with a small gain and will look for a new entry in coming days. Our EUR/USD short from 1.3010 with a break-even stop is still in play.
JPM is hitting the skids because of trading losses
We just closed our USD/JPY long for a 20-pip gain as risk aversion could heat up dramatically tonight. Traders just learned that JP Morgan has lost $2B in its prop trading (they call hedging) in just the last 6 weeks. Still worse, the bank faces much bigger losses if the trades keep going the wrong way. Financials are getting killed in after hours trading, which should make for a “risk off” Friday around the world. We think yen will be a primary beneficiary; at least until the BOJ pops up.
Forex Market Update- CNBC and Risk Aversion
CNBC contributors suggest today’s risk aversion is based on the sudden realization that Europe’s problems are huge. Seriously? It’s more likely that these same people, after weeks of trying, have given up on baiting retail investors into buying the stocks they want to unload at the top. Without individual investors to hold the bag, fund managers seem to be in a race to the door. Our EUR/USD short has almost reached target one and we are watching USD/JPY closely as US 10-yr yields push up a couple bps. S&P 500 is down 20 points after surging almost the same amount into yesterday’s close. Clearly the circus is not leaving town just yet.
Forex Market Update- AUD / QE3
As Goldman renews its call for Fed QE3 in June, we can’t help but think currencies like AUD will be back in favor soon. Of course, the sell-off in gold today seems a bit contradictory to the printing that the ECB is likely to embark on as well. The RBA is nowhere near printing money with rates still much higher than its major counterparts. AUD/USD at 1.01 must be attractive to fundamental/value players in FX. EUR should be doomed this week, so EUR/AUD is a good short in our opinion at these levels as well.
Forex Market Update- EUR Under Pressure
EUR has come under intense selling pressure, along with many risk assets, as the Greek Left Coalition says the bailout accord is null and void. This means the leaders do not want to be bailed out and prolong the suffering they would endure under decades of austerity to pay back borrowed money. We say good for you Greece. This puts the odds at a euro exit at greater than 50%, which is the best thing for this country in the long-run; and perhaps even the short-run. Bankruptcy by countries like Greece is the best option for the people, but leaders around the EU must be irate. In reality, this should only make EUR stronger in the big picture, but may hurt the currency on uncertainty in the short-term.
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