(FXA) Archives

Where The Economist ?Big Mac? Index Finds Currency Value

My former employer, The Economist, once the ever tolerant editor of my flabby, disjointed, and juvenile prose (Thanks Peter and Marjorie), has released its ?Big Mac? index of international currency valuations.

Although initially launched as a joke three decades ago, I have followed it religiously and found it an amazingly accurate predictor of future economic success. The index counts the cost of McDonald?s (MCD) premium sandwich around the world, ranging from $7.20 in Norway to $1.78 in Argentina, and comes up with a measure of currency under and over valuation.

What are its conclusions today? The Swiss franc (FXF), the Brazilian real, and the Euro (FXE) are overvalued, while the Hong Kong dollar, the Chinese Yuan (CYB), and the Thai Baht are cheap. I couldn?t agree more with many of these conclusions. It?s as if the august weekly publication was tapping The Diary of the Mad Hedge Fund Trader for ideas. I am no longer the frequent consumer of Big Macs that I once was, as my metabolism has slowed to such an extent that in eating one, you might as well tape it to my ass. Better to use it as an economic forecasting tool, than a speedy lunch.

The Big Mac in Yen is Definitely Not a Buy

Why the World Hates the Aussie

Newsletter

Discretion certainly can be the better part of valor. That was the feeling that came over me last weekend when I saw the Australian dollar (FXA) plunge to a new three year low against the buck.

I had been mulling over buying the Aussie around the $88 support level for the past couple of months. After all, with a synchronized global recovery in progress, and an international bull market in stocks underway, Australia is usually your first stop on the buy side.

Then the Australian Bureau of Statistics (ABARE) showed up to take away the punch bowl. It reported that December job losses came to 22,600, when the market had been expecting a gain of 7,000. That leaves total employment at 11.63 million and the unemployed at 722,000.

This is the equivalent to a US monthly nonfarm payroll flipping from a forecast +100,000 to -300,000. Yikes! It?s amazing that the Australian All Ordinaries stock index didn?t go to zero yesterday. Talk about a party pooper.

The technical picture couldn?t be more dire. A crucial support level at 88 cents that held all the way back to 2010 suddenly became a distant memory. A brief attempt to break the 50-day moving average to the upside at $90.50 failed miserably. Looking at the eight-year chart below, an undeniable double top is now in place at $105. The current downtrend has $85, and then $80, beckoning on the downside.

Further peeing on the parade from the greatest possible height has been the loose-lipped governor of the Reserve Bank of Australia, Glenn Stevens, who has been talking down the Aussie at every opportunity. In his latest foray, he declared large-scale currency intervention to be part of the central bank?s ?tool kit? to boost the economy. Translate this into plain English, and it means a lower Aussie soon.

You really have to ask why all is not well in the Land of Oz in the face of such unremittingly positive news elsewhere. Looking at the charts below, it is clear that Australia is currently fighting a currency war with Brazil, the other major supplier of natural resources to the world economy. That?s because a lower currency makes a country?s exports cheap in the international marketplace.

So far, Brazil is winning big time. The Real having cratered some 26% against the dollar over the past year, compared to only a 17% decline for the Aussie. Governor Stevens obviously is trying to play a game of catch up. But he has a long way to go.

There are other reasons for the weakness in the Ausie. It may have contracted emerging market disease, whereby investors shun small undeveloped economies in favor of large developed ones. A dependence on commodities is not exactly something you want to wear on your sleeve these days in this deflationary environment. Why have any hard assets in your portfolio as long as paper ones are going to the moon?

The more frightening question is whether the global economy has evolved to the point where it no longer needs Australian exports as much as it did in the past. I have been warning readers for some time that the Chinese economy, Australia?s largest customer, is moving from a commodity consuming export model to a domestic services oriented one.

You don?t need as much iron ore, coal, or uranium when a growing share of your added value is intellectual, and not physical. Stabilizing population growth means you can get away with less food too. This explains why commodity prices have been flat in the face of a Chinese GDP that is still growing at a 7.7% rate. This is all bad news for Australia.

These are all vexing, important questions deserving more first hand, in depth, on the ground research. I think I?ll start by checking out the bikinis at Sydney?s Bondi Beach in two weeks.

Worthy of Further Inspection

Lessons from the Australian dollar

Newsletter

Last month, I shot out a Trade Alert to buy the Currency Shares Australian Dollar Trust (FXA) December, 2013 $89-$91 bull call spread that turned immediately profitable. A mere four trading days later I sold out, after the (FXA) rallied an impressive $1.2, adding 0.84% to the value of my model trading portfolio.

That turned out to be the absolute top of the move. This is not unusual, as I am legendary throughout the market for picking the perfect tops and bottoms of market moves, and then leveraging up the other way. This is why pros stampeded into my Trade Alerts. Maybe it?s my math and engineering background that enables me to do this with such precision, a world where accuracy is measured to the Angstrom (0.0000000001 meters).

When the market marked my position at its maximum theoretical value of $2.00, that?s all I needed to know. The Trade Alert to get out flew your way the next morning.

After that, the Aussie was deluged with bad news. Reserve Bank of Australia governor, Glenn Stevens, said he was considering intervening in the foreign exchange market to head off its appreciation. Then, the government blocked a $2.7 billion takeover bid by US agribusiness giant Archer Daniels Midland (ADM) for the Australian grain handler, GrainCorp. A ban of foreign takeovers means less capital coming into the Land Down Under. Then, Goldman Sachs followed up with a forecast that the Aussie was heading for $85. After that, it was all over but the crying.

So here we are three weeks later, and I am getting plaintive emails from followers asking me what to do about their Australian dollar positions. The excuses as to why they are still long Aussie are legion, and range from ?I was traveling? to ?my dog ate my homework.? In the meantime, the (FXA) has plunged from $93.80 to $90, spilling much blood among those who still held the position.

Let me tell you how many trading rules these people violated:

1) When positions go deep in the money, you always place a stop loss at your cost, below the market. That way, you are effectively playing with the ?house?s money.? Your worst case scenario is that you break even.

2) You can?t travel and trade. I structure these trades so they can breathe and you don?t have to watch your screen 24/7. But you can?t disappear off the face of the map counting on notes in bottles washing ashore to keep you up to date.

3) Understand your own risk tolerance. Before you enter every trade, calculate how much money you are willing to lose if it goes against you. Then, if it hits that point, get out in the most automatic, emotionless, automaton way possible and go on to the next trade. There are plenty of fish in the sea, over 100 this year alone. You don?t need my permission to take a loss.

4) Don?t look at any position in isolation, look at the entire portfolio. I design these things so that some will be going up in value at any given point in time, and others down, in all market conditions. That way, one will hedge the other, limiting losses. In the case of the (FXA), your hedge was in being short the Treasury bond market (TLT), (TBT), which was profitable, and mitigated your losses if you didn?t get out of the (FXA).

5) You?ve got to watch the news. Bloomberg, Reuters, and the Wall Street Journal can get you a headline faster than I can send out a Trade Alert. When the Australian central bank governor started flapping his gums about possible intervention to push his currency lower, that?s all you needed to know. Hasta la vista, baby.

6) I am not always right. In fact, this year?s trading statistics show that I am wrong 15% of the time. That is less than almost anyone else. But wrong is wrong. Don?t let that 15% cost you all your profits for fear because you lack discipline.

I don?t think the Australian dollar is going down forever. In fact, there is still a reasonable chance that the Currency Shares Australian Dollar Trust (FXA) December, 2013 $89-$91 bull call spread will close at its maximum theoretical value of $2.00 by the December 20 expiration.

Central bank intervention can only dictate the direction of a currency for only short periods. After that, fundamentals take over. In the face of a 2014 global synchronized economic recovery, that means UP for the Aussie.

International interest rate differentials are the primary factoring in determining direction over the long term. With overnight Aussie rates at an all time low of 2.5%, further cuts are unlikely, lest the real estate bubble there inflates further. That means the next directional change in Australian interest rates is up, and that will be great news for the Aussie.

Suddenly, The Aussie Isn?t Looking So Good

The Rising Risk of a Market Melt Up

Newsletter

The risk of a major market melt up just took a quantum leap upward with the European Central Bank?s surprise 25 basis points in interest rates a few minutes ago. The move had not been expected from normally sleepy and moribund European monetary authorities for a few more months.

The ECB?s action has major positive implications for the world economy. It gives a shot of adrenalin to a global synchronized economic recovery, which was already in the cards for 2014. The effect on all asset classes will be huge.

Of course, the Euro ETF (FXE) crashed by $1.70, as one would expect, one of the largest moves of the year in the foreign exchange markets. We already took profits on a short position we strapped on in the Euro the last time it ran up to $1.38, which turned out to be the peak of a multi month move. But it has also spilled over into the other currencies, expanding into a much broader move into the US dollar.

The Japanese yen (FXY), (YCS) has just puked up 60 basis points, where we have a major short position and were looking to add. As a result, we have already gained 58% of the potential profit for a position that we added only two days ago. The Australian dollar (FXA), where I am also attempting to go long on a bigger dip, has lost 50 cents. Gold took it on the nose, again.

The other blockbuster event, which transpired this morning, was the release of the early read of US Q3 GDP, coming in at a red hot 2.8%. This was much higher than expected, with many estimates hovering around the 2.0% level. This means that the 0.5% we lost in the Washington shut down will turn out to be just a speed bump. We should make it all back, and much more, in the run up to Q1, 2014.

But wait! There?s more!! The price of oil has plunged by $20 in six weeks, thanks to the massive oversupply coming out of US fracking fields, and the movement of US-Syrian hostilities to a back burner. Even an Israeli attack on a Russian resupply of missiles at a Syrian port failed to generate any interest in Texas tea. Two months ago, this would have been worth a one day, $5 spike.

The US Energy Information Agency calculates that a $20 cut in the price of oil adds 0.4% to US GDP, and cuts unemployment by 0.1%. Newly enriched consumers spend more money and corporations with lower costs earn more profits. In other words, it cancels out the negative effects of the Washington shutdown in one fell swoop.

The University of California argues that ten out of the last 11 recessions were triggered by oil price spikes. The inverse is true as well. Collapsing oil prices create economic booms. Guess which way we are headed?

US Q3 earnings reports are generating extremely favorable comparisons, up about 10% YOY in aggregate. We have an extremely favorable calendar right now, as November and December are traditionally strong months for risk markets. Maybe it?s also that holiday grog. We also have the 2014 ?Great Reallocation? out of stocks and into bonds to look forward to, which has probably already started.

It all adds up to a first class market melt up, which could start at any time. Indeed, given the torrid market performance since the summer, and its Teflon like behavior during the October Washington shutdown, some strategists are claiming that a melt up has already started. The net net of all of this is that the world looks like a much friendlier place, and I am much more inclined to add risk than I was only a few minute ago when I dragged my sorry ass out of bed.

Below, please find the posture you should take in the markets listed by asset class.

*Stocks - ?buy the dips, running to a new yearend highs, especially in technology,? industrials, health care, and consumer cyclical
*Bonds - ?sell rallies, heading to the top of the 2.50%-3% 10 year yield range
*Commodities - start scaling in on dips in copper, iron ore
*Currencies - sell yen on any rallies, buy the Australian dollar on a China recovery
*Precious Metals - stay away, the world wants? paper assets
*Volatility - stand aside, will bounce along bottom
*The Ags - stay away until next year, great weather is killing prices, but too late to sell short

Enjoy the Dollar Rally While it Lasts

Diary, Newsletter

Any trader will tell you the trend is your friend, and the overwhelming direction for the US dollar for the last 220 years has been down.

Our first Treasury Secretary, Alexander Hamilton, found himself constantly embroiled in sex scandals. Take a ten-dollar bill out of your wallet and you?re looking at a picture of a world class horndog, a swordsman of the first order. When he wasn?t fighting libelous accusations in the press and the courts, he spent much of his six years in office orchestrating a rescue of our new currency, the US dollar.

Winning the Revolutionary War bankrupted the young United States, draining it of resources and leaving it with huge debts. Hamilton settled many of these by giving creditors notes exchangeable for then worthless Indian land west of the Appalachians.

As soon as the ink was dry on these promissory notes, they traded in the secondary market for as low as 25% of face value, beginning a century?s long government tradition of stiffing its lenders, a practice that continues to this day. ?My unfortunate ancestors took him up on his offer, the end result being that I am now writing this letter to you from California?and am part Indian.

It all ended in tears for Hamilton, who, misjudging former Vice President Aaron Burr?s intentions in a New Jersey duel, ended up with a bullet in his back that severed his spinal cord.

Since Bloomberg machines weren?t around in 1790, we have to rely on alternative valuation measures for the dollar then, like purchasing power parity, and the value of goods priced in gold. A chart of this data shows an undeniable permanent downtrend, which greatly accelerates after 1933 when Franklin Delano Roosevelt took the US off the gold standard, banned private ownership of the barbarous relic, and devalued the dollar. Gold bugs have despised him ever since.

Today, going short the currency of the world?s largest borrower, running the greatest trade and current account deficits in history, with a diminishing long term growth rate is a no brainer. But once it became every hedge fund trader?s free lunch, and positions became so lopsided against the buck, a reversal was inevitable. We seem to be solidly in one of those periodic corrections, which began two weeks ago month ago, and could continue for months, or even years.

The euro has its own particular problems, with the cost of a generous social safety net sending EC budget deficits careening. Use this strength in the greenback to scale into core long positions in the currencies of countries that are major commodity exporters, boast rising trade and current account surpluses, and possess small consuming populations.

I?m talking about the Canadian dollar (FXC), the Australian dollar (FXA), and the New Zealand dollar (BNZ), all of which will eventually hit parity with the greenback. Think of these as emerging markets where they speak English, best played through the local currencies.

For a sleeper, buy the Chinese Yuan ETF (CYB) for your bank book. A major revaluation by the Middle Kingdom is just a matter of time.

I?m sure that if Alexander Hamilton were alive today, he would counsel our modern Treasury Secretary, Jack Lew, to talk the dollar up, but to do everything he could to undermine the buck behind the scenes, thus over time depreciating our national debt down to nothing through a stealth devaluation. (Click here for my interview with him, ?Riding with Treasury Secretary Jack Lew.)

Given Lew?s performance so far, I?d say he studied his history well.

Hamilton must be smiling from the grave.

Loading Up on Australia

Newsletter

It looks like I?m Waltzing Matilda again. I am going to use the two-cent drop last night to scale into a long position in the Australian dollar. This is a dip in the (FXA) that gives up one quarter of the four-cent move off of the August 88 cent bottom.

The decline was triggered by dismal employment data showing that 10,200 jobs were lost in August. Many analysts had been expecting job gains. To give you some perspective, this is equivalent to the US getting a nonfarm payroll of (minus) -150,000 out of the blue when everyone had been expecting an improvement of a similar amount. Yikes!

The problem with this analysis is that employment data is a lagging indicator, sometimes a deep one. A few things have happened since these numbers were collated. The China hard landing has been taken off the table, emerging markets (EEM) have been screaming, and there have been massive short covering rallies across the entire hard asset space. Looking at just this single data point is the equivalent to driving ninety miles an hour and only looking at the rear view mirror.

You wanted a dip to buy? This is a dip.

The steadily improving China data puts not just the Aussie in a fresh new light, but all Australian assets. If it is sustainable, then Australian stocks also look great down here as well. The Australia iShares ETF (EWA) has told you as much, rocketing some 16% off the August lows, triple the gains seen here in the US. Australian bonds are the only security you want to walk away from, which are likely to see further losses matching those in the US.

You?ve gotta love Australia. It is the low cost producer of a whole range of economically sensitive commodities, including iron ore, copper, natural gas, coal, tin, gold, wool, wheat, beef, and others. Get it right and you make a fortune. It is the leveraged play on an improving global economy. Call it a call option on the world. If you have any doubts about the attractions of the Land Down Under, just spend a free summer afternoon strolling Sydney?s Bondi Beach.

If you want some independently confirming data on the likelihood of this turnaround, look at the chart below of the Baltic Dry Index, which reflects the cost of chartering dry bulk ships to carry stuff like iron ore and coal. It has been absolutely on fire, blasting up by 100% in the past four weeks.

This morning?s unbelievable 31,000 drop in weekly jobless claims to 292,000, a new five year low, reaches the same conclusion. It is a far more contemporaneous data set, and reflects a return to a normal economy. The Australian jobs data is so old it has hair growing in it.

The unfortunate aspect of this Trade Alert is that (FXA) options are fairly illiquid, and trade at double the normal spread found in the foreign exchange options market, so execution here is crucial. Put in a limit order for the spread that works for you. If you don?t get done, just walk away and wait for the next Trade Alert, of which there will be many.

Or you can just buy the (FXA) outright, given that the August low on the charts is looking pretty solid. Buy some Australian shares (EWA) too, while you?re at it, and throw a couple more steaks on the barbie!

Suddenly, Australia is Looking Very Attractive

Ambush in Australia

Diary, Newsletter

For a lifetime central bank watcher, like myself, this was one for the record books.

Reserve Bank of Australia, Glenn Stevens, said last week that he welcomed a weak Australia dollar and that it probably had further to fall. To put gasoline on the flames, he added that there was room for the RBA to further lower interest rates, assuring that more weakness in the Aussie was assured.

The Australian dollar didn?t have to be told twice what to do. All bids for the troubled currency immediately vaporized, and it gapped down two full cents to the 90-cent level, a three-year low. When the Aussie broke a crucial support level at parity in the spring, I predicted that 80 cents was in the cards.

That forecast, bemoaned and lambasted at the time, is now looking increasingly likely. This is why I have been warning my Australian friends all year to pay for their summer vacations in advance while their currency was still dear.

What is far more important here is what the RBA moves means for the global economy. It certainly raises the stakes in the international race to the bottom, where every country tries to devalue their way to prosperity. During the Great Depression, this was known at the ?beggar thy neighbor? policy, a term I?m sure you have all heard a lot about. A cheaper currency means your exports now cost less, so customers shift business from your neighbors to you, boosting your economy.

In recent years, the US was winning that game. Then Japan took over the lead in November, with a yen (FXY), (YCS) that has fallen 25% since. Now, Australia has grabbed first place, with a 15% plunge since March. Who is the big loser in all this? Europe, where even the guy who runs the beach mini mart in Mykonos tells me his economy sucks because his currency (FXE) is grotesquely overvalued.

The sad thing is, I don?t think a weaker Aussie will help the Land Down Under very much, if at all. Their problem is not a price one for their commodities, but a demand one. Everything Australia sells is a commodity where prices are set by a global marketplace.

The slowing of China?s economy is the big driver here, as orders for Australia?s exports of iron ore, copper, and coal fall precipitously. Grains (DBA) sales are hurt by America?s bumper crop, which is killing prices. Fukushima demolished uranium exports (NLR). Australian offshore natural gas (UNG), at $16/btu, doesn?t stack up very well against US fracking gas at $3.50. Gold (GLD) is not exactly flying off the shelf either, with prices at one point this year down 33% from the highs.

There is another big factor, which no one but myself seems to me noticing. The slowdown in Chinese commodity demand is not a temporary affair, it is a permanent one. The government there is making every effort to shift the economy away from commodity consuming, metal bashing exports, to a more services oriented one.

This more suitably matches the Middle Kingdom?s own resource base, of which there are few, towards a higher rung in its own development. You will probably start to hear about this from other strategists, gurus, and research houses in about a year. It is momentous in its implications.

The RBA?s move caught many traders off guard, as they had already begun scaling into long Australian dollar positions, looking for an autumn rally. Mad Day Trader, Jim Parker, knew better, and was advising Aussie shorts up to the 94 cent level.

As for me, I?ll be selling every decent Aussie rally for the foreseeable future, until global commodity prices finally bottom, or Australia changes central bank governors, whichever happens first. I bet a lot of Australians right now prefer the latter over the former.

The Thunder Down Under is Fading

Where the Economist ?Big Mac? Index Finds Currency Value.

Diary, Newsletter

My former employer, The Economist, once the ever tolerant editor of my flabby, disjointed, and juvenile prose (Thanks Peter and Marjorie), has released its ?Big Mac? index of international currency valuations.

Although initially launched as a joke three decades ago, I have followed it religiously and found it an amazingly accurate predictor of future economic success. The index counts the cost of McDonald?s (MCD) premium sandwich around the world, ranging from $7.20 in Norway to $1.78 in Argentina, and comes up with a measure of currency under and over valuation.

What are its conclusions today? The Swiss franc (FXF), the Brazilian real, and the Euro (FXE) are overvalued, while the Hong Kong dollar, the Chinese Yuan (CYB), and the Thai Baht are cheap. I couldn?t agree more with many of these conclusions. It?s as if the august weekly publication was tapping The Diary of the Mad Hedge Fund Trader for ideas. I am no longer the frequent consumer of Big Macs that I once was, as my metabolism has slowed to such an extent that in eating one, you might as well tape it to my ass. Better to use it as an economic forecasting tool, than a speedy lunch.

The Big Mac in Yen is Definitely Not a Buy

The China News is Big.

Newsletter

NOTE TO READERS: There is a short letter today because I spent the entire weekend writing Trade Alerts, which you will receive right at the Monday morning opening.

Last Friday, China announced a $150 billion reflationary public works budget designed to arrest the current free fall in the country?s GDP growth rate. The move came totally out of the blue and caught many China bears by surprise.

The National Development and Reform Commission has approved 60 new projects, led by railways, roads, harbors, and airports. While the plethora of plans is stretched over several years, it is clear the Politburo is trying to help the Communist party through its handover of power later this autumn. This has major implications for the global economy.

Cheng Li, research director at the Brookings Institution, said Beijing slammed on the brakes too hard last year to break the back of the property boom. Home prices are now off as much as 25%. So the Middle Kingdom appears to be back-peddling on these measures as fast as it can.

The immediate impact on financial markets was almost as great in the U.S. as it was in the Middle Kingdom, which saw Shanghai rocket 5% in a single day. It was off to the races for anything commodity related, including Caterpillar (CAT), copper (CU), Freeport McMoRan (FCX), US Steel (X), coal (KOL), and other materials sectors, all of which have been in a vicious bear market since 2011. It also calls into question the prudence of my short position in the Australian dollar, which has added two cents since the announcement.

We will have to wait a few more days to see if this move is real and sustainable, or just another short covering dead cat bounce. But this is what bottoms look like, and if it is, the ?BUY? opportunities in the entire space are huge. These are almost the last cheap stocks left.

Hmmm. Looks Like the Economy is Slowing Too Fast

My Tactical View of the Market

Newsletter

The easy money has been made on the short side this year for a whole range of asset classes. While we will probably see lower lows from here, the risk/reward ratio for taking short positions in (SPX), (IWM), (FXE), (FXY), (GLD), (SLV), (USO), and (CU) are less favorable than they were two months ago.

Of course, the ultimate arbiter will be the news play and the economic data releases. It they continue to worsen as they have done, you can expect a brief rally in the (SPX) up to the 1,340-1,360 range before the downtrend resumes. First, we will revisit the old low for the move at 1,290. Then 1,250 cries out for attention, which would leave us dead unchanged on the year. Lining up next in the sites is 1,200. But to get that low, probably by August, we would need to see something dramatic out of Europe, which we may well get. For the Russell 2000, look to sell it at the old support range of $78-80, which now becomes overhead resistance, to target $72 on the downside.

Don?t underestimate the devastating impact the Facebook (FB) debacle will have on the overall market. Retail investors lost $6 billion on the deal after institutional investors were given the heads up on the impending disaster and stayed away in droves. The media has plenty of blood on its hands on this one. The day before the pricing, one noted Cable TV network reported that the deal was oversubscribed in Asia by 30:1. Morgan Stanley reached for the extra dollars, increasing the size, and boosting the price by 15%. It all came to tears.

Expect investigations, subpoenas, congressional hearings, prosecutions, multi million out of court settlements, thousands of lawsuits, and many careers ended ?to spend more time with families.? Horrible thought of the day: Apply Apple?s (AAPL) 8X multiple, which is growing at 100% a year, to Facebook, which is not, and you get a (FB) share price of $5. None of this exactly inspires confidence in the stock market.

Notice that emerging markets have really been sucking hind teat this year, dragged down by falling commodity prices, a slowing China, and a general ?RISK OFF? mood. This is probably the first sector you want to go back in at the summer bottom to take advantages of their higher upside betas.

The Euro went through the old 2012 low at $1.260 like a hot knife through butter. On the breach, a lot of momentum programs automatically kicked in and doubled up their short positions. That is what has taken us all the way down to the high $124 handle in the cash. Let?s see how the market digests this breakdown. The commitment of traders report out on Friday should be exciting, as we already have all-time highs in short positions in the beleaguered European currency.

The problem is that any good news whispers or accidental tweets on the sovereign debt crisis could trigger ferocious short covering and gap openings which the continental traders will get a head start on. So again, this is not the low risk trade that it was months ago.

Still, the 2010 lows at $1.18 are now on the menu. I would sell all the ?good news? rallies from here two cents higher. Aggressive traders might consider selling penny rallies, like the one we got today. Notice that the Euro is rallying into the US close every day. This is caused by American traders covering shorts, not wishing to run them into any overnight surprises.

The Japanese yen seems to be stagnating here once again, now that the Bank of Japan has passed on another opportunity to exercise more much needed quantitative easing. Therefore, I will use the next dip to get out of my September put options at a small loss. There is a better use of capital and bigger fish to fry these days.

The Australian dollar has been far and away the world?s worst major currency this year, falling from $110 all the way down to $94 on a spike. It now languishes at $97. I long ago stopped singing ?Waltzing Matilda? in the shower. I hope all my Ausie friends took my advice at the beginning of the year and paid for their European and American vacations while their currency was still dear. We could see as low as $90 in the months to come.

Gold (GLD) and silver (SLV) still look week, as this week?s failed rally attests. The strength of the Indian rupee still has the barbarous relic high priced for the world?s largest buyer, and this will continue to weigh on dollar based owners. But we are also reaching the tag ends of this move down from $1,922. Speculative short positions are at a multi-year low. It would take something pretty dramatic to get me to sell short gold again. For the time being, I am targeting gold at $1,500 on the downside, $1,450 in an extreme case, and $25 in silver.

We are well into the move south for oil, which peaked just at the March 1 Iranian elections just short of $110/barrel. The market now seems to be targeting $87 for the short term. The global economic slowdown is the clear culprit here. But in the US, we are starting to see a clear drag on oil prices caused by the insanely low price of natural gas. You can see this clearly on the charts below where gas has been rising while Texas tea has been plunging. Utilities and industry are switching over to the cleaner burning ultra cheap fuel source as fast as they can. As a result, greenhouse gas emissions are falling faster in the US than any other developed country, according to the Paris based International Energy Agency. Sell any $4 rally in crude and keep a tight stop.

When China catches cold, copper gets pneumonia. So does Australia (FXA), (EWA), for that matter. The China slowdown will most likely continue on into the summer, knocking the wind out of the red metal. If copper manages to rally back up to $3.60, grab it with both hands and throw it out the window. Cover when you hear a loud splat. That works out to about $26.50 in the ETF (CU).

It all points to a highly choppy and volatile ?RISK ON? rally that could last a week or two. It will be a time when you wish you took your mother in law?s advice to get a real job by becoming a cardiologist or plastic surgeon. Do you want to know when I want to reestablish my shorts? If you get a modestly positive nonfarm payroll on at 8:30 am on Friday, June 1, that could deliver a nice two day rally that would be ideal to sell into.

Tag Archive for: (FXA)

<img decoding="async" class="aligncenter wp-image-32651" src="http://madhedgefundradio.com/wp-content/uploads/2014/06/McDonalds-China.jpg" alt="McDonalds - China" width="400" height="301" />The Big Mac in Yen is Definitely Not a Buy

<img decoding="async" class="aligncenter size-large wp-image-22294" src="http://madhedgefundradio.com/wp-content/uploads/2013/08/Thunder-Down-Under-570x400.jpg" alt="Thunder Down Under" width="499" height="350" /> The Thunder Down Under is Fading

The Big Mac in Yen is Definitely Not a Buy

The Thunder Down Under is Fading