Update April 27, 2011

Been taking the past few days engaged in heavy fundamental readings. Been clarifying few points about the business as well. We will be moving forwards soon, unfortunately it is often in business that things never go perfectly to plan. Soon to be back on track.

• Dollar moves have been will in expectations, however as an observer who has not been watching closely the moves seem very dramatic.

• Gold and silver are also worth mentioning.

• Crude still remaining elevated as expected

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Eurozone Current Account and EUR/USD Comparison (1999 - 2010) - April 24, 2011

Data Source: ECB

Between the colored regions is when the EUR/USD rallied in a general uptrend. Below the EUR/USD Chart is the Eurozone Current Account and below are the components of the Current Account (Net good and services - good exports minus good imports and service exports minus service imports, Net Income, and Net Transfer Payments)

Some Fundamental Observations:

• The Current Account does not give good fundamental support alone in explaining EUR/USD trends up.
• The net Goods component of the current account is probably the best fundamental indicator of what supports the EUR/USD trends up out of the Current Account. 
• Every time the net goods component was positive (Exports in goods > imports of goods; a.k.a more euros into the zone) or rising from negative to positive, there was a strong general uptrend in the EUR/USD
• The onset of the sub-prime crisis leads to much greater negative net factor income and net transfer payments
• Into 2011 well into the sovereign debt crisis; net factor income volatility appears to be decreasing and starting to turn positive (a.k.a Eurozone starting to receive more capital back on investments/remittances vs. payout them out more as seen through the sub-prime/financial crisis 2007 - 2009)
• Net Transfer Payments grew larger and larger as the Eurozone grew, and was possibly exacerbation by the multiple financial shocks in the past three years. Net Transfer Payments remains elevated. 

The most stable period of Eurozone growth appears to be between 2002 and 2004 (green), as the trade balance in both goods and services were positive (especially with goods primary driver), while net income and transfer payments, though negative, were not volatile and large enough to weigh down the current account. As we see post 2006 all three components of the current account become much more volatile. 

After 2006 the Current Account (CA) is not primarily reflected by the trade balance. The trade balance becomes more volatile plus Net Factor Income (NFI) and Net Transfer Payments (NTP) become much larger negative components of the CA. 

However, despite such a fundamental divergence the Euro rallies to all time highs (from 2006 to 2008 from 1.20 to 1.60 - yellow). The rally in the EUR/USD is reflected when the net goods component goes from positive to negative. 

The subsequent shorter rally in 2009 (EUR/USD about mid 1.20s to about 1.50 -blue) is again supported with a sharp reversal in negative net goods to positive net goods (about -11B euros to +15B euros)

The last period I highlight as a general up trend is interesting in that we are seeing a sharp reversal in net goods from Jan 2011 to Feb 2011 from about -14B euros to about -993M euros, but do not have positive net goods yet. 

Conclusion:

I have not calculated the data sets, but I would logically assume the exchange rate value is the catalyst for trade movements. Therefore, if the EUR/USD is posting higher highs up to 1.50 resistance and the net goods component of the CA remains below +5B euros (past rallies in EUR/USD eventually posted greater than 5B euros net goods), there will be a sharp reversal in the EUR/USD at 1.50. 

If net goods continue to trend higher beyond 5B euros, it is possible the EUR/USD rally is fundamentally sound and continue beyond resistance. Continued higher highs on the EUR/USD without fundamental support would just be sentiment and speculation and subject to a strong mean reversion. 

Keep in mind of course the nature of the trade data is reported late, and that sentiment can sustain currency rallies on months end before correcting. 

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USD Long Term Perspective - April 21, 2011

As a fan of history, I like to give context to current events. Some notes on long term price moves of the dollar index (cash)

• For ten years, 1987 - 1999, the dollar roughly traded in a range of 80 and 100 ($20 dollar range)
• I see two Major trends between the period 1987 and 2011
• Mid 1990's boom - Housing boom, low interest rates, positive technology shock, human capital development
• Tech Bubble Burst, rising interest rates, 9/11
• 2008 financial crisis/housing bubble burst cause the dollar index to reach historical lows on the USD cash index
• Since the 2 major trends cited above it seems ranges have normalized

The 80.00 level is a significant long term psychological level. Both major trends occur above this support level. The support level is broken with the onset of the 2008 financial crisis. The major trends plus the 2008 financial crisis indicate major changes and events in regards to the context of the USD. The rise of the USD coincides with the rise of the US economy in the 1990's which reflected its dominance in the world. The subsequent fall of the USD coincides with the rise of the new strength (not  necessarily dominance) in other major pairs mainly the Euro (the largest component in the dollar index construction) vs. the dollar, which also is inline with the rise of importance of other economies (again not necessarily dominance). 

Of course the 2010 sovereign debt crisis put the Eurozone into question, but looking at the range of the USD movement indicate that perhaps the crisis is not as important as markets would have us believe given much larger USD trends and ranges in the boom and bust described above between 1995 and 2007. As shown in the chart above the period from 2007 onward shows a narrowing US price range. 

What is important is the underlying fundamental structural changes that have occurred over the history as marked by the broken 80.00 support level. Of course I emphasize the strength/importance of other economies does not mean the demise of the USD anytime soon. Significant hurdles to overcome, that can take decades to play out, are still in place; China's pegged currency, world economies' reliance on crude oil, soft agriculture products priced in dollars, and of course the US still being the number one economy in the world. 

Significance may wane, but overall dominance of the USD is still there along with the economic support. Like I wrote in my last POST, a new panacea is needed before we can see further fundamental shifts (I was referencing the energy industry, but the idea applies here as well). 

Some bulleted conclusions:

• New ranges can be seen between 70 and 90 on the USD cash Index - similar to the $20 range seen between the 1987 to 1997 decade but at new lower level (reflecting strength of other economies)
• As economies normalize out of the recent volatility periods the USD index has room to range to 70 which equates to 2007 level exchange rates such as 2.00 GBP/USD, 1.60 EUR/USD. 
• The fundamental structure between Asian economies and Western economies is very apparent in the AUD/USD and NZD/USD as the pairs are reaching new historical highs in literally uncharted prices territory.

PS: todays USD drop caught me by big surprise as I was expecting a much bigger dollar strength correction. Prices can remain elevated for a few months before a real large correction will occur, go with the flow...

April 21, 2011 - 6 month daily

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Motor Fuel and CPI - St. Louis Fed

http://research.stlouisfed.org/publications/mt/20110501/cover.pdf

Taken from the link above

The St. Louis Fed report indicates that for the past four years Motor Fuel has been the real volatile component in the CPI calculation despite its small weight. The CPI trend has a standard deviation (SD) only 2% when you exclude Motor Fuel vs. 5.4% and 6% SD's for headline and food exclusion respectively. 

A historian would laugh at this chosen time frame as such deviations will have no effects in the long run. Though since the FED is short run oriented this perhaps does have real implications for Fed policy, and CPI weightings and calculation as inflation becomes more relevant. 

Also as traders and investors, the short run is what we are interested in, or at least the majority of behavior would often reflect this if not thought. If motor fuel is indeed as important as this report may claim, perhaps focusing on its effects on consumption and growth may led to fruitful macro trades?

Either way, as we progress towards the end of the century weightings will indeed have to change significantly as energy prices will continue become more and more volatile. CPI will have to be rebalanced more frequently. This will all change of course when the next energy panacea is created by huge leap in energy technologies or a new viable source of energy discovery. 

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Lets Talk Gold - April 19, 2011

April 1 YR Gold

Today Spot gold hit 1500 for the first time. Yesterday I tweeted:

Looks like that statement was a bit overstated as the coming weeks happened to be today. Of course today was just a touch on the daily chart. I would look for 3% to 5% pull back for scaling in on an overall up trend. Of course any type of "uncertainty" and "risk" will benefit gold flows. In the short run and long run (Q2 and beyond), there is plenty of fuel to flame the fire bigger. 

Currently traders and investors in the breakout (1425 to 1500) are the smart money riding the trend. We have yet to see the effects from "not so so smart money" which will carry gold much higher. 

Either way, just like in 2010, any rationale will work for you fundamentalist, so pat yourself on the back for creating more self fulfilling prophecies. 

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The Economist - "Go East Young Moneyman"

Go East Young Moneyman

The Economist writes about the current trend of west to east flows in terms of the mobile labor market.

However, since the start 2011 there has been overheating in Asia Pacific markets with unruly inflation and natural disasters and slowed growth prospects. Many investors are pricing in a bubble with strong asset flows out of Asian emerging markets in Q1 2011.

So despite these worrying developments, the trend is still strong with young people heading to Asian markets to start their career. If and when a bubble burst in Asia I am sure we will see a strong reversal in this trend. When a mass exodus of young talent in the region occurs, is when I will  fly in to pick up the pieces.

If one can tackle great uncertainty successfully, great rewards are sure to follow...


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Update April 18, 2010

Preparing for big transitions, watching markets lightly:

SPX

• Big gap down on es and SPY today
• Bearish momentum is strong, last two days of last week higher lows
• trend still in tact - strong price targets around 1250+ range

USD

• Perhaps the dollar correction came faster than I expected
• I would like to see most of the majors correct another 100 to 200 pips more (room for shorting majors vs USD)

Crude

• continued consolidation above new support
• moves inline with dollar strength today

Continue to maintain same expectations from Here

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