If countries move away from free trade

Per-Erik Karlsson from Avantage Financial GMBH at 11/17/09

S&P 500 futures up strong this today and taking out the 1103.25 high from 11th of Nov. The correction off the 1103.25 high on Thursday last week looks short lived and it will be interesting to see if that strong push up through this resistance zone can materialize. If it doesn’t break away higher within the next 3 to 4 sessions we expect to see a deeper correction towards 1050 or so.
Volatilities in equities and FX options are dropping further today after the market looks confident that the down side has been blocked out for the near term. The VIX has drifted towards the 20 level over the last 3 sessions as we expected, but if we get below 21 we would look to try a long again as we think the VIX looks cheap towards 20 as we are still not convinced this recent rally will be sustainable toward the year end. In Asian session Japanese GDP data surprised to the upside, but we still saw cautious comments from analyst’s pointing out that stimulus probably was the driving factor for the upside surprise and not likely to be sustainable. Worth noting that the Baltic Bulk Freight index is up about 21% over the last week, which signals a increase in global trade. The Yuan revaluation talk continues ahead of Obama’s trip to Beijing this week. We suspect China will resist any major Yuan revaluation until the export figures fully recovers. It is probably not so easy for US to argue that much with China since US is very dependent on the credit from China and China holds about $2trn in reserves. Also comments out from Chinese Vice Commerce Minister Chen Jian overnight signaled that China is not likely to let the Yuan be revalued anytime soon. Good news out from APEC communiqué stating they must reject protectionism, which we think is absolutely key to keep the recovery going. If countries move away from free trade, we expect the economy would soon be in big trouble. Free trade is very important and although it might not be fair trade, it is vital that free trade is kept up as much as possible. We maintain our view even after the stronger than expected Japanese GDP data that JPY has limited scope for a very strong rally as BOJ will most likely step in and prevent the JPY from moving much below 87 vs. USD. Remember that Toyota was out last week saying that if JPY got stronger they had to move their production abroad. We can mention it again as we have done over the past few months, Japan has really weak looking fundamentals with ageing population, weak domestic spending, huge public debt and now a strong JPY. That is not a good mix to have in our opinion and it is unlikely that JPY can sustain a substantial rally when the fundamentals are that bad. We expect AUD to continue to perform strongly and dips to be supported as other Central Banks are still clearly behind RBA in the tightening cycle and market is now pricing in another 25bp hike in December and a total of 200bp over the next 12 months. GBP recovering as the sell off following last week’s BoE inflation report looks all gone and breaking above last reaction high at 1.6799 today, which is technically bullish. We look to sell GBP across the board if it can rally a bit higher. Comments out from RBNZ that the current NZD strength is unsustainable over last few days.
We agree and are once again looking to get short in NZD vs. a basket of AUD, EUR and CAD. Gold marching towards 1150 now and it is truly overbought now and we see overhead trend channel resistance coming in at 1167 today. Stories continue to circulate that Central Banks will once again be net buyers of Gold and producers projecting supply shortages. Keep in mind that the high in Gold back in 1980’s adjusted for inflation would be around 2000 USD/OZ now. IEA November Monthly Report raised its 2010 oil demand that is the 5th consecutive increase for 2010 demand projections.
Crude rallying strongly on increased risk appetite today, but still not been able to break above 80 USD per barrel for a week now. That basically shows that Crude is relatively weak in comparison to the S&P, which made a new yearly high today. Still Crude has good support down at prior breakout level of 75 USD per barrel and looks range bound with range being 75 to 82 for now. The contango in Crude has also narrowed, which is a bullish signal. See article on EADS getting hit by strong Euro, we expect to see more of that going forward as companies start doing business at the current rate.
Remember that there is always a sizable lag in the exchange rates companies operate at due to hedges and longer term contracts. Meaning that Eurozone companies might still be operating with a Euro rate that is much lower than the current rate, but when companies will have to re hedge and get new contracts the real rise in Euro will affect their pricing ability and sales. That is when we will start seeing the effect of the current Euro rate on corporate earnings and sales.

Technical’s

Euro: Stops triggered on the break below 1.49 Thursday, but dip short lived as the equities rallied strong on Friday. The range is 1.48 to 1.5060 for now and need to see a break out of this range to trigger a more directional move. Long term rising support from March this year is coming in at 1.4705 today, so technically bullish above this trend line.

Cable: Big bounce from 1.6660 level and breaking the 1.6800 level opens for a test of the yearly high at 1.7043 from August.

USDJPY: Has been trading inside the falling trend channel since March 09, with overhead resistance at 92.11 and support at 86.53. We see limited scope for JPY to go below 86 and favor longs on dips, however need a daily close above 92.50 to really open the upside.

Swissy: Bearish below 1.02 and need to break 1.00 to extend the drop. Overhead resistance coming in at 1.0246 this morning (falling trend line from 30 Jul 09)

AUDUSD: Still trading inside the rising trend channel that has been in place since 13th of July 09. The rising support of this trend line is down 0.9054 today with overhead resistance at 0.9586. Key support is 0.9212 today, which is Thursday’s 12th of November low.

USDCAD: Bearish below 1.09 and this level held the rally, key support down at 1.02. A note, 1.0435 is minor support level, which was the breakout level on 20 October for the rally to 1.0869.

EURJPY: Struggling to stay above the 135 level and looks more range bound inside the key resistance of 138.72 and support down at 131 (2 Nov. low). Short term rising support from 2nd of October low coming in at 132.18 this morning as well.

GBPJPY : Key levels remains 147.80 support and 153.30 resistances. Short term rising support at 149.50 today, so to keep upside potential going it needs to close above this level today.

AUDJPY: AUD is strongly correlated to equities. We expect the direction in equities to drive AUD as well. Key support remains 83 and overhead key resistance is the yearly high at 85.31