intermarket analysis

Carry Trade And Aussie – Explained

Forex Kong 13 Comments

You’re learning about currencies….you’re seeing the impact in markets – you’re having some fun. Who knows? Perhaps a few of you are even getting in there and placing a trade or two – good for you.

An important distinction to make when trading currencies, is to understand what “role” they play in the global economy “aside” from their normal function as a “token of value” in the given country of origin.

We all use money – yes…..but big banks use money in entirely different ways. Ways that can affect global markets regardless of “who” or “where”. I’ve mentioned the Carry Trade many, many times and encouraged you to read up  – as it is the most basic and simple example of how banks use “your savings” behind the computers and digital printouts – in order to generate massive profits. You don’t honestly think the money is just sitting there in a vault do you?

Banks ( as well Kong) utilize cash on hand to fund ventures via many foreign exchange strategies in order to turn profit. You are happy to see the printout on your stub when you check the balance – while your actual money is likely being put to work….far, far away in some foreign land.

Simply put – If I can walk in a bank in Japan and borrow money at next to “zero” % interest – then take that money and invest it in Australia where even the base savings account rate is 2.75% – boom – Carry Trade on.

So….the Aussie. The Australian economy has flourished over past years and in turn has been able to offer a considerably higher rate of return on savings than many other countries. So in times of “risk on” money flows to the Aussie like the Ganges River! As big banks ( and Kong) borrow low yielding currencies ( JPY and USD ) and purchase those that offer better returns. Simple as that.

Unfortunately we’ve got a problem here though. Australia is currently in its own “easing period” and has plans to further lower its interest rates ( as Japan as well the U.S has ) in order to keep the economy moving. This puts pressure on Carry traders with the knowledge that the Aussie will continue to “cramp this trade” as it continues to lower its rates….closing the gab between 0% and 2.75% ( not long ago it was 4.50%!) smaller and smaller as the Carry Trade starts to lose its appeal (viability).

This is of incredible significance on a global scale ( and another contributing factor in my longer term view ) as to provide further pressure on an already fragile global banking system. When big banks (and Kong) have one of their largest revenue streams / cash cows producing smaller and smaller returns, in a global environment that is clearly slowing – all the money printing in the world can’t make that one go away.

The Australian Dollar has taken a huge hit already, and as much as I had originally been looking for a solid bounce before getting short ( which I am still going to do ) I am confident that what this really suggests is that the big money has already been backing out in preparation for much further losses to follow. Nothing short term will change my mind about this…as I do look for higher levels in AUD – to sell, sell , sell , sell , sell.

Stunned At The Bullishness – Risk Off

Forex Kong Got something to say?

I am absolutely stunned!

I’ve been on and on about this for literally months now….watching TLT seeing the trouble ahead with bonds, and in turn the USD  – as equities are ALWAYS the last to go!

https://forexkong.com/2013/04/20/intermarket-analysis-questions-answered/

This should have served as a roadmap for your preparation – and at this point there really are no excuses.

This market has absolutely tonnes of room for correction. I can see several JPY pairs easily shaving -1000 pips and still maintaining there trends, and USD has got nothing but “air” underneath it here all the way down to like… 79.00

In any case – I don’t suggest taking this lightly as my “short U.S equities” has also been triggered.

Good luck all.

3% more overnight alone on Long JPY trades that equate to one thing…and one thing only.

RISK OFF.

Why Markets Are Moving Lower

Forex Kong 6 Comments

As much as the Fed would have you think otherwise ( as the current chatter of “QE tapering” leads headlines) markets are “selling off” for exactly the reasons that a market “should” sell off. We’ve been over this on several occasions as the SP 500 looks set to reverse at more or less the exact spot we’d looked at some weeks ago.

SP 500 Upper Level Resistance

What I find particularly amusing about this – is how the media and Fed are doing all they can to suggest the reason for this weakness is the Fed’s recent “whisper” that it may taper it’s QE programs, when in reality nothing could be further from the truth!

The market moves lower on poor guidance and “so so” earnings, weak global growth projections – and all the other “normal reasons” that markets move.

The Fed wants you to believe this “downturn” is due to the potential withdraw of stimulus – so you will applaud more stimulus! The Fed/media  is “aligning itself” with the current weakness as to look like ” the hero” when time comes for the announcement of FURTHER STIMULUS.

As the summer correction runs its course – markets will be “begging” for answers, begging for understanding as to “why it can’t go up forever! “why! why Ben why!?”

It can’t go up forever because at some point….some point – the fundamentals will indeed catch up with the QE freight train.

I remain short USD and long JPY against nearly everthing under then sun – as a “currency salad” I look to enjoy this summer. I may however put the bowl down at a moments notice as Central Bankers have been known to spoil the odd picnic.

 

 

 

 

Kongonomics – Japan In Real Trouble

Forex Kong 12 Comments

“The following is taken largely from the newletter of John Mauldin”

After the collapse of what might still be the largest economic bubble in history, in 1989, Japan is still mired in a 24-year non-recovery. Nominal GDP in 2011 was almost exactly what it was 20 years earlier, in 1991. You can find other ways to measure nominal GDP which indicate limited growth; but compared to the US and China, nominal growth in Japan has been virtually non existent.

Japan’s gross debt to GDP ratio is expected to top 245 per cent this year, according to estimates by the International Monetary Fund – which is considered to be “ridiculously high”.

They cannot continue to grow their debt at the current rate. There is a limit. No one knows for sure what that is, but it is getting closer. And they know it. So they have to get their fiscal deficit below the growth rate of nominal GDP.

If JGB (Japanese Government Bonds)  interest rates rise 2% in Japan, then the government must pay almost 80% of its revenues (as currently received) just to cover the interest on its debt. Even a 1% rise would be fiscally devastating.

The Abe government plans to raise taxes. Japan’s current sales tax is 5%, due to increase to 8% next year and 10% by 2015 with hopes of generating further revenues , but this will also hurt consumer spending. So round and round it goes.

The government of Japan has no choice. Prime Minister Shinzo Abe’s radical experiment with macroeconomic stimulus will create a debt and monetary overhang so huge that it may just bankrupt the financial system and quite possibly trigger hyper-inflation, and at this point – there is no turning back.

I’m watching this closely as my theory that the “EU Zone” would be our catalyst for “global fireworks ahead” may very well be replaced by Japan as this is developing extremely quickly.

I believe the “easy money” short JPY is now gone, and am currently positioned “long JPY”.

Nice call Kong! The Nikkei is down a wopping -2,500 points since your post : https://forexkong.com/2013/05/25/nikkei-20-year-chart-rejection/

Nikkei – 20 Year Chart Rejection

Forex Kong 15 Comments

For the past several weeks the real story has been Japan’s amazing efforts to weaken the Yen – and in turn drive it’s stock market “The Nikkei” to the moon in the process.

Regardless of what you might think (with respect to recent data coming out of the U.S or even the latest stream of “upbeat earnings” from U.S companies) – the primary driver ( actually  “the only” in my view ) to higher equity prices in the SP500 has been the massive liquidity injections by The Bank of Japan coupled with Uncle Ben’s usual 85 billion per month.

We have now ( and finally ) reached a point where there is absolutely no question that we are in “bubble territory” as even the Fed is now doing what it can to “talk down” its own stimulus (which we all know can’t happen).

The correlations laid out here have been very straight forward. “Nikkei up = Yen down” and “SP 500 up = USD up”.

What’s interesting when we “zoom out” (and look at much longer term charts such as the last 20 or so years of  The Nikkei) we see that nothing is really that far out of wack.

The Nikkei has been rejected at the downward sloping trendline of “lower highs” – for the last 20 odd years running.

Nikkei_Longer_Term

Nikkei_Longer_Term

So once again we are left to consider if indeed the massive amount of money printing and central bank intervention can truly..TRULY…make a lasting difference in the growth of a given economy…or merely provide a brief “reprieve” from the pressures therein.

As the Nikkei corrects lower – so will USD.

I remain short USD….and look to get long JPY in coming days.

Japanese Bond Implosion – Explained

Forex Kong 4 Comments

As I’ve pointed out many times before, it’s important to understand the relationship (and intermarket dynamics) played out between bonds, currency and the stock market. In this case we’re looking at Japan whos recent “money printing fiasco” may have set in motion a domino effect across these asset classes – with a potentially catostrophic result.

The Japanese stock market “The Nikkei” is down aprox -1000 points as of this writing. Tha’ts over 7% drop overnight alone.

The following video outlines the potencial pitfalls of access money printing, as well provides an excellent “road map” for where the U.S is headed shortly.

WATCH THIS SHORT VIDEO – IF FOR NO OTHER REASON THAN TO BETTER YOUR UNDERSTANDING OF BONDS, INTEREST RATES AND MONEY PRINTING.

[youtube=http://youtu.be/Njp8bKpi-vg]

Markets Want Bad News

Forex Kong Got something to say?

You see – since the recent “jawboning” from the Fed (with suggestion that they might consider “tapering” their current QE program) the markets have perked up and taken notice.

Off the top of your head you’d imagine – this is a good thing! Less QE – suggesting a growing economy with no need for additional stimulus….and if the Fed is considering tapering off QE – that must be indication that things are improving etc….

WRONG.

Wall street knows (without question) that once the “kool-aid” is turned off – its lights out. If Ben where to stop buying all the new bond paper ( can you believe like 80 % of it! ) yields would literally skyrocket overnight ( in order to entice foreign bond buyers – the rate of interest paid on those bonds must move higher) and BOOM – Greece in a handbag.

NOW – with the wonderful contribution from your local media – YOU WILL WANT TO HEAR BAD NEWS ABOUT THE ECONOMY/ JOB GROWTH ETC – SO YOU CAN GO BACK TO SLEEP KNOWING THAT QE WILL NEVER END.

The “spin” will now be reversed…. to ensure that the general public will once again “support” more money printing.

Bad news will now be perceived as good news – cuz you know…….the Fed’s got your back.

 

 

The Fed, Gold, Stocks and USD – Explained

Forex Kong 4 Comments

The most reasonable explanation for the continued U.S dollar strength ( making a fool of good ol Kong here ) is two-fold in my view.

1. The massive amounts of liquidity provided by the Bank of Japan is most certainly spilling out  – and into U.S equities. In order to make those equity purchases – your foreign currencies need to be exchanged for US dollars ( through which ever institutions / brokerages these stock purchases are made) so as “hot money” looks to take advantage of the continued pumping of U.S equities by the FED and his “banksters”, USD goes along for the ride.

I have been considering a time when both USD and U.S equities would fall together ( and had assumed that time was now ), and now am even more certain of this market dynamic – as we clearly see the two continue to rise together.

How far it can go now is anyone’s guess as the upward break in USD coupled with the complete detachment of U.S stock prices from reality – have both blown right past/through any prior levels I had in mind. Chart patterns and lines of support and resistance have absolutely zero value in a market as rigged as this.

2.The Fed’s continued manipulation of the Gold and Silver markets ( in order to drive prices lower, and mask the massive dilution / devaluation of US dollars via 85 billion in printing per month) and artificially low-interest rates (providing “savers and retired folk” zero on their money) coupled with the massive bond purchasing program has achieved its goal in essentially “snuffing out” any other viable investment opportunity – other than the U.S stock market.

If the Fed was to stop buying U.S government debt or allow the price of Gold to accurately reflect the massive devaluation of the dollar – the entire thing would collapse within days.

Check out this chart of U.S Macro Data ( at it’s worst in 8 months ) compared to the S&P 500.

US_Macro_Data

US_Macro_Data

The higher this parabolic rise goes – the faster / harder it will fall, giving the Fed exactly what it wants……justification to print even more money.

One seriously needs to question – whose interests does the Fed truly serve?

Certainly not those of the American people.

 

Gloves Off – Let's Do This Ben

Forex Kong 7 Comments

We’ve skated around the issue long enough and I’m about ready to get this done. I’m throwin ‘ em down – my gloves are off!  Common big boy! – Let’s do this!

They say “don’t fight the Fed! Kong – Don’t fight the Fed!” – well……..this guy can shoot fine, and he’s pretty good with the puck – but can he fight? Can “Big Ben” fight?

I’m cruisin the neutral zone lookin to find out fast, as that good ol Canadian “fightin spirit” comes alive. I’ve had it with this guy. It’s “Go Time”!

He he he…..seriously though – I do find it fitting that hockey is the only team sport on the planet (that I’m aware of) where you are given complete and total reign to “beat the living daylights” out of your opponent while the crowd cheers you on. If it ever happened in American football or soccer, tennis or water  polo – you’d be suspended for life.

In any case….to put the “naysayers” to rest – and to alleviate the current bordem on my end – let’s look at it this way.

For every single point higher we see the SP / Dow move higher – I will add “two points” to any number of “bearish currency plays” for as long as it possibly takes – to call this guy out and beat the living daylights out of him.

This has gone past the point of  “antagonizing” – and my patience has worn thin.

I imagine we’ll dance a little longer and that’s fine – but we’ve all got our limits. I’m not lookin for any more of these “assist plays” and I’m already a top scorer so……..it’s time to see what choo got.

2% on the day and likely the week – as I’m on the bench here this eve.

 

 

Australia Now Cuts Rates – China Slowing?

Forex Kong 8 Comments

Markets got a bit of a surprise overnight as the Reserve Bank of Australia again slashed its key interest rate by yet another 25 basis points. That brings it to a record low of  2.75% – and the absolute lowest I can imagine it going for some time.

The Aussie (AUD) got absolutely pounded across the board overnight – losing ground to practically ever single currency on the planet. With troubling data coming out of China (Australia’s biggest trading partner) “fundamentally speaking” this can’t be seen as very good news. The AUD was only a short time ago yielding 4.75% and has taken a 200 point haircut over the past 18 months .

Short term we can see the selling pressure in AUD is obvious, and will likely provide some trade opportunities on the long side – however, I would be very cautious and not rush into anything there. Looking longer term I see this as yet another sign that the Global Economy is no doubt retracting – and that even the “best of the best” ( as Australia is generally seen to have a solid economy) are making moves in preparation.

I see the USD rolling over again here this morning as suggested and will watch closely – although commodity currencies such as AUD and NZD have also been selling off so once again – a very difficult fundamental background.