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Thursday April 1, 2010 - 15:03:15 GMT
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Zoom-zoom growth: Comdols supported, but we like Euro-block pairs

Key News
Manufacturing news says recovery is here:
- China:  better than expected w/13th straight month of gains above 50
- Australia:  weaker than expected
- Italy:  better than expected, best pace in almost 3-yrs
- France:  slightly better than expected
- EuroZone:  better than expected - new 40 month high
- Germany:  much better than expected
- UK:  better than expected, w/new 15-month high

Quotable – China debt comments
“Indeed, high gross debt in an economy indicates sophistication of its financial and capital markets as well as overall indebtedness. Moreover, gross debt is a useful indicator in assessing macroeconomic risks to the extent that a potentially serious asset price deflation does not allow selling assets to pay off debt, as has been the case during the Great Recession as well as other major financial crises in history.

“However, in the absence of a serious asset price deflation, a more relevant concept of indebtedness for a country as a whole should be its external debt level, because domestic debt tends to be offset by domestic assets. Given the same level of indebtedness, external debt tends to make a country more vulnerable to the vagaries of international interest rates and exchanges that are beyond the country's controls. And a country needs to generate sustainable foreign currency revenue (i.e., through exports) in order to service its external debt.

“Measured by external debt, China's indebtedness is one of the lowest in the world. This substantially reduces the risk of a ‘macro margin call' on China due to potential negative external shocks. While the relevant risks would be less to the extent that a country is able to issue the external debt denominated in its own currency, this has been the privilege for only a handful of economies in the world (e.g., G3).”
—Qing Wang, Morgan Stanley

FX Trading – Zoom-zoom growth: Comdols supported, but we like Euro-block pairs

Well, if true, stocks did it again.  They forecasted a recovery.  The optimists have been right; piling into stocks with confidence as they climbed the proverbial Wall of Worry.  The worry warts (guilty as charged) look like they were wrong; especially if the China credit bubble concerns prove untrue.  

But, vigilance remains given the potential for rising protectionism as China-US relations continue to fray and Euro Monetary Union unraveling potential.  Either of these events clobbers commodity currencies.  And speaking of commodity currencies…

The Canadian dollar has been leading the charge higher along with the optimists on growth; in fact it’s been doing even better than most risky asset classes as the chart below compares the rallying in World stocks to that of the CAD-USD pair:

[Chart not available in text format.]

But, interestingly, the US dollar has been doing pretty good itself as it breaks that previous tight correlation with stocks.  From mid-2002 to around December 2009, it was a tight stock up dollar down; stock down dollar up correlation.  You can see this in the chart below; vertical line shows that now stocks and the lowly greenback are heading in the same direction….

[Chart not available in text format.]

…is this just a blip in correlation?  Maybe!  But, it does fit the story we’ve been telling for a while that this bull market in the US dollar could very much mirror the 1992-2002 bull market when both stocks and the dollar moved together:

[Chart not available in text format.]

We often see things in charts we want to see; stuff that seemingly supports our stories.  Granted!  But despite a very differing set of circumstances, the broader macro of money entering both stocks and the real economy in the US, where real property prices have been hammered, and considering those assets look even cheaper to international investors whose local currency has appreciated tremendously against the buck, the money flow theme makes sense.  

So how does this circle back to the Canadian dollar?  If this theme is correct, it likely means going forward we will see ebb and flow between the Canadian dollar and the US dollar i.e. they will be running on the same driver to a large degree.   Ditto for the other commodity currencies!  So, we think the comdols are fairly valued against the buck.  We think the Canadian dollar can continue to appreciate against the buck near-term.  In fact, we have a are now sitting on short USDCAD (long CD futures) in our PositionTrader FX with a nice little profit—our technical target on this move goes to 0.9720.  

But that said, we think the real value will come from pairing the comdols against the Europeans…we’re watching EURCAD, as JR mentioned yesterday, but the one we like even better may be CADCHF (Cad-Swiss franc)…it appears a bit overbought near-term, and like due for correction, but the next breakout move may be a good place to jump on this train:

[Chart not available in text format.]

Well, I’m sure people are – but it’s safe to say the CADCHF pair isn’t exactly on typical investors’ radar screen. Sure, we sometimes target that pair in our SwingTrader FX service. But there’s a way to position for a longer-term move in these two currencies even if you want to steer clear of FX.

We position ourselves every month in conservative, easy-to-use investments that nearly perfectly captures FX market price action without the leverage that turns some investors away. (Want to give it a try?)

And while the long CADCHF idea is no sure bet, it’s certainly something to keep an eye on as the individual fundamental pictures do warrant such a move. Targeting these two with a broader time horizon may in fact prove to be a great idea.


Jack Crooks
Black Swan Capital

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