World economy talk

[Lady Bathory]

USDJPY will hit 110 but i don't think it will happen before next week's FOMC meeting. The meeting poses a big risk to the dollar rally. The market is expecting guidance on what happens after QE ends. If Janet Yellen doesn't provide sufficient guidance it could lead to profit-taking in USDJPY. But as long as USDJPY remains above 104 the uptrend is intact. There's strong momentum in USDJPY and it shows no sign of slowing. As the currency pair continues to rally we're seeing an increase in daily trading volume which is a bullish sign.

[Lady Bathory]

Risk events this week: Wednesday’s FOMC meeting, Thursday’s Scottish referendum, and the ECB’s TLTRO.

FOMC meeting: Another $10B reduction in the amount of asset purchases to bring the total down to $15B a month. The market will be paying close attention for signs of timing of a Fed rate hike. There's a good chance the Fed will change its language which will mean an earlier-than-expected rate hike. If the Fed amends the phrase “rates will stay low for a considerable time” the market will take it as a bullish sign and send the USD higher.

Scottish referendum: It's too close to call. Polls suggest a realistic chance that the people of Scotland will vote for independence. A yes vote would create massive uncertainty for the UK and the broader EU. Scottish independence could embolden other separatist movements like Catalonia.

ECB TLTRO: If the Targeted Long Term Refinancing Operation (TLTRO) auction is not successful the euro could weaken further.

[Lady Bathory]

This week will be dominated by speeches from FOMC members. St. Louis Fed's Bullard yesterday said the Fed may need to eliminate language suggesting that rates will stay low as QE ends next month. Members Dudley, Bullard, Mester, Evans, Lockhart, Kocherlakota and George are due to speak publicly this week.

Geopolitical risk is back on the radar following the US bombing of ISIS positions in Syria. A coup in Yemen and news from Ukraine also drove US Treasury yields lower due to safe haven demand.

Overall it will be a quiet week as the market waits for next week’s US jobs report, the Eurozone's CPI numbers and details of the ECB's asset buying plan.

[Lady Bathory]

USDJPY upside momentum appears to be fading as sellers gather near 110.00. Protests in Hong Kong threaten to drive safe haven flows into the yen. If the protests die down and the Nikkei makes new multi-year highs then thrusters will reignite and send USDJPY beyond 110. Next target 110.67 (August 2008 high).

[Lady Bathory]

The U.S. dollar sold off across the board but the broader picture remains with a strong dollar fundamentally. We see USDJPY corrective target at 107.50 but buyers have been stepping in at the 108 handle leaving the uptrend intact and offering buying opportunities for 112.00 long term target and possibly 120.00 on a long term horizon.

[Monseratto]

https://ph.news.yahoo.com/china-just...090801574.html

China Just Overtook The US As The World's Largest Economy

[Lady Bathory]

The U.S. dollar selloff continued as traders reacted to dovish minutes from the FOMC which suggested interest rates will remain at zero for longer than expected. The market has been expecting the first rate hike in July 2015 but expectations got pushed further out. Fed funds futures now imply the first rate hike in Q4 2015. The FOMC is concerned over the strong dollar and weak global economy which are unlikely to generate inflationary pressures so there's less need for the Fed to tighten monetary policy in the foreseeable future.

[Lady Bathory]

Despite the selloff the U.S. dollar remains high compared with early 2014. I still hold the view that the dollar will end the year strong vs. G10 currencies. USDJPY fell significantly last week but found strong support at the 105 level. I believe the uptrend is still intact and we will be retesting 110 in the next 1 to 2 months.

[Lady Bathory]

The U.S. dollar resumed its rally against G10 currencies after a hawkish Fed statement. The market was expecting a dovish Fed. Central bank policy differentials is the main driver in FX this year with the Fed in tightening mode and the BOJ and ECB in easing mode. I maintain my view that the dollar will end the year higher (USDJPY 112, EURUSD 1.25).

[Lady Bathory]

Divergence in monetary policy will set the tone for FX into next year. The most extreme divergence among major central banks is between the Federal Reserve and the Bank of Japan. The Fed ended QE as expected while the BOJ expanded its QE program. The European Central Bank is somewhere in between the Fed and the BOJ. The ECB is pumping cash into the eurozone economy without doing outright QE (buying government bonds). For now the ECB is buying corporate bonds and extending loans to banks.

[Lady Bathory]

Somebody asked me to write something about oil. Crude oil prices have fallen more than 20% since mid-June due to three factors — demand, supply, and the U.S. dollar. Demand for oil is weak because of global economic weakness specially in the eurozone. The return of Libyan oil to market, U.S. shale oil, and Saudi refusal to cut production all contribute to rising supply. But the biggest factor in my opinion is U.S. dollar strength. Oil is viewed as a store of value. Investors held oil as a hedge against dollar depreciation due to Fed money-printing. As the Fed wound down QE the dollar appreciated and investors who held oil wound down long postions. See chart below.

It is not a coincidence crude oil prices fell as the dollar strengthened. The negative correlation between the U.S. dollar and oil prices has been quite strong historically. See chart below.

[Monty]

Interesting insights. Did you get a chance to do some regression analysis?

[Lady Bathory]

Yes.

The U.S. dollar has pull back from multi-month highs on some profit-taking. The long USD trade has become overcrowded so traders scaled back long positions. But i'm still bullish on the dollar.

[Monty]

Nice. Thanks.

Yes, I have the same view.

[Lady Bathory]

The Fed minutes pushed the dollar higher against all G10 currencies. The dollar fell temporarily as the market reacted to headlines of declining inflation expectations but more in-depth reading showed differing opinions within the FOMC on how policy normalization should continue and on how to communicate it to the market. After the dust settled, USDJPY resumed its uptrend. The psychological 120 mark is now in sight with little resistance on the way to there.

[Lady Bathory]

USDJPY
Looks like dollar bulls may finally be getting tired but i would wait for a break below 117.50 before shifting to a bearish bias. The dollar failed to rally after last night's positive U.S. GDP report and we got a correction instead. Downside momentum remains today as falling U.S. Treasury yields puts pressure on the dollar.

[jyg1995]

Bakit ang baba na ng Yen? .3790 na lang,before .5000 level.

[Lady Bathory]

The oil market dominated headlines as OPEC decided not to cut production. Oil prices fell and the decline was made worse by an illiquid market due to U.S. Thanksgiving holiday. The U.S. dollar is up against the entire G10 complex. Yesterday USDJPY fell below 117.50 but encountered strong support near 117.00. I expect dollar bulls to continue to support USDJPY and hold it above 118.

[Lady Bathory]

Slowing demand and excess supply caused oil prices to crash. The cost of producing oil varies widely across the world. When oil prices remain too low for too long some projects become unprofitable and it makes sense for companies to shut down production. As the saying goes in the commodities market: the cure for low prices is low prices. Cutting production reduces supply. When supply falls below demand prices will rise again. High oil prices made U.S. shale projects possible. The breakeven level in North Dakota's Bakken is around $69/barrel and Texas' Permian Basin is around $68. If WTI remains around $70 for more than 6 months oil production will slow and funding will tighten. Low oil prices raise the risk of future price shocks. The lower prices fall and the longer prices remain low the greater the impact. Prolonged low oil prices will stimulate demand and at the same time reduce supply as investment in oil projects diminish. That will create a price shock as supply cannot return quickly. Projects that have been shut down cannot be restarted with a flip of a switch.

[Lady Bathory]

There's already a massive selloff in U.S. oil and gas stocks. If oil prices persist at current levels for several months, the Saudis will achieve their objective of hurting North American oil production. Below is a chart of the ETF XOP. XOP corresponds to the performance of the S&P Oil & Gas Exploration & Production Select Industry Index.