GBP/USD Analysis 01/24/2011
GBP/USD Daily Chart Click-to-Enlarge
GBP/USD Hourly Chart Click-to-Enlarge
DXY Daily Chart 01/24/2011
The GBP daily chart (top picture) shows RSI near the top of its range potentially looking for another small sell-off. This sell off would be supported by the GBP hourly futures chart (middle picture) that has a triple top forming at the same area of resistance right around 1.60. The Dollar Index RSI is indicating it is oversold and could be poised for a little rally, further supporting a decline in GBP against the US Dollar(bottom picture) Monitoring these three charts would be essential to jumping back into GBP, we would want the RSI to fall back down somewhat and the hourly futures to come back down. We are looking to enter long on GBP/USD down around 1.5800-25, with a profit target around 1.60. We believe that GBP/USD is susceptible to a sell off given the indications from multiple time frame charts that GBP/USD is topping out at 1.60, the RSI is relatively overbought and the US dollar index appears to be poised for a rally. We will also be keeping an eye on other crosses such as EUR/USD and EUR/GBP due to the influences those particular crosses have on GBP/USD.
SPX Daily Chart 01/19/2011
Daily Chart 01/19/2011
Looking at the chart above, we can see that bullish momentum on the SPX may be slowing due to today’s decline. We have a RSI indicator (developed by J Welles Wilder) attached to the chart and is telling us that the SPX has been in overbought territory for awhile and the index could possibly see a decline since the RSI is now below 70. Many technical traders may see today’s price action as a sell signal. We believe that the SPX will sell off to the 20 Moving Average at 1270, which is providing immediate support to the index.
Gold Update for 01/18/2011
01/18/2011 Click-to-Enlarge
In our previous post “Is Gold the Canary in the Coal Mine” we talked about the commodity rally and how this year we could see commodities consolidate or sell off. We also mentioned that immediate support came in at 1360 (which has largely held up over the last few days). If bearish momentum on gold picks up, the green 100 day Moving Average will be the next level of support. If that breaks we are expecting the next area of support to be down around 1322. If that goes, then the next support comes in at the 200 day Moving Average. As for topside resistance, gold has been unable to get above 1432 and consequently a triple top lies in that area.
GBP/USD Trade Update on 01/18/2011
For those of you following our blog, we are posting an update on our GBP/USD trade. We have liquidated our trade at 1.60 earlier this morning for a gain of 248 pips. We closed this trade out due to a strong bounce down from 1.6050 and we are now looking to re-buy on dips around the 1.5800 handle, possibly lower if Cable does not find support until 1.5700 where the 100 day moving average lies on the daily chart. We believe macro economic forces will be supportive of GBP crosses over the coming months due to the historical performance of the GBP prior to the Global Financial Crisis, and that higher inflation will force the Bank of England to hike rates sooner then anticipated, which leads us to believe that GBP has room to appreciate given current levels.
GBP/USD Outlook for 2011
Before the Global Financial Crisis, EUR/GBP cross spent years trading between .65 and .70. Obviously much has changed since then but we at FXIB cannot see a good reason for the Euro, with all its Sovereign debt woes, to still be trading 20% higher against the GBP. In our opinion it’s only a matter of time before the cross falls to .75 at least. What does that mean for the other crosses? If EUR/USD falls to 1.20 and EUR/GBP falls to .75, then we are forecasting that cable will be trading at 1.60. If EUR/USD rises to 1.40 and the cross falls to .70, then we believe that GBP/USD will be trading at 2.00. These forecast are based on previous price action before the Great Financial Crisis hit.
01/13/2011 - Click-to-Enlarge
Taking a look at the GBP/USD Daily chart above, the white line is a 20 day Moving Average and is starting to turn up. The blue line is a 60 day Moving Average providing intermediate support. The green line is the 100 day Moving Average providing strong support at 1.5716. And of course the 200 day Moving Average is the purple line at 1.5423. We are looking to buy GBP/USD on dips toward the 200 day Moving Average. We believe that the UK government austerity programs will increase confidence in the GBP as the budget deficits are reduced and the economy manages to sustain growth. Only concern we have is that the Bank of England is not acting fast enough to control inflation right now, but as the BoE hikes interest rates to slow inflation this will support the GBP. We firmly believe that this year will be the year that makes or breaks the EU, unfortunately the longer the structural problems of the EU sovereign debt crisis remain unfixed, the higher likelihood we will see the EU collapse. Recent reports have indicated that if Spain needed to be bailed out that would be the catalyst for the EU breaking up. Given this backdrop, we foresee the GBP strengthening against the Euro and consequently against the US dollar.
FXIB Fourth Quarter and Yearly Review With 2011 Outlook
Foreign Exchange Market
Fourth Quarter Review
In our fourth quarter outlook we predicted that the market had overpriced in the US Federal Reserve Quantitative Easing program and that the US economic recovery would strengthen. The US economy did produce stronger growth this quarter and the US dollar did initially rally once the market knew what the Quantitative Easing program would consist of. Some important economic events we witnessed this quarter includes Ireland being bailed out by the EU, China hiking interest rates and reserve requirements, and commodities continuing to rally.
Yearly Review
The US dollar finished the year stronger against the Euro, at the start of 2010 the exchange rate traded around 1.43, and finishes the year at 1.3365. The primary driver for the US Dollar gaining against the Euro is the European Debt crisis making Euro denominated assets less appealing to investors. The Yen also made significant gains against the US dollar in which at the start of 2010 the exchange rate was at 92.50 and finishes the year at 81.00. This year saw the Yen at record levels against the major currency crosses. The US dollar finished slightly stronger against the British Pound, in which the exchange rate started at 1.61 and finishes the year at 1.55. The following should come no surprise, but the Australian Dollar made significant gains against the US dollar, rallying from .90 to 1.0200. The Australian economy has been strongly supported by this year’s rally in commodities and Chinese growth. The Swiss Franc finished stronger against the US Dollar due to its “safe haven” status amidst the European Debt crisis. The Swiss Franc started the year at 1.0300 and finishes at .9300. The US Dollar also finished weaker against the New Zealand Dollar, as the New Zealand Dollar rallied from .7250 to .7800. Last but not least, the US Dollar fell against the Canadian Dollar as the exchange rate went from 1.0550 to finish the year at .9900. The reason for the US Dollar decline this year can be largely attributed to a slow recovery and the US Federal Reserves Quantitative Easing program in which the market severely overpriced.
The 2010 Commodity Bubble
Commodities posted a record gain as adverse weather slashed global crops, debt woes in Europe boosted demand for precious metals as investment havens and China consumed more of everything from cotton to copper. The Thomson Reuters/Jefferies CRB Index of 19 raw materials jumped 29 percent in the last six months of 2010, the most since the gauge debuted in late 1956. Last month the gauge reached 333.67, the highest since Oct. 1, 2008. Cotton extended a rally to an all-time high, silver rose to a 30-year peak and coffee jumped to the highest since 1997. In 2010, commodity prices beat gains in stocks, bonds and the dollar as China led the recovery from the first global recession since World War II. Crops were ruined by Russia’s worst drought in at least a half century, flooding in Canada and parched fields in Kazakhstan, Europe and South America. Corn and soybeans recorded the biggest second-half increases in five decades. We at FXIB believe commodities are in a bubble and have been in a bubble since the third quarter of 2010. Recent economic reports from China are indicating that the Chinese economy is starting to slow down and this should start to take the steam out of commodities. We at FXIB are expecting the commodity bubble to deflate in the first half of 2011 as market prices become more aligned with fundamentals. The US economy has not recovered to pre-2008 levels but yet commodity prices set new record highs that exceeded 2008 levels.
Looking Ahead at the First Quarter and 2011
We have identified 11 potential risks for 2011 that we will be keeping an eye on:
Potential US Dollar pluses:
- European sovereign debt crisis intensifies, driving European yields higher.
- European Central Bank drops vow to remove stimulus; adds liquidity instead.
- UK adds to Quantitative Easing to offset economic drag of fiscal austerity.
- Chinese property bubble bursts.
- US yields rise as US economic recovery gains strength.
- US adopts comprehensive long-term fiscal program modeled after Simpson-Bowles Commission recommendations
- USD retains and builds on reserve currency status as central banks shun euro and reduce existing holdings.
- Geopolitical uncertainty in Iran, Korean Peninsula revive USD safe-haven status.
- Bank of Japan, Bank of England, and European Central Bank embark on expansive new monetary easing, including Quantitative Easing.
- Bank of Japan joins Asian neighbors in actively managing the JPY FX rate
- Commodities bubble bursts as fear of dollar collapse abates.
Potential US Dollar Minuses
- US and Japan join global sovereign debt crisis; gold and other metals benefit
- US yields fall as US economic recovery flags; deflation fears revive
- UK economy rebounds despite austerity; Bank of England raises rates to contain inflation
- US yields soar as government fails to get a handle on fiscal policy and market loses confidence
- Risk appetites rise, fueled by a rush of global central bank liquidity sending metals, agricultural products and energy sharply higher
- Emerging markets continue to grow steadily, drawing capital from developed markets
- JPY resumes climb versus USD and Asian currencies as Japan keep money at home rather than seek higher returns abroad
- European sovereign debt crisis abates; banks replenish capital
- China engineers a soft landing, restraining inflation without damaging asset markets
- India overtakes China, becomes the market focus in emerging markets
- Euro regains market confidence, dollar’s share of reserves declines
Is Gold the Canary in the Coal Mine?
Click-to-Enlarge (01/05/2011)
For most of 2010 commodities rallied to new highs, most notably Gold. Since the start of the new year commodities have been selling off, whether this is a just a blip or the start of a new trend it is hard to say. Regardless, Gold failed to break through the triple top at $1,430 and immediate support is now found at $1,360, with further support at $1,315. If $1,315 breaks there is no support till the 100 day moving average (blue line) currently at $1,277. What is important is yesterday Gold broke through a bullish trend line that has been in place since late July.
Time to Turn Bearish on Netflix?
Netflix Chart - 2010 (Click to Enlarge)
Technical Analysis
Looking at our chart above, you can see that moderate support lies down around 165 with a 100 day simple moving average at 160. Trading volume has also slowly been decreasing whether this is due to it being end of the year or just lack of buyers is hard to say. If short, have an initial profit target at 165, with a stop loss at 212.
Valuation By The Numbers
Price to Earning Ratio: 69.27x
52 Week Range: $48.52 – $209.24
Current Price: $180.27
Some other numbers is that the Price to Earnings ratio still comes in at 48 times when considering the earnings forecast for the next 12 months. Netflix also currently trades at nearly five times their annual sales. These are extremely high multiples. Also, the market the Netflix is operating in is ever becoming more competitive which will eventually lead to depressed profit margins.
Here is a more in depth article: Why We Are Short Netflix
The EU Breaking Up Is Not So Far Fetched As It Once Was
Over the last few weeks, we have been noticing that Europe is ever becoming more reluctant to fix the structural problems of their sovereign debt crisis. All Europe has been doing is putting band aids over a infection that has now turned into septicemia with no political will to come up with a cure. Reports have come to light that Germany has threatened to the leave the EU and most recently, Germany is refusing to expand the $750 billion bailout package. Bond yields on European debt slowly grind upward as US rating agencies continue to downgrade the credit worthiness of European countries. Debt levels among European countries has exploded, with some debt to GDP ratio levels at 125%. All the while, countries such as France and Germany have to borrow more to fund the bailouts of the smaller countries who buried themselves in debt. It is our opinion at FXIB that this is only transferring the debt crisis from one country to another country and forestalling the inevitable.
Structural Problems
The EU has a monetary union but lacks the fiscal union necessary to contain the debt crisis. The fundamental problem is that each European country issues its own bonds and has their own fiscal policy, but not able to devalue the currency. This leaves them susceptible to bond vigilantes and in a precarious position. European countries are now tasked with having to produce balance budgets, but not at the expense of hurting their economy and all the while maintaining massive social welfare programs. We don’t have to look far in history to see how this will end up. Looking at US history shows us that monetary unions do not work unless there is a fiscal union. It was 1787 in the US and the states were bankrupt, with out a strong central government, states were resorting to issuing their own currencies, and not coordinated at all in trade. Alexander Hamilton realized that the crisis had finally come to a point that the Articles of Confederation were deemed to be insufficient. The solution to the crisis was for the states to give up their sovereignty and to establish a more powerful central government that could tax, assume the debts of the states, issue a single currency, and issue bonds for the country as a whole. At the height of the crisis in 1787, John Jay wrote “that America had no sooner become independent than she became insolvent”. Now you might be wondering why Europe doesn’t do the same thing to fix their debt crisis. The difference is that Europe lacks the political will and fortitude to give up sovereignty, to form a central government that can tax and issue bonds for the EU as a whole. So we at FXIB believe only two outcomes exist at this point: Mostly likely outcome to happen is that the EU breaks up and reverts to 1999. The other outcome is that in the off chance Europe does get its act together and start working as a team to resolve their political differences, then we expect a government structure that is similar to the US which would support the Euro.
Why American Politicans Should Take Heed of EU Debt Crisis
Even though the US does not have the structural problems that the EU has, the debt load of the US is quickly reaching a point that is unhealthy for the economy and poses a threat to our economic security. Bond vigilantes will not be pre-occupied with Europe forever and once the EU debt crisis reaches a conclusion they will more then likely turn their attention to the US. We have already seen US yields sky rocket over the past two weeks, with the 10 year bond yield at 3.56% as the bond market prices in higher inflation and as the supply of bonds outstrips demand. We at FXIB are split on how high bond yields will go, but what is clear is that the Bond Bubble over the last few years has burst. Higher bond yields not only affect what kind of interest rate our government pays, but what kind of interest rate US citizens pay for mortgages, cars and loans. And this is why our politicians need to pay attention to what Europe is experiencing, because if our politicians continue to spend and bury us in debt we will quickly end up like Europe with our own sovereign debt crisis. For right now, the US is benefiting from the EU debt crisis with the US dollar gaining value against the Euro as more investors dump Euro assets and pile into US dollar assets.
How A EU Break Up Impacts Currency Traders and Investors
I’m sure we’ve all heard the motto: “Hope for the best, but prepare for the worst” this motto aptly reflects our outlook on the EU. For a currency traders and investors, these are very interesting times. You have the US Federal Reserve printing $80 billion more dollars a month which lowers the value of each dollar and dollar denominated assets, then you have the EU that appears to be on the verge of breaking up which is not providing any confidence in the Euro or Euro denominated assets. What is a investor or trader to do? Until the EU debt crisis gets resolved we at FXIB are reluctant to hold Euro’s in our investors portfolios, we feel that it presents too much of a unnecessary risk that we don’t want exposure to. As for investors who may hold European stocks or assets denominated in Euro’s, you can protect your self by using Euro currency futures to hedge against a declining Euro (of course this only works as long as the Euro remains solvent). In the unfortunate even that the EU does break up, we expect each European country to revert back to their own currency like it was in 1999. There will probably be a fixed exchange rate for awhile giving investors/traders who hold Euro’s or Euro denominated assets an opportunity to switch to the “new” currency.
Conclusion
Unless Europe works together to resolve their differences, we see the odds of a EU break up ever increasing. We will be paying close attention to reports over the next few weeks/months regarding the EU and debt crisis. And we hope that our politicians wake up and smell the roses so we don’t end up like Europe.
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