Monday, May 11, 2009

Too Obvious?

Can a good technical set-up sometimes be too obvious to work?

While that might be the question of a man whose mojo continues to reside in the possession of Dr. Evil, it's nevertheless the one that's percolating in Macro Man's mind this morning.

Following on from Friday's rather blah employment data, which were probably a bit worse than expected when all was said and done, it nonetheless appeared as if the reflation trade was soooo on, baby.

Equities rocked and, perhaps just as importantly, the dollar got a kicking worthy of an 80's-era Doc Marten-wearing football hooligan. The technical damage was considerable, as EUR/USD roared through the 200 day moving average after the London market went home. This level, which topped out the December rally in the pair virtually to the high tick, has been a useful barometer in identifying technical trend reversals and acceleration points. Even the widely-hated kiwi dollar caught wing, bursting through the 200-day towards the end of last week and accelerating through the highs of the year.
What does it say about the dollar when even the kiwi is kicking its ass?

Such, at least, was the logic on Friday evening. Macro Man ended last week with a modest dollar short against high-beta, technically perky currencies, including the NZD. And while the NZD has indeed performed well so far today, price action elsewhere has left him wondering if all these 200-day breaks are....well....a little too obvious.

For one thing, he expected to awaken this morning to find that Asia had pushed EUR/USD a lot higher. It hadn't.

Moreoever, if the reflation/dollar going down forever trader were really in force, he wopuld expect some of the best price action to be in the commodity complex; after all, isn't that where the green shoots should be taking hold the most?

Early last week, copper broke through its 200 day moving average and appeared poised to break through its recent high and accelerate aggressively to the topside. Instead, the good doctor has meandered about, and at the time of writing has sagged back below the 200-day.
Macro Man finds this development to be somewhat worrisome, and not just because he has a small long in copper. One often finds such divergences at tops and bottoms, and so it's a lit disquieting to see one emerge just as the market is getting convinced that a nice bear run on the dollar is about to begin. Throw in equities approaching the resistance of their yearly highs and credit quietly rolling over this morning, and all of a sudden Macro Man finds himself having doubts about the "obvious" USD bear trade.

So while he clearly reserves the right to get back in, he's taken the money and run this morning. In a market wherre positioning seems to trump all, the dollar bear trade suddenly looks a lot more crowded than it used to.


Anonymous said...

I wouldn't want to be short USD short term. When this rally runs out of steam it will fly again.


Short term long USD, mid term short

Anonymous said...

question is WHEN does this bear rally end...Grantham says SPX 1000 - 1100... thats a long long way


Anonymous said...

Frankly fx has been led around by its nose under the aegis of CTA's and other Chicago linked globex traders for several months. Their antics are almost too predictable and relate almost nothing to macro economics or anything else other the momentum trades.

Anonymous said...

I never believe any forecast like Grantham's that calls for a rally followed by a crash. If we're really going to have "7 lean years" and go to SPX 500, why should the market take it over 1000?

The advertising campaign for the US banks just ended, they've raised capital or will soon. The incentive to talk up the economy is passing. I suspect the rally will pass with it.

The reflation idea is just a mistake. There's been precious little quantitative easing. In the US currency in circulation is up less than $150 bn yoy, barely enough to account for increased currency in mattresses. People are confused by the inclusion of excess reserves in the monetary base, but those are simply a backdoor way to transfer risk from banks to Fed, the Fed has used those reserves to buy MBS from the banks, which means the Fed is illiquid and can't allow the banks to withdraw their excess reserves -- which means they can't be the basis for lending and can't be inflationary.

If the dollar goes down it'll be because of a global loss of trust in the US as a parking place for capital, not quantitative easing.

dblwyo said...

MM - just for the record the Employment data wasn't really that encouraging. YoY private BLS was down -3.8, 4.3 and 4.7% in the last three months. Not only is the 1rst derivative still negative (& will be) but the 2nd appears to be increasing. Contrary to hearlines, pundits and tapes.
I suspect more folks than me paying attention, hence the about to recover meme driving reflation might be weaker than you think.
Also reflation depends on a) sustained growth and b) the huge liquidity/money supply surge being accompanied by a surge in velocity instead of the monetary authorities being unable to pull it back. They're already working on it.
So if we have low growth long-term, no money supply/credit surge then reflation is just another passing memery :)

Charles Butler said...

Hi MM,

Such a dearth of proof for the reflation crowd that the ECB announcement of last Friday was directly trumpeted as QE by lots of outlets - despite Trichet's comments to the possible contrary. Mugs' game when the screechies have to grovel for content.

Anonymous said...

is the US curve too steep or got further to go?

Anonymous said...

@anonymous what is the basis of your comment on CTAs driving forex?

spagetti said...

its not greenshoots anymore, its daffodils.. according to Mr Buy BRICs

and JP i saw today expects a V recovery today.

its "deja vu" all over again..

probably the last big down leg of equities is starting now

fodacadillac said...

I remember having to read it twice to make sure I saw it correctly when it was reported last week that 45 times forward earnings had been priced in to consumer cyclicals for 2009.

It was enough to suggest to me that things had gotten a bit frothy and a fair some of the buying might be momentum chasing.

Let's see if the prodigous sightings of green shoots last week can endure some possible inclement equities weather.

Anonymous said...

Is this your son Macro? I read it and it reminded me of your stylings!

Brian said...

Agreed on the "obviousness" of the USD bearish breakdown. Took out the trendline, 200-day SMA, and former low (thus first lower low of this cycle) in one fell swoop last Friday:

I had short term USD bear positions last week, but took those off today. Looking for a re-test of those support-now-resistance levels in the USDX (83.20 - 83.50).

Anonymous said...

Anonymous 9:41 AM
question is WHEN does this bear rally end...Grantham says SPX 1000 - 1100

Grantham also had a few caveats e.g. this is a headfake