QE bubblenomics rage on

QE bubblenomics rage on as silver continues to add a dollar a day and as tech stocks are close to challenging 2007 highs. But is the greenback sell-off losing momentum or ready for another go at the lows?

The Wall Street Journal’s front page article rightly suggests that the world’s ire heading into this week’s G20 meeting is focused more squarely on the US and the policies of its Federal reserve than it is on China at the moment. The German Finance Minister recently accused the US of lowering the value of the dollar with its policies. Russia has also chimed in with comments suggesting that the US ought to consult with other major powers before pumping money into the economy since so many of the US’ assets are held abroad. Alas – the risks to the world’s reserve currency and the reason for the accelerating rally in precious metals prices. How the US handles the situation and the outcome of this G-20 meeting will be very interesting. With every day that commodity price stretch higher and the USD goes weaker, the negative pressure on the Fed from without and from within ratchets higher and higher.  Read this great commentary from Andy Xie about QE and its implications.

Chart: EURUSD
EURUSD is looking a bit tired after the recent surge above the old 1.4160 high failed to bear further fruit. But the rising trend-line is still intact at the moment and there’s a lot of wood to chop before the pair is in anything approaching a structural bearish market, which would require a move back below 1.3350 to start.

 
China: New capital controls
The capital controls response to “international currency wars” are in more evidence today as China is set to tighten controls on capital inflows into the country after its FX reserves ballooned alarmingly in September.  This is likely to be an ongoing theme in the markets and watch for the likes of Brazil and Korea and others to increase capital controls as well. At some point, these kinds of measures can be expected to break the back of the speculative bubble in all things emerging markets.

GBP weaker
The pound rally softened a bit today on a trio of negative data developments, including a very negative RICS House Price Balance report that suggests house prices are in steep decline in the UK. This is the leading survey and we can expect the other surveys on average to show steeper price drops in the months  ahead. The latest batch of production numbers were also very slightly disappointing and its hard to take anything positive away from the latest trade balance number –with the only possible consolation being at least it wasn’t quite as horrifically awful as the previous month’s number. Still, the pound barely lost much ground in the European session from its highs versus the very weak Euro and the 200-day moving average in EURGBP may remain in play as a key demarcation for that cross.

JPY stronger
The yen carved out a rally versus the market overnight after a very strong current account and trade balance number for September and as the Chinese allowed their currency to strengthen sharply against the USD. While this looks impressive, we doubt there is basis for further stronger gains in this measure going forward, considering the rise in commodity prices this month that will eat into the numbers and the effects of the strong JPY on an already slowing economy. If we look at interest rate spreads at the front end of the curve, USDJPY is beginning to look a little cheap now that US 2-year rates have backed up to almost 40 bps from their recent lows and the spread is at the highest level in over a month – though admittedly only about 10 bps wider than it was at the trough in the spread. Still, it offers some measure of fundamental support and an argument against a swoon through 80.

Looking ahead
We may be in for some nervous trading for a couple of days in anticipation of the G-20 to close the week. Again, our baseline expectation is for a strong statement on currencies that seems to show a cooperative spirit – but that hides intractable differences and the likely eventual continuation of new layers of capital controls and protectionism down the road. It feels like we once again have a potential key inflection point with this meeting. Either the bubble takes a break and we see a very sharp sell-off in precious metals and perhaps a reasonably sharp rally in the USD as the world eases off the gas pedal for risk, or we see a further acceleration in this bubble market in risk and precious metals and a final down-leg in the USD as we quickly march to a climax in the speculative bubble before the New Year. Stability would seem the least likely outcome, in any case.

Be extra careful out there.
 

Economic Data Highlights

• New Zealand Oct. Credit Card Spending rose +0.8% MoM
• Japan Sep. Adjusted Current Account Total out at ¥1661.3B vs. ¥1273.4B expected and ¥1179B in Aug.
• Japan Sep. Trade Balance out at ¥926.9B vs. ¥876.9B expected and ¥195.9B in Aug.
• UK Oct. Retail Sales Monitor out at +2.4% YoY vs. +2.2% in Sep.
• UK Oct. RICS House Price Balance out at -49% vs. -39% expected and -36% in Sep.
• Australia Oct. NAB Business Conditions out at 2 vs. 7 in Sep.
• Australia Oct. NAB Business Confidence out at 8 vs. 10 in Sep.
• Japan Oct. Machine Tool Orders rose 70.9% YoY vs. 113.6% in Sep.
• Switzerland SECO Consumer Confidence out at 7 vs. 17 expected and 16 in Sep.
• UK Sep. Visible Trade Balance out at £8228M vs. £8000 expected and £8473M in Aug.
• UK Sep. Industrial Production out at +0.4% MoM and +3.8% YoY vs. +0.4%/+3.6% expected, respectively and vs. +4.3% YoY in Aug.
• UK Sep. Manufacturing Production out at +0.1% MoM and +4.8% YoY vs. +0.2%/+4.9% expected, respectively and vs. +6.0% YoY in Aug.
• US Oct. NFIB Small Business Optimism out at 91.7 vs. 90.0 expected and 89.0 in Sep.
• Canada Sep. New Housing Price Index rose +0.2% MoM vs. +0.1% expected

Upcoming Economic Data Highlights

• US Nov. IBD/TIPP Economic Optimism (1500)
• US Sep. Wholesale Inventories (1500)
• UK Oct. NIESR GDP Estimate (1500)
• New Zealand Reserve Bank Financial Stability Report (2000)
• US Weekly API Crude Oil and Product Inventories (2130)
• Australia Nov. Westpac Consumer Confidence (2330)
• Australia Sep. Home Loans (0030)
• Japan Oct. Consumer Confidence (0500)