This text is from blog famous currency strategist Joel Kruger .
A DIFFERENCE OF JUST 15% – The performance in US equities markets since the onset of the global crisis has been nothing short of astounding. Despite all of the stress in the financial markets and despite all of the weakness in the domestic and global economy, stocks are just 15% off of the record highs pre-crisis in 2007. Investors have been comforted by the fact that governments and central banks are fully committed to “proponomics,” (artificially supporting markets to stimulate economic recovery) and therefore do whatever necessary to keep things afloat. A combination of ultra accommodative monetary policy, global coordination, and some relative underperformance in other countries has helped to fuel this remarkable recovery, and many now eye a retest of those pre-crisis 2007 highs. However, I would be careful at current levels, and do not expect to see gains extend much further.
See forex technical analysis for today from Joel :
WHAT IS REALLY GOING ON? – The most important point here is that equities have been rallying less on specific fundamentals and more so on the incentive to be buying stocks. It is true that valuations have become very attractive given how cheap money has been, but now when we are trading so close to record highs, are valuations still really all that attractive? Furthermore, should I remind that the use of ultra accommodative policy is a reflection of a troubled economy. My contention therefore is that this market will start to fizzle out at current levels and could in fact be poised for a material pullback over the coming weeks. While it is true that doses of ultra accommodation, global coordinated intervention, excessive stimulus and quantitative easing are the necessary medicine required to save the markets from collapse, it is equally true that there are very real side effects which eliminate any chance for a quick recovery. Instead, the expectation is for a very slow US and global economic recovery which lasts several years and offers no hope at any of the economic boom we had seen pre-2008.
THE GLOBAL COORDINATION VARIABLE – Still, one fascinating development from this latest crisis has been the ability for markets to remain so well supported despite the ongoing turmoil. The primary reason has been the global coordinated response to the crisis. Simply put, because the world is so effected by all that has gone on, it is in every country’s best interest to step up and act on behalf of the greater good in order to eliminate the very real risk of total meltdown. In the past, when one country might have been in trouble, they were deemed to be on their own, and their downturn was isolated. But today, everyone realizes that a threat to any major economy is a threat of contagion to other economies and therefore, these intervention efforts prove to be a lot more successful as there is a lot more money behind them. While it is still early, look no further than the intervention from the SNB over this past year.
SUCCESSFUL CURRENCY INTERVENTION? – The Swiss central bank has committed to not letting the EUR/CHF cross rate drop below 1.2000, and to this point, these efforts have been successful, whereas in different times they would have most probably failed miserably. I believe that the confidence that the SNB exudes in defending the 1.2000 barrier stems from the knowledge that they will be backed up by other central banks should markets decide to test their resolve. By extension, the Japanese Yen sits very close to its record highs against the US Dollar, and knowing that the government is less than enthused with the currency so strong, I wonder if this latest surge in EUR/CHF offers any assurances to successful Yen intervention efforts going forward. This could be an interesting story into Q4 2012 and 2013 and it will be interesting to see how things play out.
EURO EYES JUNE PEAK AND 200-DAY SMA – Moving on, the Euro has broken higher on Friday, with the market seen testing next key resistance in the 1.2750-1.2830 area which represents the June peak and 200-Day SMA respectively. Gains might finally stall out there, but ultimately, only a break back below 1.2465 would relieve short-term topside pressures. Expect choppy trade for the remainder of the day as market participants digest the critical US monthly NFP report. Elsewhere, keep an eye on USD/CAD. I had said in recent reports that I liked buying around 0.9800 and given the daily ATR, an entry at 0.9790 could be very compelling on Friday. Stops should be initiated only on a daily close below 0.9650, while gains are seen extending back above parity and towards the yearly highs just shy of 1.0500.