Some clueless analysis - by Deutsche BANK Europe
Analyst’s three-month forecasts have fallen as fast as the euro EUR USD (1.0780) In the third week in August, the euro recorded its worst one-week fall in two-and-a-half years. For medium-term traders this was nothing short of a disaster. This group of market participants had placed huge bullish bets at the start of the month - effectively doubling-up their existing long positions.
However, as feared in our last report, the violation of the July low put all of these new positions into the loss zone and opened the floodgates for a one-way slide to
below $1.08. During this time we witnessed one of the most dramatic reversals of popular opinion since ‘deflation’ came and went in June. Economic data, which for months had been showing signs of a recovery in US and of continued stagnation in the eurozone, was abruptly transformed from dollar-bearish into dollar-bullish.
Whereas, for most of the summer, market commentators argued that any US revival would suck in imports and worsen the trade deficit, suddenly the widening growth deficit was hailed as positive for the US-currency. Of course this re-evaluation of the data had nothing to do with economic enlightenment; those who had to stop losses needed to be able to justify their selling decisions with sound, fundamental arguments, as they had done for their decisions to buy in the first place. Investment bank analysts, who initially clung to their bullish year-end forecasts, did not help. It was not surprising that there followed a veritable clamour for these forecasts to be revised. A survey of 20 major banks by the French newspaper, L’Agefi, revealed
that three-month forecasts have now fallen almost as fast as the euro itself – from $1.17 at the start of August to $1.12. This means that the euro would need only to recover half of last month’s losses for these analysts to be 'right’.
The latest EUR-Sentiment Survey showed that at least the doubled-up part of the medium-term positioning had been squared. The remaining longs were established in the $1.16 - $1.19 zone. The reference price is so far away that these
players are relatively insensitive to marginal losses. Further capitulation trades are therefore unlikely – even if the euro falls to 1.0730, which is the remaining downside
risk. Below this support, the pace of the decline could re-ignite their sensitivity. The liquidation of the remaining longs would then be sufficient to push the euro to parity.
Even failing this horror scenario, the desire among medium-term traders to rebuy is also missing. This means that the single-currency could remain in limbo, at least
until it is able to clamber to above 1.1250.
Long liquidation means that investors can now see the merits of the dollar’s downside.
USD JPY (116.20) The announcement by the Bank of Japan that it had not
intervened in the FX markets in August went a long way to explaining the dollar’s
3.8% decline over the course of the month. Is this an example of how the yen would
perform every month if the authorities stopped intervening? This is a question that
investors could rightly ask themselves. But there were arguments to justify a
stronger yen: many commentators argued with the repatriation of redemption and
coupon payments on US bonds; others focused on the firmer Nikkei as a clue that
foreign capital was being attracted to Japan’s stock markets; and Japanese growth
and employment data surprised to the upside. Cynics even pointed to Tokyo’s
defiance of US pressure to not exploit an Iranian oilfield as a sign that Washington’s
tolerance for intervention (a reward for their support in the Gulf war) might soon run
out. Thus, for the first time in months, there was some openness to the idea that the
dollar could fall. This suggests that many old long positions were finally unwound by
the end of July. As the dollar fell, new longs were created, as the numerous
rumours of intervention testified, but these were limited to the short-term crowd.
Whatever the reason for the dollar’s fall, medium-term traders appear at least
to have been unbiased in its interpretation. Now that the likelihood of intervention
has moved from the domain of certainty back into the realms of probability, the only
3rd
An ‘unstable
cocktail’ bubbles
over
EUR JPY (125.20) Despite the euro’s hefty recovery at the end of July, we
refused to turn bullish on the cross. The advance - a highly unstable cocktail of
intervention and aggressive medium-term accumulation - would lack dynamism and
longevity, we argued. Instead, we searched for a downside point, beyond which the
entire carbuncle would explode. This point was reached a little more than one week
later and the euro promptly plunged over 3.5 percent to the target. The slide was
only briefly interrupted by a wave of short-term buying, fuelled by the notion that the
cross would be the next target for BoJ intervention. But, these positions are already
being capsized and we are grappling with the prospect of further immediate
weakness to 123.00. And, as last month’s target was also an important mediumterm
pivot point, we must also evaluate the likelihood of a broader decline to as low
as 116.00, the centre of the heavily traded zone from where the last upswing began
one year ago. A price stabilisation, which looked doubtful last month, looks equally
improbable this month. The cross would need to rise to above 133.10 to escape the
broader downside risk. Whilst it dwells below 128.80, it is especially vulnerable. |
