Weekly Overview for May 26th

The week ended with the dollar index down .72%, the Dow down .19%, the NASDAQ down 1.16% and the S&P down 1.02%. Both the metals ended up—gold added 2.03% and silver 6.2%. The Nikkei lost 6.5%. The VIX However, closed at 13.9. (The VIX is the Volatility Index for the S&P, is quoted in percentage points, and translates roughly to the expected movement in the S&P index over the next 30-day period.)

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The EUR gained while the GBP lost in value to the USD. Numbers for both came in pretty good with Great Britain’s housing number coming in better than expected and GDP printing consensus. However, the UK’s poor retail numbers has the central bank talking about easing once again. Just when it appeared that the UK was on track, things looked like they may be heading south again and investors sold pounds. The Euro Zone’s current account came in at 25.9B Euros—beating expectations. Regardless, the ECBs talk during the week was dovish. Even though recent Eurozone PMI and German IFO number picked up a bit, the latest GDP number for the region revealed a union still in recession. The ECB would like to see the uptick continue into the future before they start talking down their easing.

Yields on both the JGB and the US were both up this week, with the Japanese bond yielding a high of 1%– a yield not seen in a year while the US hit a monthly high. The Bank of Japan rushed into the market with bond purchases to keep rates from going any higher. Earlier in the week, Japan revealed that they were concerned about the Yen’s fast depreciation—spooking some USD/JPY longs. But then, after the spike in interest rates, Kuroda didn’t seem like he was too worried about it, as long as “the economy improved.” Japanese merchandise trade balance came in at Yen -879.9b. Exports printed 3.8% vs. 5.9% eyed and imports 9.4% vs. 6.7% eyed.

It appears that the Japanese already ambitious QE needs to get more ambitious. If interest rates are rising, it must mean that the demand for JGB is weaker than the supply. With the BOJ’s 2% inflation target, there is no wonder Japanese are dumping the JGBs for equities. There is only one way to pick up demand, and that is for the BOJ to check into the same hotel as the US and not check out until the job is done. The U.S. tax payer cannot afford higher interest rates payments on the US debt either.

Many analysts think the strength in the USD is due to the feds “tapering” talk coupled with the recent positive economic numbers and stock market highs. The housing numbers mostly came in stronger than expected along with durable goods, which printed 3.3% vs. 1.5% eyed. However, one has to keep in mind that it’s the Feds easing that is propping up both stocks and the housing market. Homeownership is still at an 18 year low. And if one looks, demand for homes is mostly hedge funds and speculators. So whether or not the Fed can taper and not cause the stock and housing markets to turn is dubious at best. I take it that, like the Japanese, the US is hoping that the economy will be able to absorb the higher interest rates. Although this might be true for the banks, I don’t see how the governments can. Interest on the debt is difficult to pay at these levels as it is.

Nonetheless, the tapering or not might not be what is causing the greenbacks recent strength. The reason housing demand is coming from Wall St. is because credit markets are tight. And this could be the cause of the dollar strength. Global demand is also waning. Chinas’ HSBC manufacturing PMI came in at 49.6 vs. 50.5—the biggest drop since Sept 2011. It is quite evident that the QE money is ending up on Wall St and not Main St.

This weak global demand could also be why the commodity nations did poorly this week. The Aussie’s Westpac Consumer Sentiment printed -7.0% while Canada’s Retail Sales missed coming in at 0.0%. New Zealand’s Trade Balance also missed printing 157M vs. 475M eyed with exports falling and imports rising—not very good on top of the bad numbers out of China. Also the recent divergence between the AUD/JPY and the Nikkei 225 does not bode well for the apparent economic recovery. The AUD/JPY is up a mere 8.5% vs. the Nikkei’s whopping 40% (50% at its peak) rise since the beginning 2013. This divergence I believe reveals a bull run unconfirmed by real market demand.

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All this is leaving most Forex traders wondering whether or not this recent dollar trend is “for real or not.” Are the EUR/USD and GBP/USD yet to complete the weekly Elliott Wave triangles they are in or are they heading for their final thrust to new lows. It is tough to say. But one cannot deny that this time, the USD’s strength is broad-based with the Yen losing also. And another aspect of the USD’s recent bullish trend is the fact that this time the two metals have gone south with the rest of the worlds fiat currency’s. This just might be a tell tail sign that this dollar move is deflationary and a result of weak credit markets worldwide.

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