2010 The Return to Normal (Hopefully)

What a year we have seen in the markets with share markets globally clawing back nearly all of the losses seen throughout the global financial crisis. The currency markets are by and large close to levels seen prior to the crisis and commodity markets have also seen gains with records getting shattered in gold day after day.

I have been thinking for a while now what 2010 will bring us, so this could be quite a post so I will try and break it down in sections so it doesn't get too long winded.

Sharemarkets

In 2009 most of the developed sharemarkets worldwide have moved together in an upwards motion. The emerging world is very overinflated and whilst all the world attention is always on the big three (Nikkei, FTSE and S&P500) markets like the Shanghai Index (China), Kospi (Korea), NSE (India)and the BOVESPA (Brazil)have seen enormous gains throughout 2009. These gains in part should be consolidated and added to mainly cause of the rising local demand that countries like China are now creating.

Other factors include the large amount of money that has been invested by American companies looking to escape one of the worst recession's in living memory and put some real growth on the bottom line. Some of these emerging markets are starting to look very bubbly especially in areas like property. I note that China is starting to make noises about putting interest rates up and raising property taxes in an attempt to take some of the steam out of it's market and return some common sense to it.

The 10 Year US Treasury Note I find is the best indicator of the overall US economy and a look at this years chart is pretty interesting



2010 should be a year with continued growth in the emerging world and some mild growth in the developed world. In the UK and USA especially the unemployment rate is the bull in the china shop and will continue to keep GDP low, most recoveries start with temporary employment going up and that inevitably leads to full time employment. These numbers will be interesting to watch as we go through the year.

Currency Markets

2009 was an interesting and at times a puzzling year in the FX market. The British Pound seemed like it was a permanent short this year and that sentiment was constantly backed up by BOE Governor King saying that a devalued pound was desirable for a UK recovery. The euro was back bigger, and better than ever and in stark contrast to the pound was an almost permanent long with ECB governor Trichett refusing every opportunity to comment on fx rates only to say a strong USD was desirable and China amongst others was a huge buyer of the euro keeping it nice and inflated at least until the 8th December anyway. The star of the show this year in performance terms was the Aussie it was in the early 61's at this time last year and as we end the year its just below 90, a stellar performance indeed fueled by Chinese demand for Australian commodities like iron ore and natural gas.

2010 I believe will be a year in two distinct parts. The first will be full of speculation about when the Federal Reserve will lift rates and the second half will be what now that the fed has lifted rates.

Euroat the end of 2009 lost ground against the USD, there has been lots of speculation as to the nature of this fall. In my opinion it wasn't so much the selling of the euro that was pushing this move but more an unwinding of USD short positions. The first part of next year I expect to see more of the same of what we have seen in 2009 with an added dose of caution for two main reasons:
1. Traders may be less likely to short the USD with speculation from the Fed that a rate increase is forthcoming
2. The Euro zone has perhaps suffered more than anywhere else in the world with structural failures through this crisis. Greece is an excellent example and whilst Greece only represents 2% of the total euro zone it does send a shockwave through financial markets about the stability of the area and with Spain in the queue with similar problems to Greece the euro could be in for a bumpy ride if a Spain failure eventuates as Spain represents upwards of 10% of the GDP of the Eurozone. The Euro is a watch this space carefully proposition in 2010.

Yen fate firmly rests with the Japanese Government and the Bank of Japan, the new government's reluctance to intervene in FX, and worse their broadcasting of this policy to the markets has made traders around the world want to test this theory. The Yen's strength this year was part safe haven, and part testing of the pain threshold.

At the end of this year the BOJ increased its quantitative easing program and also started talking up the weak yen and backing this up by not increasing rates and also noting that rates will stay very low for a very long time. In 2010 in my opinion the yen will return to its traditional role of one half of the carry trade and with low rates for the foreseeable future its hard to see the yen strengthening any further into 2010.

Pound is going to be a bit difficult, with the BOE constantly telling the market that a weak pound is a good thing, and while the economy recovers it probably is, but ultimately from a macro economic perspective if it's not rained in soon and extraordinary measures such as quantitative easing and the economy starts to recover then inflation is a real concern.

In 2010 I expect the pound to reverse for the most part and become a buy again against most of the other pairs. The economy should get the injection it needs if a change of government is forthcoming. I expect like this year the pound will be a difficult pair to trade.

USD is the one to watch in my opinion, what happens here will have large ramifications for the whole market. As 2009 was in most part the recovery year, the year of easy money, the year no matter how bad your balance sheet it as long as you were big enough you got bailed out. The Federal Reserve always play an integral part in the FX market but none more so as the role it will play in 2010 as the fed will be forced sooner rather than later to unwind the extraordinary measures it has in place, the buying of toxic mortgages will cease or slow to minimal levels at the very least (that in itself is bullish sentiment for the USD). In my opinion by the time we get to September 2010 the unemployment rate should be somewhere between 9.00% and 9.5% at this point the fed will be under pressure to increase rates even a little to stop a bubble affect building. We have already seen some pre emptive moves with mortage companies raising the fixed mortage rate, they know a rate rise is coming the writing is on the wall.

During the Global financial crisis the USD along with US treasuries became the safe haven play, so markets settled into a familiar pattern stronger USD, meant weaker sharemarket and stronger US treasuries, this has become the new normal for a while, prior to the crisis this was not how it was in previous years and in 2010 I hope we see a return to a market that is more like the one prior to the crisis, where a drop in the sharemarket didn't necessarily mean a rise in the USD.

Overall I believe the USD will be weaker at the end of 2010 than where we are today so a bear market is my forecast for the USD, but I wouldn't expect one way traffic like we have seen in 2009, I would expect some substantial rallies in the USD posible up to 7% and 8% in strength at the economically significant points during the year.

At the end of 2009 and on the verge of 2010 I wish all traders good trades, always remebering that every trade you take this year should be well thought out with good reasons for getting into and out of the trade. Its a dangerous game we play and the line between success and failure is thin but you can widen it with good analysis and management

Good Luck and Happy New Year.

Euro Dollar

This week we have seen some unwinding in USD and Yen mainly due to thin markets and lack of liquidity which is ontributing to the lack of buyers. I was going back through my diary looking for an entry early this morning that my wife wanted when I came across the following entry.

"EU reaches 1.50 correction will be needed to 1.45 before 1.60"

I had scribbled this out on November 11th when it reached the 1.50 level. It made me stop and think for moment given the strength seen in USD this week. Is it really possible that this level will be seen again soon. I would have to say thay maybe this could happen, looking at the charts their are tons of road blocks in the way, the path would be rocky indeed and given the emerging countries liking for the euro, then ultimately they might decide if 1.45 EU is in their best interests.

Looking at the other side of the argument, The USA has gone just silly this week they get one good employment number and we have so called smart commentators calling for the end of all stimulus and all fed help, have these people lost their minds. I was pleased that at the start of the week Mr Bernake came out as the voice of reason and spoke intelligently about one good employment report saying that whilst encouraged this would not sway fed policy in the short term and extra measures were still in play for the short to medium term.

I am not sure EU will reach 1.45 but technically and fundamentally its a very sweet long opportunity if it does and the ride from there could be long and profitable, we will watch as always in anticipation.

Interest Rates still the main driver

What a difference a day makes, they say a week in politics is a long time, a day can make all the difference in the forex market, but caution is the main play in the first part of the new week.

I am going to go out on a limb here and say that the USD will become weak again this week and the main play will be the same as its been for months now with USD being sold off against all the risk pairs. The NFP number seen last fridy whilst excellent for the US economy to me does not seem sustainable. This number is fat with temporary jobs created at this time of year to fill the ranks of retailers at Christmas time, I would expect the January Number to be much more sobering and realistic.

Traders took the opportunity on friday on the back of this number to unload some of there short positions in USD and commodities. To me for the USD to gain in strength fundamentally we must see action on interest rates, and at this stage I cannott see the Federal Reserve making any sudden moves based on one employment number.

The overwhleming trend in the market is for risk apetite based on cheap USD and JPY so the carry trade is as attractive as ever. At time of writing the EU is approaching 1.4900 from daily lows of 1.4840 so it's pretty clear that traders see no end to the current situation and that the strength in USD seen on friday serves as a pretty good long entry point on Monday.

As always the market will give us our answer in good time.

NFP

Today is one of those days that should have a sign on it, If you are a new trader then stop, close the platform and have the day off. I say this cause so many new traders get caught out on Non Farm Payroll (NFP).

NFP day is always characterised the same every month, always falls on a friday, very small liquidity during the Asian session, all the pairs tend to drift lower, the London open is lacklusture and then we limp along for the next 5 hours until the NFP data is released and then we get a trend.

So what should we do, it has been my experience to run as fast as you can in the other direction today at least until the data is released, small volume in the lead up will only mean one thing there is no actual trend to trade. What you have is whipsaw action swinging 10 pips here and 10 pips there for no real reason.

The asian session has seen very little movement with all the smart money keeping their powder dry waiting for the dance to begin later on today.

The warning I gave at the top of this article is targeted at anybody that has less than 12 NFP's under their belt, please dont trade today until you see the data and we get to see the trend, take it from me there is nothing worse than watching all of your profit from this week go up in smoke cause of lack of patience and trading before we get a clear direction.

As for the data itself this is terribly dangerous play to trade it, probably one of the most volatile releases outside of a rate hike that the market deals with, the first part of it their will be tons of knee jerk reactions in both directions but if you wait for a clear trend and then take your trade, you will give yourself a much greater chance of success.

Good Luck All

Rates Day

Today we go through the monthly routine of a rate announcement, this time its the turn of the European Central Bank. The rate announcement in my opinion will be a non event, as I believe their is zero chance of a rate rise and the book rate should stay at 1%.

What may hold my interest if I can stay awake is the speech that always follows 45 Min's after the announcement. The sentiment at this announcement is always keenly followed by traders for clues to when and if the loose monetary policy which has been a feature of the European Central Bank for a while now will be reviewed/and or tightened.

I personally don't believe that the last press conference of the year will deliver anything earth shattering and would be surprised if we were to see excessive moves in Euro as a result given that most of the professional money is in the process of shutting down their trading operations for the year. Mr Trichett has been known to surprise in the past so you never know and as always keep the stops in place.

The other interesting thing I am currently watching is the markets reaction to the extra funding provided to the Japan economy, this I believe has been universally seen as a positive by traders in both the equity and forex markets. This will continue to pressure the yen and selling should keep accelerating for now, all the yen crosses have seen substantial gains this week.

Markets tend to like decisive action from reserve banks and the Bank of Japan have acted decisively this week even in the face of criticism from parts of the Japanese government. The risk for deflation is real and whilst they don't want to become a large holder of US Dollars, short term I believe the BOJ see's this as a necessary measure to help protect their economy.

As Forex traders this really only means one thing and that's a weaker yen, decisive action is very helpful in the forex market as the move tends to be up or down, not sideways or anything else makes it much easier to trade and profit from.

Good Trades All

The Carry Trade "Carries On"

This week has seen renewed interest in the carry trade for USD and Yen, with the Bank of Japan putting extra stimulus measures into their economy to effectively try and stave off deflation and weaken the yen to an acceptable level.

First a short explanation of the Carry Trade
"The dollar and yen are the two major funding currencies of the carry trade. Investors borrow yen and dollars and then invest the proceeds into higher yielding assets including equities. This is what is called the carry trade, and it works best when an investor can use high leverage to increase the return. Since these trades are highly leveraged, they are closely monitored and reversed at the first sign of a possible fall in the value of the higher yielding assets"

The Reserve Banks and governments around the world have been pumping large amounts of liquidity into their respective economies to get investment and spending going. Whilst this in many areas of the world is a valuable and a needed measure. They have also lowered interest rates to very very low levels in many parts of the world (USA 0.1%, ECB 1.0% and Japan 0.1%). For this reason the carry trade is very attractive and will continue to be attractive until these conditions that I have outlined above are altered.

So, I hear you say, so what, how can we profit from this as traders, and the answer is very simple, I use fundamental analysis to try and ascertain the trend for intraday, one week, one month out etc. I see no reason to short against any carry trade except for the odd day or so where intraday sentiment may dictate something different. The overall trend and reserve bank governors are saying that for the time being the USD will remain weak, the yen will be encouraged into weakness and gold will remain strong.

For this