CITI - EUR/USD: 3 Reasons To Hit 1.40 S/T & 3 Reasons To Sell There

EUR/USD hit new multi-month highs in the wake of the debt ceiling deal as the price action reflected USD-selling on the back of expectations of delayed Fed tapering. In this regard Citibank thinks that EUR/USD could outperform in the near-term targeting a move towards 1.40. Citi outlines 3 reasons behind this view:

 1/ EUR may be among the prime beneficiaries given its status as the second most liquid reserve currency. Peripheral risks in Eurozone are no longer rampant like in 2011 and this should add to attractiveness of the euro denominated assets.

2/ USD may suffer more if risk appetite remains supported given that the Fed is implementing its most aggressive easing policy to date and that the tail risks of euro break-up are no longer on the table.

3/ A potential rating downgrade could strip the US off its average AAA-rating. This may force some central banks to rebalance away from UST and move into liquid alternatives like Bunds and 

If such a move materializes, then it could be a good selling opportunity as EUR/USD gains may not be sustained as we move closer to multi-year highs of 1.4000, Citi advises. Citi outlines 3 reasons behind this view

1/ In particular the ECB need not tolerate ‘excessive currency gains’ that may jeopardize its inflation mandate.

2/At the same time Citi still expects the Fed to head towards QE exit at some point in early 2014. The diverging policy outlook between accommodative ECB and more data dependent Fed could limit any EURUSD gains and usher the next leg lower in the currency pair in coming months

3/ Another LTRO could be very much on the table before long which would be EUR negative. 

Read more: http://www.efxnews.com/story/21279/eurusd-3-reasons-hit-140-st-3-reasons-sell-there-citi

Read More

NOMURA: The Chinese Recovery Is Over

Last night, China posted solid growth of 7.8% for Q3.

One of the themes this year has been China outperformance. While many emerging markets have slowed precipitously, China has held on pretty well, which is ironic given all the hype about a "hard landing"

But according to Nomura economist Zhiwei Zhang, this is it. This quarter marks the top, and now we're about to see deceleration. In part, it's because this quarter and recent ones have been driven by unsustainable investment spending that can't continue, while leading indicators and other measures we've seen for September are already showing a slowdown.

Leading indicators of activity suggest China‟s recovery ended in September. Both investment growth of on-going projects and new projects slowed by 0.3pp and 1.1pp from August, to 18.6% y-o-y ytd and 13.3% y-o-y ytd, respectively, which does not bode well for investment growth down the road. In the property sector, growth of floor space sold slowed further to 23.3% y-o-y ytd in September from 23.4%, while growth of floor space started picked up to 7.3% y-o-y ytd from 4.0%.

The rate of decline of land area purchased eased in September, to -3.3% y-o-y ytd from -9.1% in August. Collectively, this suggests an increase in housing inventory which is likely to pressure the property sector in future. We maintain our view that the recovery ended in Q3 and that GDP growth will slow to 7.5% y-o-y in Q4 and 6.9% in 2014. We see downside risks to our Q4 GDP forecast. We have argued that China‟s recovery is fundamentally unhealthy , as it has been mainly driven by heavy industry and stands in contrast to the principles recently espounded by both President Xi Jinping and Premier Li Keqiang – that a lower rate of GDP growth can be tolerated to ensure a better quality of growth in the future. We expect the government to cut its growth target for 2014 to 7% in December in an effort to contain financial risks such as local government debt risk.

Read more: http://www.businessinsider.com/nomura-the-chinese-recovery-is-over-2013-10#ixzz2i70hTqs0

Read More

JPMorgan Has A Simple Money-Making Trading Algorithm That You Shouldn't Try At Home

Looking for a simple way to outperform the market on your international equity index portfolio? Here is a simple algorithm from JPMorgan (warning: do not try this at home). Select two countries with the worst performing currencies (against USD) over the past 4 months and go long equity indices of those two countries. Now select the two best performing currencies and short the indices of those countries (to the extent that's possible). Repeat the exercise once a month. If you back-test this simple strategy, you get the following excess returns.

Hard to believe, right? Obviously there is friction in shorting equities of certain countries and the "actual returns may vary". Nevertheless this is telling us that currencies drive equity returns for many nations.

The explanation seems to be tied to exports. Exporters' shares and firms that support them, such as developers, raw materials firms, banks, etc.  perform better when a nation's currency is weak. The opposite holds true as well - strong currencies make exports more expensive, creating drag on revenue. This simple strategy therefore points to the rationale for "currency wars". Want a stronger stock market in the next few months, weaken your currency. You may end up with other problems, such as inflation, but the stock market should do well.

Take India for example. After the rupee took a massive beating this summer (see post), inflation has picked up and the economy has slowed.

Econoday via Sober Look

Yet SENSEX, the broadly watched stock market index, is now at a 3-year high.

This post originally appeared at Sober Look. Copyright 2013.

Read more: http://soberlook.com/2013/10/this-simple-trading-strategy-points-to.html#ixzz2i3JmNKjU

Read More

BofA: Debt Limit Timeline: When To Worry

As of 8th October, the Treasury had $32bn of cash balance and $92bn in debt manoeuvre capacity, according to our estimates. The sum of these two, $124bn, reflects the actual payment capacity of the government. The Treasury can shift funds between the cash balance and debt manoeuvre capacity by issuing cash management bills or shrinking/ raising regular bill sizes, within the overall payment capacity.

October 17th: The Treasury will run out of debt capacity. However, we do not attach any importance to this date, as payment capacity will still be $70bn, according to our estimates. According to the Treasury, they will be down to $30bn in cash by October 17th, suggesting they can continue to meet their bills for a number of days longer. But the date maintains symbolic and political importance for the negotiators, so the passage of this date without a deal would likely be met by a risk-off trade. Also, after this date, all coupon bond auctions would likely be deferred in favour of rolling cash management bills.

October 31st: Payment capacity drops gradually to $22bn on October 31st, still enough to pay the $6bn coupon and roll over the bills maturing on this date, according to our estimates.

November 1st: The Treasury’s payment capacity will run out due to large Social Security, Medicare, defence, and veterans payments of around $67bn. We project that only half the payments on this date can be made. It is very unlikely that the Treasury will be able to pay all its obligations on time on or past this date. However, it is conceivable that bills maturing after Nov 1st can still be rolled over with new issuance, since the effective interest that needs to be paid every week is around $10mn, a rounding error in budget terms.

November 15th: The Treasury would theoretically almost certainly default on its debt, if no debt limit deal is reached by then, since the coupon payment of $31bn is exceptionally large. There is still some uncertainty to our forecasts, but so far, the daily cash flows would tend to cause an extension of the deadlines, given the effect of the shutdown that has reduced expected federal outlays by about $2bn per day. One uncertainty is the purchase of Treasuries for the highway trust fund on Oct 15, but we do not expect it to be large enough to make a difference to the crucial Nov 1 and Nov 15 deadlines.

We still expect a last minute deal to avoid a US default, but this will most likely be a temporary solution. A short-term deal to raise the debt-ceiling by 4-6 weeks could pass

soon and will provide markets with some relief. However, as long as part of the US government remains closed, the economy will increasingly feel the pain. A temporary agreement that also includes the continuing resolution would be a positive surprise. But even in this case, the time that such a deal would buy could be wasted without a permanent solution.

Read More

BNP - Long USD Vs EUR & GBP Remain Attractive Opportunities

Since the start of the week, the tone of ECB comments has been turning progressively more dovish, notes BNP Paribas.

"Following last week’s comments from Nowotny on the EUR’s strength, another ECB policymaker said on Monday the ECB was prepared for negative deposit rates. Although these comments are having little market impact against the backdrop of on-going US political uncertainty, we suspect they will play into a EUR sell-off once those uncertainties are resolved. Indeed, the EUR is already trading well above levels implied by relative interest rates," BNPP adds.

"Similarly, we expect the GBP to be vulnerable to an eventual USD bounce back due to both positioning and some further softening in in data, where our UK economist expects a below-consensus print on the September retail sales later this week," BNPP projects.

In line with this view,  BNPP holds a short EUR/USD position from 1.3510, targeting 1.28 with a stop at 1.3730. BNPP also holds a short GBP/USD position from 1.6040, targeting 1.5330, with a stop at 1.6310

Copyright © 2013 eFXnews

Read More

DANSKE: EUR/USD, AUD/USD: Flows, Valuations, Risks, & Forecasts

EUR/USD: Flows. The euro-zone current account surplus continues to rise, while the US is stuck with a deficit. The combination of the ECB’s OMT programme and the eurozone escaping recession should help attract capital again. Trading accounts are likely still long EUR.

• Valuation. EUR/USD is not far from its PPP level. Also, our short-term models suggest that fair value for the cross is close to 1.35 at present.

• Risks. A prolonged US government shutdown could weigh on H2 activity data and/or provide the Fed with little visibility on the economy and postpone tapering as key releases are cancelled; this could weigh on USD. ECB may fail to react should short-end eurozone rates rise further as excess liquidity falls; this would support EUR.

Forecast: 1.33 (3M), 1.30 (6M) and 1.27 (12M)

AUD/USD: Flows. Speculators remain short AUD, which could limit further downside in the near term.

• Valuation. The recent fall in AUD/USD has brought the pair down to a level where overvaluation is only half of its postn)

• Risks. The summer sell-off in AUD has come about very fast and a near-term correction cannot be ruled out should China and or commodity prices surprise on the upside.

Forecast: 0.93 (3M), 0.90 (6M) and 0.87 (12M)

Conclusion. With the RBA now on hold and some carry currencies temporarily back in favour, we could see a pause in the AUD downturn. But looking into next year, AUD will have to fall and/or the RBA will need to cut rates to foster the rebalancing of the Australian economy as the mining boom fades. With a USD trough in sight, the potential for AUD/USD to edge lower thus remains in place. On a 3-6M horizon AUD/USD could remain under pressure as the struggling non-mining sector in Australia contrasts with a decent US outlook and the RBA and the Fed are likely to act accordingly.

Read More

Chinese September Money Data Disappointing

Chinese September money numbers cast doubt on hopes that the economy is regaining momentum.

Six-month growth rates of real M1 and M2 fell last month and have declined significantly since spring 2013, towards levels reached during the 2011-12 “hard landing” scare – see chart. This suggests that economic expansion will slow in late 2013 / early 2014 unless exports pick up on the back of stronger global activity.

Six-month real money growth, moreover, is below that of industrial output, based on an August number for the latter*. There appears, in other words, to be no “excess” liquidity available to boost asset prices.

The fall in real money expansion in September partly reflected a food-driven rise in inflation – likely to reinforce an official bias against further monetary policy easing at present.

Read More