Trade idea: participate in foreign currency appreciation and loose U.S. monetary policy through a broad basket of Asian ETFs (plus Brazil): EWH, EWS, EWM, EWT, THD, EWY, EEM, EWZ…these funds are up significantly since the August lows, so scale in.
from Ken Landon, J.P.Morgan Strategy, NY (Oct 21, 2010)
* NEWS – The big theme is intact: an expected increase in money printing and debt monetization by the Fed is keeping the dollar under pressure against most currencies. US Treasury officials seem pleased with the recent movements in the FX market, although they would like China to increase the pace of CNY appreciation. In any case, in lieu of a more analytical Lowdown, today I will make a few comments on some news stories that caught my eye. I will use the summary given by JPM’s “Market Intelligence” group when introducing the articles:
1) Geithner tells the WSJ that the US doesn’t intend on devaluing the dollar as a way to achieve prosperity. Geithner said he would use the G20 meeting as a forum to advance efforts to “rebalance” the world economy so it is less reliant on US consumers, to move towards establishing “norms” on FX. WSJ http://tinyurl.com/267ahmp
John Normand already commented on the Geithner interview and concluded that there is no change in US dollar policy. Mr. Geithner parsed the world into three groupings by currencies: currecies of countries, such as China, that are grossly “undervalued,” those that are “fairly” valued (i.e., G3), and those currencies of countries that are taking appropritate actions through intervention and capital controls to prevent “overvaluation” or inflationary pressures.
According to the WSJ, “Treasury Secretary Timothy Geithner said he would use weekend meetings of G-20 finance ministers to advance efforts to “rebalance” the world economy.”
Central planning on a national scale is daunting enough, but now the meaning of “globalization” — formerly associated with opening up markets and trade — is co-ordination between governments to “rebalance” global economic activity. Such an effort likely will end in extraordinary dislocations and slower economic growth. The underlying framework that drives the world-view of “global imbalances” is at its core opposed to the free movement of capital and labor across national borders. Because the core philosophy opposes free movement of key economic factors such as capital and labor, it ultimately leads to trade protectionism with all its negative consequences.
In my opinion, the interview with Geithner is just another reason to sell USDs despite the Treasury Secretary’s claim that “the U.S. doesn’t aim to devalue its way to prosperity.” When the world’s largest importer of capital openly endorses capital controls such as taxation of inflows, as Geithner did in the WSJ, then the logical conclusion is that the US is amenable in principle to doing so itself. I do not think such controls are likely in the near-term, but I do think that such statements reveal the core philosophy that is guiding the policy actions of Washington.
As for trades that are implied by the Washington world-view, short USD and long a basket of Asian currencies makes sense. Historically, Asian currencies and Asian equity markets are highly and positively correlated. A trend appreciation in regional FX likely will attract a huge portfolio inflow into Asian stock markets (i.e., stronger currencies is not a reason to turn bearish toward Asian equities).
2) Fed Article in the FT – says Fed officials are considering a more “flexible” approach to further QE. “Fed officials are weighing an approach that allows more discretionary meeting-by-meeting decisions than the unconditional “shock and awe” stimulus it launched during the depths of the crisis in 2008 and 2009” See: http://tinyurl.com/35calpd
I found nothing new in this FT article. In my opinion, the view that the Fed will announce an incremental approach to QE is already accepted by most people in the market. It also is not surprising that the Fed would want a “discretionary” approach that is contingent upon incoming economic data. In fact, that is the message that Fed officials have been transmitting to the market over the past several weeks. To my knowledge, no one is advocating a large “shock and awe” announcement. In my framework, which is not within the mainstream, the Fed’s primary objective of additional debt monetization is to provide a continuous source of funding for the central government. An open-ended discretionary approach fits in perfectly with that objective because it does not limit the amount in dollars or the amount of time over which “QE” will be implemented.
3) Foreclosure crisis tops White House agenda – Tim Geithner, Treasury secretary, Shaun Donovan, housing secretary, and Tom Perrelli, associate attorney-general, held a closed meeting on Wednesday to co-ordinate the administration’s response to the problem. (FT) http://tinyurl.com/22wm4rw
Investors have beaten down the stocks of large banks in recent weeks because of the foreclosure “crisis.” However, of more significance for markets is the following story:
Foreclosures – the White House on Wed says it has found no sign of “systemic” home foreclosure problems that threaten US financial stability or structural problems that could undermine investments linked to mortgages.
http://www.cnbc.com//id/39767501
Housing and Urban Development Secretary Shaun Donovan said “We have not found any evidence at this point of systemic issues in the underlying legal or other documents that have been reviewed.” The Obama Administration has so-far refused to support a systemic moratorium of foreclosures. The comments by Secretary Donovan makes it increasingly unlikely that such a moratorium will be imposed by the executive branch, which provides some clarity in a situation that has remained murky for the pass few weeks.
from Ken Landon, J.P.Morgan Strategy, NY (Oct 21, 2010)
* NEWS – The big theme is intact: an expected increase in money printing and debt monetization by the Fed is keeping the dollar under pressure against most currencies. US Treasury officials seem pleased with the recent movements in the FX market, although they would like China to increase the pace of CNY appreciation. In any case, in lieu of a more analytical Lowdown, today I will make a few comments on some news stories that caught my eye. I will use the summary given by JPM’s “Market Intelligence” group when introducing the articles:
1) Geithner tells the WSJ that the US doesn’t intend on devaluing the dollar as a way to achieve prosperity. Geithner said he would use the G20 meeting as a forum to advance efforts to “rebalance” the world economy so it is less reliant on US consumers, to move towards establishing “norms” on FX. WSJ http://tinyurl.com/267ahmp
John Normand already commented on the Geithner interview and concluded that there is no change in US dollar policy. Mr. Geithner parsed the world into three groupings by currencies: currecies of countries, such as China, that are grossly “undervalued,” those that are “fairly” valued (i.e., G3), and those currencies of countries that are taking appropritate actions through intervention and capital controls to prevent “overvaluation” or inflationary pressures.
According to the WSJ, “Treasury Secretary Timothy Geithner said he would use weekend meetings of G-20 finance ministers to advance efforts to “rebalance” the world economy.”
Central planning on a national scale is daunting enough, but now the meaning of “globalization” — formerly associated with opening up markets and trade — is co-ordination between governments to “rebalance” global economic activity. Such an effort likely will end in extraordinary dislocations and slower economic growth. The underlying framework that drives the world-view of “global imbalances” is at its core opposed to the free movement of capital and labor across national borders. Because the core philosophy opposes free movement of key economic factors such as capital and labor, it ultimately leads to trade protectionism with all its negative consequences.
In my opinion, the interview with Geithner is just another reason to sell USDs despite the Treasury Secretary’s claim that “the U.S. doesn’t aim to devalue its way to prosperity.” When the world’s largest importer of capital openly endorses capital controls such as taxation of inflows, as Geithner did in the WSJ, then the logical conclusion is that the US is amenable in principle to doing so itself. I do not think such controls are likely in the near-term, but I do think that such statements reveal the core philosophy that is guiding the policy actions of Washington.
As for trades that are implied by the Washington world-view, short USD and long a basket of Asian currencies makes sense. Historically, Asian currencies and Asian equity markets are highly and positively correlated. A trend appreciation in regional FX likely will attract a huge portfolio inflow into Asian stock markets (i.e., stronger currencies is not a reason to turn bearish toward Asian equities).
2) Fed Article in the FT – says Fed officials are considering a more “flexible” approach to further QE. “Fed officials are weighing an approach that allows more discretionary meeting-by-meeting decisions than the unconditional “shock and awe” stimulus it launched during the depths of the crisis in 2008 and 2009” See: http://tinyurl.com/35calpd
I found nothing new in this FT article. In my opinion, the view that the Fed will announce an incremental approach to QE is already accepted by most people in the market. It also is not surprising that the Fed would want a “discretionary” approach that is contingent upon incoming economic data. In fact, that is the message that Fed officials have been transmitting to the market over the past several weeks. To my knowledge, no one is advocating a large “shock and awe” announcement. In my framework, which is not within the mainstream, the Fed’s primary objective of additional debt monetization is to provide a continuous source of funding for the central government. An open-ended discretionary approach fits in perfectly with that objective because it does not limit the amount in dollars or the amount of time over which “QE” will be implemented.
3) Foreclosure crisis tops White House agenda – Tim Geithner, Treasury secretary, Shaun Donovan, housing secretary, and Tom Perrelli, associate attorney-general, held a closed meeting on Wednesday to co-ordinate the administration’s response to the problem. (FT) http://tinyurl.com/22wm4rw
Investors have beaten down the stocks of large banks in recent weeks because of the foreclosure “crisis.” However, of more significance for markets is the following story:
Foreclosures – the White House on Wed says it has found no sign of “systemic” home foreclosure problems that threaten US financial stability or structural problems that could undermine investments linked to mortgages.
http://www.cnbc.com//id/39767501
Housing and Urban Development Secretary Shaun Donovan said “We have not found any evidence at this point of systemic issues in the underlying legal or other documents that have been reviewed.” The Obama Administration has so-far refused to support a systemic moratorium of foreclosures. The comments by Secretary Donovan makes it increasingly unlikely that such a moratorium will be imposed by the executive branch, which provides some clarity in a situation that has remained murky for the pass few weeks.
