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Why was Euro’s rally short lived? And Other pairs

Stock-Markets / Financial Markets 2010 Nov 23, 2010 - 04:09 AM GMT

By: Bari_Baig


Now, the Irish bailout package seems to be a “limited relief”, to us market had plenty of time to observe and then act accordingly before the markets opened around the world as Ireland went to IMF on “Sunday”.

So, how does the aid package be blamed when Media itself has two views and are now blaming Moody’s Rating Agency as it stated it “expects shift of bank debt onto the government balance sheet would likely result in a “multi-notch” downgrade to Ireland’s Aa2 credit rating, which is currently under review.” This then simply goes on to prove our point which we’ve stuck to regardless of when the seas where calm and we’d state it again that “Euro has not gotten strong because of its fundamentals [BUT] the rally was purely due to weakness of U.S Dollar”

The problem of Euro debt issue is like that of a riddle whose answer every has a fairly good idea about but no one wants to take that leap of faith just because the “Answer” seems rather too simple thus creating doubt that it may be incorrect.
It is then not just Euro which is under very serious pressure but so is Cable or should we say the European currencies are having a bad start to their week. We on Friday stated a break below 1.595s could materially disrupt the trend and the probability of British Pound visiting recent lows of 1.57s becomes quite “real”. As we write cable is now precisely at 1.595s down from1.6050s which is one full Big figure lower. At this point however, Cable is somewhat oversold but an extended sideways trend could do more damage than serve as consolidation for the parity right thus increasing the probability of Cable falling sharply by 1.5 figures from here on to 1.58 flat by tomorrow.

Moving on to land of Kiwis then, it seems the credit rating agencies are once again tightening their clutches as the big news was a warning given by S&P of possible downgrades. S&P has only fired the warning shot as no cut in the rating has taken place but at the same time has changed the outlook from stable to negative which sends out a signal that rating cuts not just by S&P but Moodys and Fitch might be on their way.

S&P has downgraded the outlook due to worrisome deficits and growing credit risks which are associated to the banking system in New Zealand. As Kiwi Dollar weakens we cannot rule out Aussie Dollar taking some of the negativity being New Zealand’s neighbor as Australia too has a rather large deficit almost 2.4% of its GDP. Unlike past two trading sessions, this week seems much more exciting for the Forex trading.

Crude is holding but [Now] its days seem numbered: The news out of Saudi Arabia is one which is giving just that much more breathing room to Crude otherwise by now it seemed the nail which Crude WTI hammered in place over an entire month of October would have been taken straight out. We are referring to Saudi King Abdullah whom has flown out of Riyadh to U.S for health reasons. From what we know, the King is suffering from a blood clot. Whenever there is any issue with the Royalties we know it puts a bid on Crude therefore this then shall be that breathing zone for Crude.

The spread between WTI and Brent have again widened and this time quite materially. As we write the spread is now in excess of $2.5 per barrel between the blends which is touching on the levels where we “normally” give a buy call on. We’d not give a buy on crude as we expect correction and as the bottom of $81 per barrel has yet to be tested. Another thing working in advantage of Crude right now is the relentless narrowing of the contango. It is very interesting for one reason as several weeks ago or more like over 6 weeks back when the widening of the contango was unstoppable and the gap kept widening over months. A narrowing contango signifies lesser bid for storage. The contango now stands at $2.26 which is approximately $4 below the high witnessed a few months back. We maintain our stance on Crude to trade down to $77.8s however, we are becoming very much concerned as failure to hold $77.8s by WTI would result in further depreciation.

The yellow color denotes [alarming situation]: This brings us to Gold the yellow metal. Gold has been holding a very tight range since the violent swings of last week. It then is in a sideways trend and as we indicated in our article [Why was Euro’s rally short lived? And Other pairs] that a sideways trend in Cable would only make it weaker the same is then applicable on Gold too. The range thus far has been between mid $1,350s to mid $1,360s with a high bias towards the former levels. The green back is slowing marching towards the highly important level of 79.6 and as the inverse correlation between commodities and Green back has returned therefore the probability of the range being broken to the lower side is mounting by the trading session. We are now further lowering our initial correction of Gold from its highs of $1,425s to $1,240 or 14% down by $22 per oz to $1,218s.

The pivotal region now stands at $1,320s and keeping in view the violence is Gold swings it is then not difficult to imagine that the suggested pivotal region would be put to test during this current trading week. We already recommended that at break of $1,305 we’d add to our short we’d now start adding from $10 per oz up from $1,305.Commodities are calm, [majority of them] we sense the calm before the storm then. Be very vigilant!

The Left over wave: Asian Equities saw the best light of the day in terms of gains as the earth kept rotating the noticeable change was in Green back which strengthened which resulted in currencies weakening which led to bonds gaining and subsequently that right there is a negative sentiment for the equities! The optimism of the street is now slowly fading away as Irish bailout is now not a rumor but a very real fact.

U.S equities which we more on a sideways trend are trading in the red side of the table meaning they are down. We emphasized not once but have been insisting time and time again since last week that equity markets have now topped out and any gains now should be capitalized by selling not by adding to Long positions.

We maintain our sell side on Dow until 10,778s however; S&P500 is becoming even more dangerous as a break of mid 1,175s could result in further opening towards the downside to 1,155s.

Today was the first trading session for KSE after Eid Break and the optimism was [Impressive]. First up, do we expect similar optimism tomorrow? We do not! Absolutely not! We’d be too naïve to even contemplate on such an occurrence! That is that. Now, coming to why we don’t see market carrying today’s positivity into tomorrow. On November 10th when KSE managed to break the top of 10,770s we projected that KSE shall extend the move by 4.6% of roughly 500 index points which is roughly 11,270s. KSE however, managed to trade 11,211 today which is only shy by 66 index points from our target. One thing which we always stress upon is target. Once the target is achieved or is nearing one should then not play or start adjusting those targets in hopes of “profiting more” because that is [Greed] dictating one’s sentiment and not the intellect. We were sellers today and we shall maintain our selling right at the open of the market.

By Bari Baig

© 2010 Copyright Bari Baig - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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