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Saturday October 10, 2009 - 01:23:03 GMT
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Week ahead Outlook and End of Week Post-mortem for October 10, 2009

Week ahead Outlook and End of Week Post-mortem

A new theme could be seen developing over the latest week. The Reserve Bank of Australia (RBA) got the ball rolling on Tuesday when they hiked interest rates by 25bps to 3.25% earlier than expected. The RBA move reverberated through all the markets after it was seen (prematurely?) as a precursor of a broad policy tightening by central banks generally.

The interest rate theme was enhanced by comments Thursday by comments by Fed Chairman Bernanke who discussed the eventual exit strategy from quantitative ease and prepared the markets for upcoming “test” reverse repos, but also reiterated that interest rates are going to remain low for a long time. Thursday also saw a shaky 30-yr bond auction. Interest rates have become the new theme for trading.

Official intervention in support of the USD is another developing theme. A number of emerging market (EM) central banks bought USD late in the week. Tokyo through a surrogate (Kampo) drew a line in the sand in the USD/JPY at 88.00 and that price was not tested again. ECB President Trichet also commented (weakly) on USD weakness in his post-meeting press conference. The threat of forex intervention in support of the USD is the other major theme.

Monday holidays in major centers will subdue trade to start the new week. With intervention a constant threat, trading could be jumpy in the week ahead. The other thing to watch will be the performance of U.S. bond markets and if any shakiness impacts equities, which ended the week on a stable footing.


Latest Week Analytical Highlights

Friday AM
"Today Japanese FinMin Fujii starting to slip into more traditional language of concern about the valuation of the USD. We had noted that Trichet had done the same thing yesterday. The markets were disappointed yesterday that Trichet had not been more forceful. Many are unhappy with the U.S. “benign neglect” dollar policy. Japanese 88.00 USD/JPY line in the sand? Bernanke reiterates rates will stay low for a long time. "


Thursday PM
"It feels like today’s BOE and ECB decisions were a lifetime ago by now. No rate changes were as expected. In his press conference, President Trichet engaged in what many felt was weak verbal intervention in support of the USD. Odds are this is not the end of this rhetoric.

Bad response to poor 30-yr auction.

There is talk that Kampo had been on the bid Wednesday at 88.00 (unofficial intervention?). Tokyo line in the sand? The $/yen 90-92 level is key level for Japanese exporters..."


Thursday AM
The markets are not expecting rate changes from the BOE or ECB today, but the focus will be on the press conference by President Trichet. Two items that will be watched closely are what he will say about strategy for an eventual movement away from quantitative ease and his currency comments. We expect he will be speaking in favor of a strong USD.

Talk yesterday that Kampo had been on the bid Wednesday at 88.00 (unofficial intervention?). Tokyo drawing a line in the sand? 90-92 is the key level for Japanese exporters.

Wed PM
There was a change in focus early in N.Y. Wednesday following unconfirmed rumors of BOJ intervention in the USD and after a report suggesting that Europe has become unhappy with the policy of benign neglect being practiced by the U.S. with the dollar. JPY was in demand early, even though the economy is weak. Key Japanese exporters might already have leaned on MOF to contain the JPY. Key central bank decisions from BOE and ECB are tomorrow. ECB future policy intentions will be scrutinized. No changes by the ECB or BOE are on the horizon.


Wed AM
"The fallout from the RBA rate hike continues to be felt. It has triggered a run into commodity currencies and commodities. We call them the business cycle trades. That the markets might be getting ahead of themselves, as demand in Europe, North America and Asia still looks to be fragile. The scenario has also manifested itself as USD weakness.

The JPY is also in demand, even though the Japanese economy remains weak. We are waiting to see when the important Japanese export sector starts to lean heavily on the Finance Ministry of the new government to contain the JPY..."


Tuesday PM
"Major developments Tuesday. The Reserve Bank of Australia raised rates by 25bps to 3.25%, for domestic reasons. However, markets took the move as the start of a global effort to start to sop up excess liquidity. Everyone had been prepared for a rate hike before yearend. The timing surprised some, including us.

A report Gulf States are in talks with Russia, Brazil, China, Japan and France to denominate oil sales in a basket of currencies hit the U.S. currency. The change would take nine years. The story was denied by the Saudi central bank and others, but “where there’s smoke…” This would be a blow to the USD reserve currency status..."

Tuesday AM
"The markets have seen major developments early Tuesday. The Reserve Bank of Australia raised rates by 25bps to 3.25%, for domestic reasons, but the markets took the decision as the start of a global effort to start to remove excess liquidity from the system. Surprisingly, virtually everyone had been prepared for a rate hike before yearend for months. It was only the timing that surprised some, including us. A press report that Gulf Arab states have been in talks with Russia, Brazil, China, Japan and France to denominate oil sales in something other than dollars has slammed the U.S. currency. This change would take place gradually over a nine year period. The story has been denied by the Saudi central bank. We have not seen a denial yet by a key player in this story. “Where there’s smoke…” This would be a significant blow to the U.S. as a reserve currency and has weighed on the unit. "

from Monday PM..
"The EUR/USD improved over the day Monday in NYC. Equity traders will say the EUR/USD led the S&P higher, while FX traders will point to higher equity prices as leading the EUR/USD higher. In any case, the two traded closely together. It was pointed out that the EUR/JPY did not trade as closely with the S&P. This was because of the unusual USD weakness vs. the JPY.

This is a big week for central bank meetings with the headline decision the RBA announcement tomorrow. The RBA is thought to be considering a rate hike before yearend. This month might be a bit early, but a November or December move is seen as very likely. The RBA is critical because a RBA move would be the first concrete indication that excessive global liquidity is going to be sopped up. No actions by the ECB, BOE BOJ or Fed are still on the horizon..."

Monday AM
"The tone of the USD had been improving until the latter part of last week, which ended with a poor September employment report. With the dust now having settled, the USD is looking slightly vulnerable. This is a big week for central bank meetings with the headline decision shaping up to be the RBA announcement tomorrow. The RBA is thought to be considering a rate hike before yearend. This month might be a bit early, but a November or December move is seen as very likely. An RBA move would be the first concrete indication that excessive global liquidity is going to be sopped up. No actions by the ECB, BOE BOJ or Fed are seen on the horizon....




John M. Bland is an author and co-founder of Global-View.com. Prior that, he was a senior forex dealer in a subsidiary of the Continental Grain Company in NYC. Previously, he was a member of the Chemical Bank corporate advisory service in NYC. He also worked in international liability management. John holds an MBA from the Hass School at the University of California at Berkeley and a BA in Economics from Berkeley.

 

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