Good Morning.. Asian markets up again led by KOSPI (up 3%) as BoK add further. The USD has remained low after a serious break of recent ranges in the USD and JPY crosses. Has USDJPY just recoupled to stocks? This sudden USD sell-off may have started due to rising equity markets (risk on) but I think it goes deeper than that. Maybe, just maybe, markets are beginning to worry about the Fed debasing the USD and that a long-term sell-off is coming as the Fed balance sheet keeps expanding. (Gold should do well in all this). I think there is a danger that we may have started the long awaited USD sell-off as the Fed has caught up (down) to all the others. Powell has said he has limitless amounts and will use them. That should always be a USD negative and he seems likely to do more than most now!! JPY crosses exploded out of recent ranges and I think this extends and have recommended a long in AUDJPY and USDJPY now (see below). EUR could also see gains towards 1.1500 now we are above the retracement resistance and I am not sure many are long JPY crosses or short the USD. Bank of Canada rate decision (expected unch) and PMI services data to dominate today and big beats are expected. But markets did not fall on the weak data so why should they rally on better data? Just a thought.
Keep the Faith..
Details 03/06/20
USD takes a hit and JPY crosses explode higher. Risk on hitting the USD or Fed policy?
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Was it the continuing rise in global equities or the problems on the streets of America, to be honest I am not sure what the spark was but the USD took it on the chin for the second day in a row and JPY crosses surged as USDJPY broke free of its recent range.
(Daily USDJPY above). A break of 109.38 and this thing could be above 110.00 in short time and I am not sure at all that the market is anywhere near long yet. I now recommend a long here at 108.58 with a tight stop below the breakout (108.08) at 107.79. AUDJPY, EURJPY all breaking some serious technical levels with EURJPY now above 121.15 and a look at 122.87 is now on the cards on the charts at least. I like AUDJPY higher too and look to buy here at 75.30. But if the USD sell-off was due to US social unrest then why did stocks not take the hit as well? It seems that the JPY finally locked back onto US stocks which it had been loathed to do for some time recently. Is the correlation back?
But why now? To be frank, I have no idea but FX markets were like the old days for a change yesterday as moves happened and extended all session. It seems to me that the Fed has done a great job of getting many front-running their policies but can the heady highs of the equity markets hold up here? That is the big question as discussed in part yesterday but let us not forget that the lack of change in fundamentals do not support this; this is all about liquidity. I still don’t hear any confident noises from central banks and last night saw the BoK announce new measures to boost the economy and the KOSPI rallied 3%; Job done? That is the key still and even EM markets are having a stellar run higher now.
Asia stocks are most expensive in ten years as they near overbought territory
This was a third round of stimulus from S. Korea, so again, few signs from central bankers that things will recover soon.
Given that asset prices should be a reflection of economic and revenue growth (those were the days), the deviation is evidence of a more systemic problem but hey; who cares as the Fed has our back; right? That is the mentality behind this rally in equities and is in part, why the USD is falling as equity markets at least, suggest we are in a risk on environment now; I somehow doubt that but this USD and JPY crosses move is doing some serious damage to deep-rooted positions and the technical picture and so cannot be ignored. Has the Fed, through its swap lines killed the global demand for USD’s now? So many questions and few clear answers. Curfews are put in place across America as rioting continues and maybe the USD is something to do with this, as the economy will find it hard to recover if locked down again every evening. But again, stocks didn’t budge and I am not sure the idea of less risk at present holds any water at all. So a s/t squeeze lower in the USD or something more? Maybe, just maybe, markets are beginning to worry about the Fed debasing the USD and that a long-term sell-off is coming as the Fed balance sheet keeps expanding. Gold should do well in all this (chart below).
What worries me here is that the markets now feel that Powell will keep inflating the balance sheet for as long as needed and let’s face it, he said there is no limit! That should have been the wake-up call for USD traders but it seems to have taken a while to sink in. Now it has started, I am not sure it will stop. Even if stocks start to fall now, markets may feel that the Fed may have to do more and the USD may be losing its safe haven status here; if so, this Dollar has further to fall. We have QE infinity in the US and rates back at zero with discussions on YCC and negative rates. The Japanese template right there. Remember when Powell admitted that the central bank has “crossed a lot of red lines” but insisted he’s comfortable with the actions given “this is that situation in which you do that, and you figure it out afterward?” The side effect of this could be a severe dump in the USD but is that a bad thing? It depends on how far but more so on how fast. Initially this could be good for commodities and the EM space and I am sure Trump will be doing back-flips with Mnuchin.
As I said yesterday, this may all be part and parcel of the 2008 events we saw and phase2 is upon us, as nothing was fixed; just moved down the calendar. The Fed got away with all of this in 2009 and the years following as many felt they would reverse a lot of this but we are steaming all-ahead again now and the problems clearly have not been resolved. How did the Fed get away with all this in 2008? Well, it managed to blow up a bigger bubble and continues to inflate it now. The same mistakes are being made but the economy is weaker now and we start from a much lower base. We all know QE does not create growth or inflation and so does the Fed, BoJ, ECB, BoE and every other central banker that has embarked on this road to nowhere; but alas, they know nothing else; maybe there is nothing else to do but delay the reckoning. The reason the USD is falling is that the Fed has caught up (down actually) with everyone else. Whatever it takes. Given the global nature of the economy (for now), without a truly global recovery plan, demand will stagnate. Even worse, inequality, which has made the crisis worse than it had to be, will only increase.
The Fed did not repair the imbalances that existed back in 20008, it made the imbalances bigger. The US, through government spending, is moving deeper and deeper into debt, so if and when this even bigger bubble pops, the mess will be on a grand scale. Powell was once believed to be a pioneer of allowing markets to correct themselves but no longer; the markets (tail) are wagging the Fed (dog). The Fed is back to the drawing board doing exactly what it did before, only printing a lot more money, running much bigger deficits and monetising debt quite blatantly. No wonder the USD is losing its shine and maybe one day it may lose its status. Where and when does the Fed stop? How easy will it be to reverse any of this, even if by some miracle, growth does reappear? I am sorry but due to the fact that the Fed has no idea either, I can’t answer that. What I can say is what concerns me most about all this hope of a rapid recovery is that the damage done by the central bankers to the basic foundations of capitalism and the push, led by Trump, to walk back globalisation are issues that will touch us all; change is afoot and none of that is priced. Economic growth will also depend heavily on the speed at which we can find a vaccine, manufacture it at scale and make it globally accessible. Meanwhile we wait.
What the global economy cannot take right now is an increase in tensions between Trump and all the foreign nations that annoy him. He has increased the rhetoric with China over the HK issue and this trade war is only in its early stages but Trump also still has his eye on the EU and a few others now. His administration has announced an investigation into a string of countries that are adopting digital services taxes, including the UK, Italy, Brazil, Indonesia and the EU as a bloc, which could lead to new punitive tariffs by Washington and exacerbate global trade tensions. We need to keep an eye on this and while it is not something for today, some big headlines down the road may be coming on this. Lighthizer is concerned that US technology companies could face higher tax bills abroad as governments seek to boost revenues in the midst of the coronavirus pandemic. The issue here is that they should be paying local taxes and have got away with this for far too long.
If you remember, the US investigated France last year for its digital services tax plans and threatened to impose tariffs on the country’s wines, leading to a series of tense exchanges over months between the two capitals. Washington said it was now expanding the investigation to Austria, Brazil, the Czech Republic, the EU, India, Indonesia, Italy, Spain, Turkey and the UK. That is not going to help global trade. It will also isolate the US further. Maybe that in part is a concern for holders of US dollars. The UK is to embark on hugely important trade talks with the US and I am sure this issue will be central to what the US want from those. It is quite clear that Johnson will be in the US with a begging bowl and Trump knows he is desperate. I fear what attachments there may be to any deal. In January the Trump administration threatened to impose tariffs on British car exports if the UK went ahead with its tax. Watch this space.
As ever, in finance and indeed any walk of life, it is tempting to compare today with the past but as I have said before, this crisis is different from all others as we have never seen the global economy forced into a self-induced coma before. The big question is what shape the recovery takes and can we avoid a depression even. Governments and central banks are doing all they can to avert a depression as they come with terrifying consequences. The Depression caused more than economic pain; it, as depressions always do, ushered in a loss of faith in democracies, the triumph of ideologies of hate, a turn to demagogues, a breakdown of international trade and finance and, ultimately, the second world war. I only mention this as I am, on a very macro basis, very concerned about where we are heading. The breaking up of current globalisation and the systematic taking apart of the foundations of capitalism have huge implications both financially but more so geopolitically. This is starting to happen now and at the same time we have a new global power challenging the hegemony of the US and the US will fight to hold their place. This could easily (especially if Trump wins a second term) escalate and we are already seeing a shift to more protectionist strategies and nationalistic governments.
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Strategy:
Macro:.
Long EURGBP @.8978 added @ .8940. Stop now at .8825
Long USDJPY @ 108.58.. Stop at 107.79
Long AUDJPY 75.30.. Stop 74.40
Brought to you by Maurice Pomery, Strategic Alpha Limited.
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