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March 31, 2012

Europe Sets Firewall Kitty at 500 Billion

Filed under: Forex News — Tags: , , , , — admin @ 3:09 am
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Tradervox (Dublin) – European Finance Ministers have capped the firewall kitty at 500 billion Euros after Germany led a coalition to oppose a further expansion of the region’s firewall power.  This comes as a shock to traders who were expecting a consensus in building a larger firewall kitty. However, the 500 billion lending capacity excludes the 300 billion Euros already given to Ireland, Greece, and Portugal.

Therefore the overall size up to 2013 will be 800 billion Euros but after that the kitty will be at 500 billion Euros. The Finance Ministers did not approve the use of the remaining 240 billion Euros in the EFSF but they indicated that the money would be used to add to the ESM kitty to its full amount of 500 billion dollars.

Austrian Finance Minister Maria Fekter was the first to talk to the press at the meeting indicating that the European leaders have now acted as expected by the IMF and as agreed at the G-20 meeting. Maria Fekter was also quick to add that the sum fixed is important and now the EU is expecting the pledges from the IMF to follow. Euro zone is counting on the pledged amount and the 1 trillion Euros injected by the ECB as a stimulus package.

This new development will affect the bullish trend of the euro as it was expected that the European leaders would endorse an expansion of the kitty to 940 billion Euros. Dutch Finance Minister Jan Kees de Jager indicated that incase the 500 billion in fresh capital is not available the region guarantees the availability of the 240 billion Euros in the EFSF. In reality, this is the only amount that is available excluding the 308 billion Euros that have already been committed to Portugal, Ireland and Greece.

The Chairman of the Finance Ministers meeting canceled his press briefing after the Austrian Finance minster talked to the press before him. Traders are looking forward to a formal statement from the Chairman of the Finance Ministers Jean-Claude Juncker.

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EURUSD Trendline Support Stops Drop

Filed under: Business — Tags: , , , , — admin @ 12:27 am

240 MinuteBars

One can make a case that the decline from 13485 and advance from 13003 composes waves 1 and 2 of the next bear leg. That may be the case but from a trading standpoint I would wait until next week before doing anything. Aside from being important with respect to price extremes (highs/lows), a new month sometimes triggers a change in market conditions as well. 13190 is the pivot and resistance is 13415 (one more high may complete the advance).

March 30, 2012

Renewable Technologies and our Energy Future – An Interview with Tom Murphy

Filed under: Forex News — Tags: , , , , , — admin @ 3:09 am


Rising geopolitical tensions and high oil prices are continuing to help renewable energy find favour amongst investors and politicians. Yet how much faith should we place in renewables to make up the shortfall in fossil fuels? Can science really solve our energy problems, and which sectors offers the best hope for our energy future?

To help us get to the bottom of this spoke with energy specialist Dr. Tom Murphy, an associate professor of physics at the University of California.

Tom runs the popular energy blog Do the Math which takes an astrophysicist’s-eye view of societal issues relating to energy production, climate change, and economic growth.

In the interview Tom talks about the following:

Why we shouldn’t get too excited over the shale boom

Why resource depletion is a greater threat than climate change

Why Fukushima should not be seen as a reason to abandon nuclear

Why the Keystone XL pipeline may do little to help US energy security

Why renewables have difficulty mitigating a liquid fuels shortage

Why we shouldn’t rely on science to solve our energy problems

Forget fusion and thorium breeders – artificial photosynthesis would be a bigger game changer Whilst you have proven that no renewable energy source can replace fossil fuels on its own. Which source is the most promising for providing cheap, abundant, clean energy?

Tom Murphy: First let me say that I think “proven” is too strong a word. But yes, I have certainly indicated as much. When it comes to cheap, clean, and abundant, I am drawn to solar. I don’t care if it’s two or three times the cost of fossil fuel energy that’s still cheap. Abundance is unquestionable, and I don’t see manufacturing as being inordinately caustic. The fact that I have panels on my roof feeding batteries in my garage only confirms for me the viability of this source of energy. Wind and next-generation nuclear also deserve mention as potential large-scale sources. Yet none of these help directly with a liquid fuels shortage. Bill Gates has stated that innovation in energy can take 50-60 years to take effect. How then do you believe that that the ARPA-E’s short term objectives for projects can be helpful for solving current energy problems?

Tom Murphy: I applaud any effort that takes our energy challenge seriously, and gets boots on the ground chasing all manner of ideas. If nothing else, it raises awareness about our predicament. At the same time, I worry about our technofix culture with a tendency to interpret news clips about ARPA-E projects to mean that we have loads of viable solutions in the hopper.

Many of the ideas are just batty. And right to the extent that implantation of innovation can take decades, we may find ourselves in a squeeze wondering where all those funky news blurbs went. What do you think is the most exciting energy science or energy technology being researched at the moment?

Tom Murphy: As cautious as I am about techno-giddiness, I do have the giggles for artificial photosynthesis. Combining universally available sunlight (in my own backyard) with a liquid fuel that can support personal and commercial transportation on land, sea, and air with minimal changes to infrastructure is too juicy for me to resist. More so than thorium breeders or even fusion, this is a real game-changer. The catch is that our finite periodic table may not avail itself to our wishes. Groups are now shaking the periodic table by its ankles, hoping that some new and unappreciated catalysts clank to the floor. I’m rooting for them, but at the same time advocate not relying on its realization. A recent report stated that replacing all coal based power stations with renewable energy, would not affect climate change, and in fact after 100 years the only difference would be a change of 0.2 degrees Celsius. What are your views on climate change?

Tom Murphy: I see climate change as a serious threat to natural services and species survival, perhaps ultimately having a very negative impact on humanity. But resource depletion trumps climate change for me, because I think this has the potential to effect far more people on a far shorter timescale with far greater certainty. Our economic model is based on growth, setting us on a collision course with nature. When it becomes clear that growth cannot continue, the ramifications can be sudden and severe. So my focus is more on averting the chaos of economic/resource/agriculture/distribution collapse, which stands to wipe out much of what we have accomplished in the fossil fuel age. To the extent that climate change and resource limits are both served by a deliberate and aggressive transition away from fossil fuels, I see a natural alliance. Will it be enough to avert disaster (in climate or human welfare)? Who can know – but I vote that we try real hard. Do you think that the shale gas boom will lead/has led to reduced investment in alternative energy, and could therefore limit the advancement of alternative energy and its mainstream implementation?

Tom Murphy: I do worry about the sentiment that “our problems are solved” based on a very short history of tapping low-hanging shale-gas fruit. David Hughes presented a sobering report to put these claims in perspective. Even though it is clear that shale gas will contribute to our net energy demands in an unanticipated way, I worry that A) extrapolations based on the “gusher” equivalents is risky; B) natural gas is not a direct answer to a liquid fuels shortage; and C) the associated exuberance can stifle the imperative that we have an all-hands-on-deck response to the looming challenges. What are your thoughts on Biofuels? Will they ever be able to compete with fossil fuels? If you were to pick one that you think has the best potential which would it be?

Tom Murphy: The scale of our fossil fuel use prohibits replacement by biofuels at a substantial level. They certainly can and do play a role, which I anticipate will increase with time – up to a point. The energy return on energy invested (EROEI) tends to be pretty poor (less than 10:1) even for the best examples like sugar cane. And it’s a heck of a lot of year-in-year-out work to manage harvests – much depending on the increasingly erratic weather. Of the biofuels, I am most intrigued by algae: mainly because it can be grown and moved about as a liquid medium in sealed tubes. That said, I worry about gunking up the works with bio-sludge, the algae contracting disease, and the fact that we have not yet found/created a viable hydrocarbon-excreting critter. Following the Fukushima disaster many have been calling for the end of nuclear power. What are your views? Should we abandon nuclear power? Are we in a position to abandon it?

Tom Murphy: I don’t think Fukushima should be seen as a reason to abandon nuclear. True, nuclear has its challenges, its risks, its hazardous wastes. But it’s one of the few things we know how to do that can scale. Of course conventional nuclear again stares right down the barrel of limited resources, which is a déjà-vu we would rather not experience. So next-generation concepts, particularly thorium are preferable. Then again, we are not prepared to execute such schemes this moment, so they are not much help in a near-term crisis. And ultimately, like so many things, nuclear is yet another technique to create electricity. That’s not where the pinch will come. I think nuclear will remain part of our energy mix in any case, so I don’t think Fukushima spells an end. What are your thoughts on the Keystone XL Pipeline? Is it vital for America’s energy security?

Tom Murphy: Canada produces something like 1 million barrels per day (Mbpd) of oil from tar sands. This is about 5% of U.S. demand. Ambitious plans call for 5 Mbpd production, but even this does not amount to half of our current oil imports. So could it play a role in America’s energy security? Possibly. Will it guarantee it? Not likely. We should remember that Canada is a separate country. In a global petroleum decline scenario, how much of that oil will Canada sell to the U.S.? How much will China pay for it? How much of this precious lifeblood will Canada decide to keep for themselves?

I won’t say that I’m opposed to the pipeline, but like every other “solution” out there, it’s complicated, and not a crystal clear win. I’ve come across many comments and articles online about human ingenuity and that we shouldn’t be too concerned with peak oil and fossil fuel depletion because our scientists are surely close to an energy breakthrough. Although this thinking is dangerously naive i was hoping to get your opinion on which technology you think is closest to providing this possible breakthrough?

Tom Murphy: I worry about the strength and pervasiveness of faith in science and technology to fix our problems. And I say this as a scientist who is no stranger to high-tech design and development. We deserve better than blind hope that someone somewhere will pull off a transformative energy miracle. Some things peak. We should acknowledge that once our inheritance is spent, we may not live like the kings we want to be. I can hope along with

the rest of us that this isn’t true. But I don’t feel like gambling: I’m the type to cash out when I’m a bit ahead, rather than keep betting my purse that the next hand will hit paydirt. More concretely, I can say that most physicists I meet in departments around the country are not aware of peak oil and associated challenges. Hardly anyone I meet is working on the problem. No one (i.e., funding) has told us this is a real problem that deserves our full attention. And I sense that it would be political suicide to do so. So which technology do I think will save our bacon? Most ideas on the table provide electricity, which does not address our most critical need. As I said before, artificial photosynthesis hits the sweet spot, and batteries are tremendously important. But let’s also prepare a plan B that may be less about techno-fixes and more about behaviors and attitudes. Giant batteries the size of a football pitch are being constructed in order to store energy from renewable sources and release it during times of low power production, for a more consistent supply. Do you think this is the future for renewable energy, or would we be better served creating a giant grid, linking many different renewable sources together so that they can cover for each other?

Tom Murphy: Batteries work, we know. I think we absolutely should be gaining experience on the practical issues/economics of giant batteries. Making large-scale storage more practical resolves the single-biggest technical barrier to widespread solar and wind deployment. I am sceptical about giant grids especially the global variety based on the simplistic notion that “It’s always sunny somewhere.” I am more attracted to resilient local solutions. Transmission loss today tends to be less than 10% on an old, dumb grid. High-voltage DC would reduce this loss somewhat, and the science fiction superconducting grid would eliminate loss (until the inevitable cryogenic failure vaporizes the lines; and let’s not ignore the considerable energy investment needed to keep the lines at cryogenic temperatures). On a moderately ambitious scale, a continental grid will reduce the need for storage, but it will not eliminate it. We still benefit from super-sized batteries. What do you think about the idea that it would be more useful improving the efficiency of current power systems, rather than researching new types of energy production?

Tom Murphy: Efficiency is a lovely thing, and it has always been seen as a lovely thing. Because of this, efforts to improve efficiencies of the big stuff like power plants have been continuous. And we have seen improvements at the level of 1% per year. In rare instances, One can get dramatic leaps via co-generation strategies, but that relies on power plants being situated near demand for waste heat. So realistically, I think incremental efficiency improvement does not have nearly enough bite to “solve” our problem, and in any case tends to be limited to factor-of-two level changes even in the long term. We need much more than that, in the end. I have found behavioural modification to be far more effective, achieving factors of 2, 3, 5, etc. in short order without grossly changing lifestyles. published an article a few months ago on space-based solar plants. Do you think that constructing space-based power plants could be a valuable option in the future?

Tom Murphy: I have to admit to being somewhat baffled by the concept. Why make solar power even more expensive with exorbitant launch costs (which only increases as energy costs increase), placing the equipment in an unserviceable, hostile space environment (cosmic rays, debris) while only gaining a factor of five in night/weather avoidance? The microwave link is no joke either. The required dishes are huge for both diffraction and ground safety reasons. I have just made a detailed post on Do the Math on Spaced based Solar. But let’s think about storage, and save ourselves absurd machinations. Despite the rather public failure of Solyndra and other less well known companies investments in green energy are growing. Which sectors would you be willing to invest in and do you feel offer the greatest potential to investors? Wind, solar, wave, geothermal? Or none of the above?

Tom Murphy: I am not myself an investor, but I would surely like to see more funding for battery research and development, and for anything that can synthesize liquid hydrocarbons using a non-fossil input. Investors want to make money, but I’d rather tackle the important problems. Sometimes timescales make these two goals incompatible. Can you make money on wave or geothermal? Possibly. I’ll leave that for others to determine.

But I’m not too excited about niche solutions, which may distract us from the real prizes to the extent that they exist. What role do you think the smart grid has to play in the future?

Tom Murphy: I’d sooner have smart people than a smart grid, deciding that it’s in our collective interest to scale back energy use at a personal level. Failing that, a smart grid helps distribute demand in such a way that intermittent renewables are more easily accommodated (using energy when it’s available). Some things may work well like this, but I don’t think this is a realistic way to hide variable energy supply from the consumer. They may be irked that they lose control over when the laundry decides to start, possibly resulting in clothes smelling of mildew, or that they are not present to fold clothes at 2 AM when the dryer is finished. Loss of control may not play well. If, instead, informed people accepted limitations of future energy supplies, and modified their own behaviour accordingly under their own control, we would break the habit of people taking energy for granted: an attitude that the smart grid attempts to preserve. We want greater personal awareness of energy, not less. Cold Fusion (or LENR) has been deemed impossible for many years, yet Andre Rossi claims to have mastered it. However he won’t let anyone examine his E-Cat machine, and some believe that it may be a fraud. Where do you stand? Do you believe that he has mastered an “impossible” science, or that the claims of fraud have merit?

Tom Murphy: This appears to be outside the domain of known physics, so I’ll not comment further. The Kardashev scale is a method of measuring an advanced civilization’s level of technological advancement. A Type I civilization has achieved mastery of the resources of its home planet, Type II of its solar system, and Type III of its galaxy. Whilst just a bit of fun, do you think that in the future, whether it be millennia or eons, we will ever reach Type I or Type II, or do you believe it impossible?

Tom Murphy: I think it is fallacious to think that humans will master the energy flow and resources even of Earth. Successful examples of long-term sustainable living tend to see people living as part of the energy/resource flow, but not as masters of it. We are only good at mastery in our fertile imaginations. The real world tends not to care what we can imagine. Titanic hubris. I would rather see humans try to live in equilibrium with natural services, rather than attempt foolhardy domination. Our attempts thus far are not very impressive: we’re failing to hold it all together even now. Popular focus is on the global energy crisis, but an equally important crisis is looming. Rock phosphate is vital for creating fertiliser, which in turn is necessary for producing large quantities of today’s food. It is depleting at a rate similar to crude oil, which could soon mean that the world will experience food shortages. How do you believe this problem could be solved? Should more media attention be focussed on the potential food shortage of the future?

Tom Murphy: Sigh. Another problem we must “solve.” How about this solution: one billion people on Earth would obviate many of our problems. Any takers? Any acceptable path to this state? The original question does remind us that our problems are numerous. It is no surprise that the phenomenal surge in population and living standards/expectations in the last few hundred years – both a direct consequence of exploiting our fossil fuel inheritance – should be exposing fault lines every which way. Aquifers, soil, forests, fisheries, coral, ice pack, and species counts are in decline. The very simple answer staring us in the face, yet somehow unthinkable, is to consume far fewer resources and aim to reduce population. Hopefully we can do this in a more controlled way than nature may enforce if we ignore the myriad warnings. This “solution” will no doubt offend many, but just because we want to continue growth does not mean we can. We need to take control of our destiny, and that starts with us as individuals. Decide to reduce; mentally abandon the growth paradigm. Let’s maximize our chances of preserving our accomplishments by easing off the gas for a bit. Oil companies are mainly driven by the aim of pleasing shareholders, which generally means pursuing large dividends and high share prices. Surely this profit seeking mentality is detrimental to the advancement of green energy technologies, as the companies have little incentive to seriously invest in new types of energy whilst old, cheaper types still exist. What are your views? Is there any way to change this dynamic?

Tom Murphy: I sense that plenty of people are waiting to cash in on green energy, and investment begins to flourish when energy prices soar. But as soon as high energy prices trigger recession, demand flags, prices crash, and the volatility wipes out many green efforts. A year or two of high prices is simply not long enough for a transformation, which takes decades to accomplish. I hope that we can tolerate smoothly and continuously escalating energy prices for conventional sources, but those high prices hurt large segments of the (conventional) economy and self-generate volatility. In principle, governments could “artificially” keep energy prices high enough to maintain the impetus for developing alternatives, pumping the revenue into a national alternative energy infrastructure. But governments are bound by voters who simply don’t want sustained high energy prices. I don’t know how to evade this dynamic in a functioning democracy, except via education about the challenges we face – including a sober confrontation of the fact that failure is a likely result of our not bucking up to the challenge. How would you best describe the current situation with oil reserves? Do you believe we have reached Peak oil or are pretty close to it?

Tom Murphy: The simple observation that a peak in global discovery in the 1960′s must be followed by a peak in production some decades later is unassailable. So we know the decline is coming, as most major oil-producing countries have experienced already. That part is easy, it’s the when that is always hard. The fact that the current petroleum production plateau has hardly budged through factor-of-three price fluctuations is very suggestive that no one has spare capacity at the ready. If we can maintain high prices without re-experiencing a spike and crash like we did in 2008, we might see sub-prime production come online fast enough to maintain the plateau. But A) this might not happen, and B) it’s not a resumption of production growth. So I would not at all be surprised if a decline makes itself clear by the end of this decade. I, would, on the other hand, be surprised to see a 5% increase of conventional petroleum production over recent (plateau) levels. But in the decline case, volatility, deliberate withholding, recession, unemployment, wars, etc. can stir in enough complexity to hide the physical truth from us for years. Will it be obvious to the world when we pass into the land of inexorable decline?

This interview is cross posted with

Thank you Tom for taking the time to speak to us. For those who wish to see more of Tom’s work please take a moment to visit his blog: Do the Math

By. James Stafford of



It’s a lay-up: buy stocks!

Filed under: Currency — Tags: , , — admin @ 2:24 am

“He may look like an idiot and talk like an idiot, but don’t let that fool you — he really is an idiot.”

– Groucho Marx

John Ross asked me this morning if I could create a scenario whereby stocks fall.  I laughed and said, “Well … no!” And maybe that is the point. No doubt ‘if you are not long, you are wrong’ is playing out in spades. But we’ve seen that sentiment many times before near tops.  

The primary thematic shaping up seems the idea that bonds have topped and as this money leaves bonds it will power stocks higher–globally. The idea seems to make sense; but often it is never that easy.  Taking a look at the chart below, there doesn’t seem a heck of a lot of correlation to hang your hat upon, only to say the long-term trend higher in bonds (lower in yields) has been met by a corresponding big run in stocks.    

Let’s consider some reasons why US stocks might NOT go a lot higher and, for grins, maybe even, dare I say it, “correct.”  

  1. A recovery in the US economy could mean finally financial assets will start competing for funds and the Bernanke Put, i.e. QE moral hazard liquidity juice, fades. Bonds would get hit here, but stocks might at least correct.

  2. Bernanke’s concern the job market is still not healed may play out because fiscal stimulus fades as the year progresses. Thus, we have well below trend growth and rising prices for energy and food leading to at least a mild case of stagflation; that isn’t good for either stocks or bonds.

  3. Germany decides to go “all in” and throws its full faith and credit behind a Eurobond for the Eurozone. Immediately, the risk profile improves in Europe. S&P and Moody’s decide it’s time to upgrade European paper and at the same time downgrade US paper given that Washington can make no real cuts amidst ideological squabbling. Lots of capital flows back to European bonds and stocks and out of the US; a possible triple-whammy out of US assets (stocks, bonds, and the dollar).

  4. China financial and social unrest ramp up and the Communist Party is at odds on stimulus given their concern about inflation; therefore it’s better to have security locally than worry about Western markets; the additional stimulus never arrives as growth and demand forecasts for China ratchet lower. Likely bad for stocks, but maybe good for bonds.

  5. Eurozone. ‘Nuff said!

  6. Rising emerging market capital controls a la Brazil (tacitly condoned by the IMF) are met with rising trade tariffs from developed countries.  Money flows out of risk assets (stocks), quickly from the periphery, and back into bonds as global trade falls.

  7. Republicans win the White House and Congress, fire Ben Bernanke, and make Ron Paul Fed Chairman. They cut the budget deficit twice as much as what Paul Ryan is lobbying for. Ultimately it would be the best thing that happened to the US financial position in a hundred years, but there would be hell to pay as US credit drains from the global economy (and we have to listen to the moochers whining and crying about “fairness” day in, and day out). US bonds rally big time, so does the US dollar; stocks would likely be hit very hard initially, then stage a gargantuan rally.  [I know; but a guy can dream.] 

For now, “don’t fight the Fed” and “the trend is your friend” are winning the day. And if the bulls are right about US recovery, European healing, and new Chinese stimulus soon on the way, it could keep running. No doubt.  

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Daily Forex Fundamentals – March 29, 2012

Filed under: Currency Charts — Tags: , , , , — admin @ 1:28 am

What’s on the Economic Horizon

U.S. Final Q4 2011 GDP On Tap!
Japan’s Retail Sales Top Expectations
U.K. Nationwide HPI to Boost the Pound?

U.S. Dollar (USD)

Is the dollar losing its mojo? EUR/USD and USD/CHF ended yesterday’s trading almost unchanged from their opening prices. Meanwhile, USD/JPY was down 33 pips for the day. Read more…

Euro (EUR)

EUR/USD went on a wild see-saw ride yesterday. During the Asian session, the pair rallied strongly as a result of the leftover dollar weakness from the previous day. However, the move proved to be unsustainable and the pair quickly dropped like a rock once the European trading session began. EUR/USD, at the end of the day, was trading at 1.3320, just a pip lower from its opening price. Read more…

British Pound (GBP)

Blimey, did I just see the pound fall? The pound took hits against its counterparts yesterday on risk aversion and poor economic data from the U.K. Cable capped the day with a 63-pip loss at 1.5891, while Guppy also 103-pip hit at 131.61. Read more…

Japanese Yen (JPY)

Aaah, there’s nothin’ like risk aversion to get the yen’s inner sumo wrestler on. The Asian currency strengthened against all of its major counterparts, gaining 33 pips from the dollar, 44 pips from the euro, and 96 pips from the pound. Read more…

Canadian Dollar (CAD)

The Loonie found itself holding on to the short end of the stick yesterday as it fell against other major currencies. Against the safe haven Greenback, for instance, the Loonie posted a 31 pip loss. Read more…

Australian Dollar (AUD)

For a second trading day in a row, the Aussie headed down under the charts. AUD/USD opened at 1.0466 and traded all the way down to 1.0356 before ending the day at 1.0396. Read more…

New Zealand Dollar (NZD)

Watch out, we’re seeing risk aversion over here! With no economic data coming out of New Zealand, NZD/USD traded on risk sentiment in markets. The pair dropped by 57 pips to .8150 before it leveled off to close at .8175. Read more…

Swiss Franc (CHF)

Did I just land on Dojiville? Oh wait, those are just the franc’s charts. With no economic report out from Switzerland yesterday, the franc bulls and bears barely had anything to trade with. Both USD/CHF and EUR/CHF ended the day with dojis! Read more…

Bonnie and Clyde, peanut butter and jelly, Justin Bieber and his hair. Some things just go well together.

In forex trading, you get better odds at securing pips when your fundamental analysis is complemented by technical analysis.

Head on to Big Pippin’s Daily Chart Art for some pip-locking technical setups!

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USDollar at Short Term Trendline Resistance

Filed under: Business — Tags: , , , , — admin @ 12:29 am

240 Minute Bars

The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) low yesterday occurred right at the 2/22 high (former resistance becomes support). Bullish evidence includes a positively sloped 20 day average (and 20 day above 50 day average) and daily RSI bouncing off of 50. Bearish evidence is simply the fact that price remains confined to a range (albeit it the upper end of its nearly 12 month range). Exceeding Monday’s high (9998) would warrant a cautious bullish bias.

March 29, 2012

Berlitz: China Pocket Guide

Filed under: Forex Strategies — Tags: , , , — admin @ 4:42 pm

The markets appear to be a game of three halves at the moment. The US markets are resilient with equities holding their highs, Europe is gently slipping but the leader is currently China where equity markets have tanked over the past few days. To many, China has become the cradle of the next crisis. With little else going on in the world the amount of airtime and speculative attention that China is getting has already spilled into its secondary markets. Now whilst Australia may indeed be struggling with its own Dutch Disease the current China concerns are giving the Aussie bears more ammo to load up on positions that can only be described as “covering the table” – short AUD/USD, long EUR/AUD, short AUD/ZAR, BRL, CAD, you name it and the number of structured basket term sheets TMM are seeing relating to shorting Aussie are indicating Tabloid positioning. And we didn’t even mention Copper or Chinese H-Shares. Yet much of this new wave is based upon China not paying top dollar for Australian commodities much longer.

The assumptions on China we will come back to in a minute, but the thing that strikes us most is the regionality of the opinions being expressed. US and leverage accounts are particularly negative on China and Australia, whereas Europe and real money accounts are more balanced. As usual though, the Chinese and Australian views remain overall pretty up beat on themselves. As ever TMM will try and explain this with a simple chart:

And it seems that even those with more optimistic views on China (Asia-based investors) have finally caught the “China is slowing sharply” bug and capitulated as February’s export data (that TMM have already addressed here, concluding they weren’t as bad as they seemed) and most recently the HSBC Flash PMI have provided new bear food, driven particularly by those in the US that view China as a Ponzi scheme. Now, TMM have mentioned before that they sit more in the middle of the two Jims (Chanos & O’Neill), neither of the opinion that China is to spectacularly crash nor become the world’s growth engine (at least, not anytime soon). And they don’t deny the fact that the banking system is full of NPLs related to the 2009-10 stimulus, and these will certainly be an overhang for the next couple of years. But that is in the price and, when considered upon the backdrop of being largely state owned & directed, TMM find it hard to get too excited about both the impact upon the economy more broadly – unlike in the West, loss-recognition and balance sheet repair (which would likely impede credit creation) are not exactly the priorities of either bank managements nor policymakers.

One thing that has puzzled many China-watchers has been the lack of expected policy easing in response to the weaker activity data and slowing inflation. The trouble is that Chinese data is very difficult to read, and TMM constantly receive somewhat, err, “lazy” analysis from both analysts and punters. A brief list of issues: (i) Lunar New Year plays havoc with January and February, and even can have an effect upon March due to the moving around and distortion of seasonal effects, (ii) the quality of the data is poor due to collection (and “massaging”) issues, (iii) the data is not easy to understand as much of it arrives in “YoY Cumulative YTD” format, a relic of earlier central planning (see chart below of China Value Added of Industry YoY Cumulative YTD – a chart that is impossible to interpret in this form), (iv) seasonal adjustment factors have dynamically changed as China’s economy has changed in composition over the past several years, and (v) there is an important difference between nominal and real figures (for example, the combined Jan/Feb nominal export growth of 7% was poor, but in real terms, was rather stronger than would have been expected given lagged US/EU orders). Any analysis of Chinese data is only complete when the above are considered – and most of the junk that both the Street & Blogosphere have pumped out on this neglect at least one of the above.

E.g. – What the heck does this mean?

So that’s TMM’s whinging out the way (and we profusely apologise for whinging at all!).

We digress. Reconstructing the above data, the below chart shows the YoY change in Value Added IP (purple line) and the 6m/6m seasonally adjusted annualised rate (saar, green line). The YoY rate is essentially flat, and while the economy clearly slowed in the latter half of 2011, the weakness appears exaggerated by base effects. The 6m/6m saar (green line), which is essentially a measure of growth momentum, clearly bottomed in December and has begun to move higher. The official China PMI also bottomed late last year (more on this below). Chinese policymakers observing the same data may well have come to the conclusion that easing is not really required – TMM would concur.

Of course, growth is only half the story – inflation is the other ingredient to the Growth/Inflation mix. But this too has fallen since the oil/food price-driven increase last year. Putting these together in a very simple model, there is a reasonable correlation between relative equity moves (see chart below, of the relative performance of Chinese H-Shares vs. SPX [Red line], vs. this naive metric [blue line]). No single driver can explain market moves, but broadly, TMM reckon that (as macro guys) the growth/inflation mix is a principal component. Obviously there are divergences related to the 2007-9 failed Decoupling Experiment, the world not being linear (and neither are returns) etc, but TMM think this is a useful way to think about China.

So, back to TMM’s PMI model. This has reasonable error bounds that have caught them out before, functions of dynamic seasonal adjustments, but is nevertheless of some use at least. The top line model reckons a PMI of 52.7 – TMM are sceptical of this given the HSBC Flash PMI was so poor – but stripping out the seasonal produces 51.2, which is a smidge above consensus. TMM, however, are less concerned about the absolute level, and more about the direction. Specifically, should the number come out close to consensus, it would confirm that activity bottomed in December in line with the Value Added IP momentum above. A disappointment, on the other hand, would likely be met with eventual policy easing.

Putting all of the above together with bearish sentiment and interesting technicals in H-Shares (see below chart), TMM have begun building a long position both here and in AUD ahead of this weekend’s PMI number, and would look to buy the dip into any knee-jerk sell-off should the number disappoint by only a tad. Again, the trouble here related to Lunar New Year and the other complicating factors mentioned above mean that the turn in momentum that TMM reckon is ongoing will not necessarily show up in the hard data for a couple of months. This is a risk TMM will have to take…

And with that, TMM brace themselves for a ravaging in the comments and wish their readers a profitable Q2.

GBPUSD pulled back from 1.6000

Filed under: Forex News — Tags: , , , , — admin @ 3:09 am

After touching 1.5991 previous high resistance, GBPUSD pulled back from 1.6000, suggesting that a cycle top is being formed on 4-hour chart. Initial support is at the lower line of the price channel, and the key support is at 1.5770, as long as this level holds, uptrend from 1.5602 could be expected to resume, and another rise towards 1.6300 is still possible. On the other side, a breakdown below 1.5770 will indicate that the uptrend has completed at 1.6000, then deeper decline to test 1.5602 support could be seen.


Daily Forex Forecast

Midweek Charts 3/28/12

Filed under: Technical Analysis — Tags: , , — admin @ 3:06 am

Good instincts usually tell you what to do long before your head has figured it out. ~ Michael Burke Good morning. Dollar remains under pressure while the euro managed to overcome resistance at $1.3300. USD Index No decisive break of interim support at 79 yet, but downside pressure remains high. In case of recovery, rallies would Read More

© 2012 FX Trading Blog

Might copper longs take a bath after the China news?

Filed under: Currency — Tags: , , , , , , , — admin @ 2:24 am

“I believe there is something out there watching over us. Unfortunately, it’s the government.”

– Woody Allen

Fundamentally, copper prices could fall.

Technically, copper prices could rise.

But either way, copper appears due for a big break.

HONG KONG, March 27 (Reuters) – China holds more than 1 million tonnes of commercial stocks of refined copper cathode currently, a level last seen in 2009, due to high imports and weak domestic demand, which may slow arrivals in the second quarter, analysts said on Tuesday.

High stocks may also prompt Chinese smelters to cut refined copper output, the analysts and sources at smelters added.

I’ve kept my premium service members aware of this burgeoning bearish supply glut and the impact Chinese demand will have on the price of copper. But as copper is tugged back and forth between bearish fundamentals and bullish risk appetite sentiment, the technicals are setting up in what is typically a very bullish trading pattern:

Two things to note:

1)      The narrowing range constitutes a pennant formation that typically resolves itself in the direction of the trend (in this case, up.)

2)      The Bollinger Bands bubbled out and now have narrowed rapidly, typically indicating a large and fast breakout (in either direction) is in order.

Often, especially in the nearer-term, the fundamentals seem not to matter and price action is dictated by sentiment and technicals. If this holds, then copper could be on the verge of a substantial break to the upside.

Today’s price action is not confirming that yet, as copper futures are down nearly 2% on the day.

In addition to yesterday’s latest update on the copper supply situation in China, overnight earnings releases suggest Chinese companies are feeling the pressure from a slowing economy. That is influencing copper prices today.

SHANGHAI, March 28 (Reuters) – China shares ended down 2.7 percent on Wednesday, the biggest one-day percentage drop in four months, as weak corporate earnings reports increased worries over the domestic economy.

Remember: there is no such thing as an obvious or easy trade. Today’s China news is likely hurting a lot of nascent copper longs.

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