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Asset Allocators Shift Money to Stocks While Shunning Treasuries

James Hyerczyk from ForexHound.com at 12/21/09


Real buying returned to the stock market today as investors shifted money from fixed-income Treasuries to higher yielding equities.  This is all part of a reallocation of assets.  Investors are betting on a U.S. economic recovery to drive stock prices higher in 2010.  On the other hand, investors are betting that the value of Treasury Bonds and Notes will continue to erode as interest rates rise.


Today’s rally in the U.S. Dollar appears to be a sign that risk sentiment may not be the driving force behind price action much longer.  The action today suggests that funds are being reallocated into the Dollar and stocks in an effort to capture a rise from the continuing improvement in the U.S. economy. The positive trade in both the stock and Dollar markets is a sign that investors are shifting back to watching traditional fundamentals for direction.


The March Euro finished the day lower.  The improving U.S. economy and lingering debt issues in Greece, Portugal and Spain are likely to continue to pressure the Euro.  Longer-term charts indicate a move to 1.3800 is likely.


The March British Pound closed down for the day.  The chart indicates the next potential downside target is 1.5980.  Traders are repositioning ahead of Tuesday’s Final Third Quarter GDP report.  Economists’ are guessing an upward revision to -0.1% from an earlier guess of -0.3%.  This figure will be a positive for the GBP USD and indicate that the U.K is getting ready to return to growth during the 4th quarter.


The March Japanese yen fell sharply on Monday and is now building downside momentum for a test of the October bottom at 1.0847. The only factor that could stop another leg lower tomorrow will be thin trading conditions because of the holiday trade. Declining demand for lower yielding assets is helping to boost the Dollar.  Carry-trade action is also putting pressure on the currency as investors sell Japanese Yen to buy stocks.


For a while this morning, it looked as if oversold conditions would trigger a short-covering rally in the March Swiss Franc back to the old bottom at .9675. This currency turned around, however, shortly after the New York opening as precious metals broke in an asset allocation play.  Traders should pay close attention to the gold market.  Weaker gold prices will weaken the Swiss Franc.


The March Canadian Dollar closed higher as strong equity markets signaled the possibility of an economic recovery.  Traders feel that a recovery in the U.S. markets will lead to an even stronger rally in the Canadian economy since this economy does not have to grow much to show strength.  Lower gold and crude prices could limit gains in the Canadian Dollar. At this time, this pair is ping-ponging between a pair of 50% prices at .9505 and .9446.


Reallocation of resources out of gold and into the Dollar and stocks pressured February Gold today.  Today’s action appears to indicate that speculative money is being taken out of the gold market and redeployed into equities.


An easing of tensions in between Iraq and Iran helped trigger weakness in March Crude Oil today.  The stronger Dollar also had a bearish influence as buying dried up in higher risk commodities.  Traders could be looking at the bearish fundamentals and not liking what they see.

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