ZIRP and the currencies

All of the major indices were up the week ending 19th December except the Dow Jones Industrial Average.
For the closing week, the Dow Jones industrial average ended the week down 50.57, or 0.59%, at 8,579.11. The Standard & Poor's 500 index finished up 8.15, or 0.93%, at 887.88. The Nasdaq composite index ended the week up 23.60, or 1.53%, at 1,564.32.
The Russell 2000 index finished the week up 17.83, or 3.8%, at 486.26. The Dow Jones Wilshire 5000 Composite Index — a free-float weighted index that measures 5,000 US based companies ended at 8,924.03, up 123.85 points, or 1.41%, for the week. A year ago, the index was at 14,644.64
What fundamental news we have that week?

On Tuesday the US Federal Reserve's decision to cut interest rates to near zero percent, a record low, and its promise to buy up more debt to rejuvenate the housing market and on Friday, the White House make a decision to lend U.S. auto makers up to $17 billion.
The Fed Zero Interest Rate Policy (ZIRP) cut the rates to the lowest level in the world and below the Bank of Japan rate of 0.30%. With ZIRP the Fed will applied the quantitative easing (QE) policy.
Quantitative Easing or ZIRP has only ever been implemented once in Japan during what came to be known as its "lost decade.'' A gigantic real-estate boom in the 1980's came crashing down in 1991, bringing many other prices with it. Efforts to restart the economy foundered time and again, as businesses were not able to generate the kind of profits that would reignite prosperity's cycle of hiring and spending. The Bank of Japan embarked upon this new concept of ZIRP to fight a frustrating period of economic stagnation and decline from the 2001 to 2006. The ZIRP was implemented to fight the wave of deflation. Deflation, another modern economic term, is an overall decline in prices over an extended period of time. The cause of the deflationary phenomena is when consumers become so resistant to spending that sellers are forced to continuously cut prices.

The word “Quantitative” refers to the money supply and easing money supply means to increase it. It basically involves increasing the money supply by printing money to buy a variety of securities with the end goal of flooding the financial markets with cash or liquidity thereby increasing the amount of currency in circulation which reduces the value of the currency and boosts inflation.

In the first year of Quantitative Easing, USD/JPY rose 18.5 percent. This means that the Japanese Yen weakened against the US dollar, which is a textbook reaction to Quantitative Easing. The Nikkei also dropped 28 percent. Between 2002 and the end of 2004, USD/JPY fell 22 percent as the Japanese economy began to stabilize. During that same time the Nikkei recovered 20 percent, but not before it fell another 20 percent.

Since than the ZIRP or QE policy has been heavily debated whether the policy lead to the turnaround of the economy. Most of the US economists and market commentators were against the Fed’s ZIRP . Time will tell.

Last week, the ZIRP announcement lead the stock market higher, but the next two days the market were moving southward on problems face by the automakers and the senate reluctant to extend any financial support to them. By Friday morning with US President announcement of a $17.4 billion rescue package for the troubled Detroit auto makers that allows them to avoid bankruptcy, the market recovered. But before noon the markets turned around and closed near to last week close.

Refer to the chart of 15 min Dow Jones Industrial Average (DJIA) below.
DJIA opened on Monday above the daily pivot point (pp) but it was contained by the 60 and 200 EMA’s and the weekly and monthly pivot point.

On Tuesday it opened at daily pp, went up to and breached the 20, 60 and 200 EMA’s and rested at the weekly and monthly pp for more than 4 hours before moving upwards on ZIPR. The next day it tested the previous day high, failed and moved southward for a double top pattern. The target downward was reached at about the daily support S-1.

Friday, the news of USD17.4 billion handout to the automakers pushed the market temporarily upward but could not sustained the uptrend as reflected by the sharp fall in the blue lag indicator below 85 level with the red lag remain below the 15 level reflecting a bearish stance for the near term.

Overall, the market new lows have remained at benign levels with no new highs. The secondary indices have been stronger than the blue chips. Will there be a Santa Claus rally. The second and third days prior to Christmas are often a little weak, but the day prior to Christmas is usually strong. The day after Christmas i.e. Friday, there is likely to be a very low volume day that drifts upward, similar to the day after Thanksgiving.

For the forex the big mover is the US dollar.

The U.S. Dollar finished the week with a loss against all major currencies.
The Euro traded sharply higher after the Fed ZIRP. The news of the ZIRP came after comments by ECB President Trichet hinted that the ECB would not lower rates in January. Trichet’s comments and the Fed ZIRP triggered a massive rally in the Euro which took the market to a better than 62% retracement of the entire break from July to October. Crunching the numbers, the euro’s rally was the biggest since the currency began trading nearly a decade ago.

For USD JPY plunged sharply lower after the Fed cut rates. The rally in the Yen was relentless causing the Japanese government to encourage action by the Bank of Japan to halt the vicious rise in price. The government is concerned about the damage the high priced Yen is doing to the economy. Japan Finance Minister Nakagawa told reporters on Thursday that he is "keenly watching" currency markets. He also stressed that he has "the means" to take action against the rise in the Japanese Yen. The Yen plummeted after his statements as traders reacted by selling the Yen in anticipation of an intervention. Instead of intervening, however, the Bank of Japan surprised everyone by cutting its key interest rate to 0.10% on Friday. Traders reacted to this announcement by buying back the Yen, a sign that a rate cut would have less impact than an intervention. Although the USD JPY did not fall back to the low for the week, there was enough selling activity to signal that the BoJ may have to intervene to push down the value of the Yen.

The EURJPY was on the uptrend up to Thursday before the European session in line with the strength of euro as against the major currencies. The chart below is the 15 chart of EURJPY.

The uptrend was well supported by the 200 period EMA and the daily pivot point. On Thursday, the euros spike up and revert back down immediately against the yen and the dollar after the first hour of London session when the European Central Bank announced to re-widened its interest rate corridor through reducing the deposit rate from 100 to 50 basis points to revive interbank lending.

Earlier in the week ECB President Trichet hinted that the ECB would use operational weapons to try to stimulate the economy instead of cutting interest rates. The action on Thursday was believed as one of those weapons. Since this aggressive action is going to take place after the next ECB meeting on January 15, it is probably safe to say that it will not cut interest rates and instead monitor the economy and the banking system to see if this action is working. Nonetheless, traders perceived the move as bearish to the Euro and took profits after a huge rally this week following the lowering of the Fed target rate to .25% to 0%.

The bearish sentiment continued on Friday when the prices limped below the daily pivot point and the EMA's.

Despite the interest differential between the euro and the dollar and yen, the euro is expected to be in the precarious situation. The euro’s path will depend upon the influence of risk appetite on broader investor sentiment. The demand for a safe haven is still as overwhelming as it has been over the past 3-4 month with the euro being snubbed by capital that flows into the US and Japan for risk-free government debt. But, if the market sours on these economies or if sweeping risk aversion lets up, traders may start looking to growth and interest rate potential as a market driver.

The Weakening Dollar

Traders of currencies have been facing this issue for the last two weeks: has the risk aversion stance of the market been impeded or to put in plainly; has risk sentiment taken a significant turn for the better or is the dollar losing its status as a safe haven currency?

Beginning in October when the chronic seizure of the financial/credit markets started to explode, it sparked a sense of panic and sent funds on the hunt for safety in the form of liquid, stable and essentially risk-free US Treasuries and consequently make US Dollar higher despite the outlook for growth in the US is particularly threatening and the need for bailouts of large financial institution and industrial firms.

However, the past two weeks, this extreme in sentiment has since clearly been contained - although with caution stance. A sense of stability has allowed investors the luxury of reassessing where their funds would be safest.

This sentiment could be seen in the EURUSD when the euro posted its best single-week performance in eight years, as an outright tumble in the US dollar left the Euro Zone currency as the prime beneficiary of a turn in market sentiment last week. The Dollar weakened as traders flush with confidence that something proactive was being done about the U.S. economy, decided to take on more risk in their portfolios. This negative tone toward the Dollar held most of the week and the Dollar finished on the downside for the week after the Senate killed the automaker bailout plan. The sharp euro recovery stood the test of continued deterioration in global risk appetite; sharp declines in global equity markets were not enough to sink the previously risk-sensitive European currency.

The Japanese yen (the other key flight-from-risk currency of choice) rallied against its liquid counterparts i.e US Dollar upon the problem of the big three US auto makers. (See the USDJPY of chart below ).


As for the EURJPY, The EUR was strengthening in similar fashion as against the US dollar, with 200 period EMA (the red line of EURJPY chart) providing support and approaching the Monthly pivot point by Thursday during the US session. It managed to recover the downtrend experienced the week before. But on Friday during early Asian session, the EURJPY dived to the week low and reversed back immediately, recovering during the European and American session. Looking back to the trigger of the heavy fall, it is clear that the failed US auto industry bailout was the culprit. However, the quick reversal (in all the yen pairs) suggests that this was a false alarm.

On the chart, the Friday dive broke the uptrend line but managed to be contained by the weekly pivot point and the daily S3 (Support pivot point). The psychological level of 118.00 also played the role as a support level.

While strength in Euro in crosses is still expected to continue in the short term, the tricky part of the overall outlook is on the relative strength in dollar, euro and yen. The euro strengtened against the dollar and yen but the yen strengtened against the dollar. Will the dollar be the weakest or strongest link among the three currencies or the dollar dive or rebound be a Euro led or yen led.

-A sharp fall in dollar accompanied by strong rally in EUR/USD and EUR/JPY will suggest that the Euro is gathering strong momentum and in such case, strong rally should be seen in EUR/JPY.

-Sharp fall in dollar accompanied by sharp decline in USD/JPY and EUR/JPY will probably drag the EUR/USD down, which is consistent with the consolidation case in EUR/USD. While Euro crosses might remain firm, this will be taken as a signal that another round of massive yen buying is underway.

-Strong rebound in dollar, accompanied by steadiness in USD/JPY and sell off in EUR/JPY will suggest that markets are back to the prior state where safe haven flows are going into dollar and yen again and should see other major currencies, including Euro, dragged down by such flows.

-Strong rebound in dollar accompanied by sell of in EUR/USD and rebound in USD/JPY will indicate that dollar is gaining back momentum and should see the greenback retest prior highs against other major currencies.

EURJPY..the risk aversion

The currency market was expecting a really horrible number to end the risk-aversion trades and stocks downternding. So what we have on Friday? A number bigger than the worst estimates and a lousy revision to go with it (see my last post).

The worst economic news instead on spooking the Dow, it facilitated the Dow to move upward. Dealers are impressed at the resilience of the stock market despite today’s horrible data
The rally in Wall Street give some relief to the appreciating yen. The appreciating yen is coming dangerously close to the level where the Bank of Japan will intervene. It is rumored that they not only expected to heavily sell the Yen, but they are going to flood the money supply with currency. This move will be different than it made years ago when it settled only on intervention. Every gain in the Yen causes a decline in exports which leads to lower profits for powerful Japanese corporations like Canon, Toyota and Hyundai Motors.

I have been following the EURJPY trade and employing various technical indicators. My past experience is in stock and future markets. Although some basic indicators can be employed in currency market in similar manners as in stock and future market, the approached is quite different since the currency market is a 24 hours market and the liquidity is much higher than the other two markets.

After testing all the possibilities of application of the technical tools, I feel comfortable using a simple tool for day trading using 15 minutes time frame for my dominant trend and 1 or 5 minutes time frame as a trigger for entry and exit. For 1 to 5 minutes time frame I utilized a few of more sophisticated technical tools.

Here is my rundown on EURJPY cross during the US session to determine the prevailing trend using the 15-minute time frame.

The tools that I used are: S/R lines, Pivot point, Fibo retracement , 00 S/R level and moving average (20-green, 50-blue and 200=red).

The US session started one hour after the V3 vertical blue line.

Before the 8.30 economic news on Friday, the cross is gyrating around the 117.00 level and the 8.15 candle inched downward from the 7-8 am candles range. After the announcement, price moved violently up and down within 150 pips. The chart showed that the cross hit resistance at 50 EMA and find support at downtrend line A3 and also the psychological level 116.00. A Fibo retracement is placed using the swing high of previous day and swing low of previously moved downward. It moved above the Pivot Point Support (S1 Pp) and find resistance on downward slopping 20 EMA and the 117.00 price level. At 1.45 pm price broke trough the range forming at Fibo retracement 23.6% and S1 Pp as Wall Street was showing a strength of moving upward.at around noon.

The moved upward was impressive. Crossed over all the EMA’s, Pivot Point, the 118.00 price level and was stopped by the upward slopping trend line A2 at about the mid point between the Pivot Point and Resistance Pp (R1).

The rebound of Wall Street and the fall of Yen (considered a safe currency during the current financial crisis) after an extremely weak US employment report look like a sign of risk aversion appetite subsiding.

Next week we get somewhat of a reprieve from US, with economic data in the Pending home sales will be of some interest on Tuesday and retail sales of major interest on Friday.
Federal Reserve news is sprinkled throughout the week while ECB President Trichet is scheduled to speak at least three times next week. Expect him to keep the door open for further rate cuts ahead.

Bad news….good result

It was a crazy week for Wall Street.

The market kicked off the week with a nearly 700-point drop in Dow Jones Industrial Average then gave way to a series of sessions that moved upwards on seesawed back and forth. On Friday the Dow rose 259.18 points, or 3.1%, to close at 8,635.42 but still recorded a loss of 2.2% for the week.

Monday heavy fall in the Dow was due to Asian stock markets trading lower on profit-taking and concerns about Japanese factories and real estate. The market opened above the daily Pivot point and from the word go, it fall downward breaching all moving average. The fall contributed to the blue and red Laguerre (lag) indicators to breach the 85 level indicating a bearish situation.

On Tuesday, in early trading hour RSI indicator moved above 30 level indicating possibility of market reversal and subsequently the blue lag crossed the 15 level after one hour trading with the red lag follow one half hours later. This signified that Monday bearish mood has been arrested. The weekly short term bull reached its resistance on the monthly Pivot point on Thursday. A double top was formed with daily Pivot point and a breached under the pivot point started the fall that found support at matching low candlesticks at 10.30 am. After the matching lows, the RSI inched above 30 and the blue lag above 15 which denoted a changing trend to the upside.

The Dow is now up after adsorbing an extremely weak US employment report. U.S. nonfarm payrolls plunged by an astonishing 533,000 in November -- the worst job loss in 34 years. It was only the fourth time in the past 58 years that payrolls had fallen by more than 500,000 in a month. and the 25th worst decline. As if that was not bad enough, the September and October were also revised sharply lower. The September number was revised from -284K to -403K (-119K) and the October number was revised to -320K from -240K (-80K). Since the recession began 11 months ago, a total of 1.9 million jobs have been lost.

Let see, how Bursa Saham Malaysia performed this week.

EWM

Bursa Malaysia (KLCI)

On Monday the Bursa Saham fall heavily in line with other Asian markets. On Tuesday it opened gap down but recovered with the gap still unfilled. Wednesday and Thursday interest in the market was low and the two days market almost opened and closed at the same level (doji). Friday with long weekend as next Monday is market holiday, and the general feeling of apprehension for the stock market in Europe and US the stock market closed lower for the week.

EWM that is traded in New York reacted after the Bursa Malaysia is closed for the day. With Bursa Malaysia performing badly on Monday and the Dow started moving southward, The EWM moved in different direction. It gap up and then the price just hobbling up and down between high of 6.90 and low of 6.65. On Friday it took the cue from Bursa Malaysia and also the Wall Street. It fall and hovering at 6.55-6.60 before at lunch time when the RSI rose above 50 and the upward moved started. At the lash hour of trading, prices spiked up ward and closed higher.

I expect that for the coming weeks, the Bursa Malaysia will react positively on any positive news in New York but any negative stance in New York has less bearing on the Bursa.

Waiting..waiting…waiting

After three consecutive weeks with a negative performance, DJIA was in a positive territory by end of November.

The Dow indicated a possibility of weekly good showings upon bearish reversal of the heavy fall below the 8,000 level, with a rebound during the last hour of the week ending 21st November. Dow opened higher above the daily and weekly Pivot Point (Pp); and the 20 period and 60 period EMA; and the downward sloping line A. Tuesday, the market showed a reprieve with a consolidation around the daily Pp and 20 period EMA. Wednesday, with next day is a Thanksgiving holiday the Dow inched upward breaking the daily Pp and bouncing from the 20 period EMA. Friday was very bullish with a gap open of the Dow at above the daily S1 pp level and subsequently breaching the S2 Pp. The Dow closed at 8,829.04 with a gained of 1,277 points, or 17%, in just five sessions, marking its best five-day percentage gain since 1932, and its best five-day point gain on record.

EWM performance.

There is a triple bottom forming last Friday and the target of the bottom was reached on Monday. The EWM than consolidate forming a triangle. I am anticipating the break to the upside of the triangle.

As mentioned on the last post, as expected the Malaysian market moved positively in early week, but went flat subsequently despite the Dow performance. The coming week will establish where is the Bursa KLSE Composite heading, since the low on Wednesday is 61.8% retracement of the swing low of October 28 and high of November 5th. My bet is that the gap experienced two weeks ago will be fill-up and a move up to 880 area. I don’t like to predict but preferring for anticipation of the flow of the market. On this basis, I believed for the past two weeks the local market sentiment has been detached from the Dow and interest on the market is dwindling. The market is waiting for any positive economic news locally or foreign news that has direct bearing on local economy.

During the week, Bank Negara cut the OPR from 3.5% to 3.25% and forecast that the economy will grow by 5% to 5.5% in 2009. Bank Negara also projected that in the fourth quarter this year, the economy was to expand by 3.5% to 4.5%.
After a string of reported weaker corporate earnings and slower domestic economic growth of 4.7 % in the third quarter of 2008, the slowest pace since the mid-2005 the impact of the news has been minimal on the market. With the 2008 almost coming to the end, December could see some assets values propping.

The iShares MSCI Malaysia Index Fund (EWM)

The chart above shown a correlated movement of KLSE Composite Index (the blue line) and EWM (the red line)

What is EWM?

EWM is an Exchange Traded Fund (ETF) that is meant to track the MSCI Malaysia Index, the iShare MSCI Malaysian Index Fund that is listed on New York stocK Exchange.

An ETF is a part of an investment portfolio traded on stock exchange just like shares. An ETF holds assets such as shares or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. The most popular ETF’s listed in Wall Street track an index, such as the Dow Jones Industrial Average or the S&P 500.

An ETF combines the valuation feature of a unit trust which can be purchased or redeemed at the end of each trading day for its net asset value, with the tradability feature of a closed-end fund, which trades throughout the trading day at prices that may be substantially more or less than its net asset value. Closed-end funds are not considered to be exchange-traded funds, even though they are funds and are traded on an exchange. ETFs have been available in the US since 1993 and in Europe since 1999. ETFs traditionally have been index funds,

Locally, three ETF’s are traded on the Bursa Malaysia, ABF Malaysia Bond Index Fund and FBM 30 ETF managed by AmInvestment Services Berhad, and MYETF Dow Jones Islamic Market Malaysia TITANS 25 managed by i-Vcap Management Sdn Bhd

There is one closed-end fund traded at Bursa Malaysia, Icapital.biz Berhad, managed by Capital Dynamics Asset Management Sdn Bhd.

As an index fund, EWM seeks to track the performance of an Bursa Malaysia index by holding in its portfolio either the contents of the index or a representative sample of the securities in the index.

Trading on EWM commenced on 3rd December 1996 and EWM holds shares of more than 60 companies that trade on the Malaysian stock market.

The two charts above shown clearly the relationship between EWM and KLSE Composite Index on daily basis for the last three months.

The chart below depicted the movement of EWM as against the Dow Jones Industrial Average (DJIA). It was reported that EWM has a beta of 0.76 as against the DJIA last month. (Not a perfect correlation between EWM and DJIA).

















The chart below is a 15 mins chart of EWM for lat 10 days. From casual observation, EWM has been uptrending since the last low on Thursday. A reverse head and shoulders pattern is forming but this could not be verified since the second shoulder is not formed yet.

Last Thursday, DJIA penetration of 8,000 mental support level was swiftly reversed by the last hour of New York trading session. A double bottom was formed as a result, but the target high has been reached. The coming week market is expected to track the development of Citicorp crisis and Bursa Malaysia is expected to experience early weakness before further upward movement.

The Dow and the Currencies

The US stock market fell sharply for a second consecutive week. See the daily Dow Jones Industrial Average (Dow) chart below.

The Dow declined this week by 5.0% to end at 8,497.31 on Friday.

The Dow had a wild week especially on Thursday and Friday with all sorts of ups and downs for the two days.

The wild gyration on Thursday and Friday is shown on the chart of 15 Min Dow. Let us analyze through for the week.
The top blue straight line is the weekly pivot point (Pp), with the dark green the daily pivot point (Pp). The Dow opened on Monday at the weekly Pp and above the 200 period EMA (the red line). The overall market sentiment is however still bearish since the EMA is still in proper bearish position with the 200 period EMA is above the 60 period EMA (the blue line). One hour after the opening the price started coming down, crossing the Weekly Pp and the 200 period EMA. By lunch time it went below the daily Pp, rebounded and closed at this Pp level. The early morning upward shifting clearly is a bull trap that sucks the short- sellers and drew some buyers and than it reversed sharply on them.

Tuesday opened below daily Pp and almost pushed down to Support (S2 Pp), only to have it recovered that took the price to the confluence of 60 period EMA resistance after lunch. The Dow reversed southward with a close at S1 Pp. The second bull trap of the week.

The stock market by Wednesday showed a downward trend upon worse than anticipated data of jobless claim (a rise in the claim figures since December 1982) announced at 8.30 ET, until it hit a technical support on Thursday at S2 Pp. The price than reversed direction upward,pierced through the 20 period EMA, 60 period EMA and the 200 period EMA and close at Resistance (R2 Pp) level.

Friday, the focus was the US economic news at 8.30 am with the Advance retail sales index fell by the most since record keeping began in 1992 at a rate of 2.8% in October, which also marked the 4th straight month of decline, and the record low of consumer confidence. The market opened gap down, crossed the 200 period EMA and by the lunch time and find support at 60 period EMA.

After lunch, the market reversed upward and took out the 200 period EMA and stop at resistance level of the last swing high with a bearish formation of an evening doji star formed one hour before market closed. At this level the market is overbought as indicated by the RSI value of above 70.

Market than take-away all the gains it had after the lunch run-up and closed at the level of the day’s low.

Notice that, a short-term double top has formed.

Dow 15 min chart

Overall, the Thursday low did not take-out the October 10th low but judging on the volume the Dow at 8,000 point level indicated a good support. Every times Dow goes to that level, there is a heavy volume that signify support or buying opportunity as if that 8,000 level is a mental buy point. How long this level could be sustained…let the market decide….to forecast especially at current low confidence level in global financial environment is a high risk gambit. Trade small if needed with preservation of our capital as best as we can.

Let us see what the market sentiment reflected on the major currencies

EURJPY 30 min chart

EURUSD 30 min Chart

USDJPY 30 Min Chart

On Monday, the three currencies cross, THE EURUSD, USDJPY, EURJOY mimicked the DOW during the US session while during the Asian and European sessions it moved sideway around the weekly and daily Pivot Point (Pp).

By Tuesday, all there currencies cross indicated a bearish sentiment as the 60 period EMA cross 200 period EMA from above. The USDJPY glided sideway until closing, with the EURUSD and EURJPY, fall heavily after the opening of US stock market at 9.30 ET. A weaker Euro could be attributed to weak euro zone economic sentiment. At 17.30 GMT(10.30 ET) the two currencies cross almost went ranging sideway up to the closing below S1 Pp.

Wednesday, the Dow which closed lower the previous day dictated a lower opening of the three currencies cross. After half an hour open for the Asian session, the currencies cross reverse direction, a technical bear correction.
EURUSD and EURJPY with a bullish divergence of RSI and a hammer candlestick carried the prices over to the daily Pp and the negative sloping 60 period EMA. The USDJPY due to previous day strength managed to correct above the daily Pp and touched the 200 period EMA. All the three crosses moved downward at the beginning of the European session. An anticipated lower US stock market provides the impetus for the USDJPY and EURJPY to fall heavily in the morning US session. USDJPY performed badly among the three crosses. The EURUSD fall meekly and contained within the S1 Pp.. The Euro zone and the US dollar weakness against the yen could be an anticipation of a weak economic data that are to be announced the next day.

Thursday, as anticipated, an oversold position in USDJPY and EURJPY which showed a bullish divergence in RSI and opening well below the daily Pp pushed prices to the 60 period EMA. The strength of the moved lasted until the US session.
The EURUSD which went sideway within a narrow channel, break the channel lower support line during the European session to penetrate the S1 Pp, reversed at London open with a formation of candlestick morning star to recover back into the daily Pp. The early morning European session registered a slight fall in EURUSD and EURJPY after the German announced a lower than forecast GDP.

An announcement of continuing jobless claims in US than anticipated trigger a reversal in the three currencies crosses as the Dow crept downward. By lunch time in New York, the Dow made a complete reversal and the three currency crosses trailed the Dow up to the close. The EURUSD showed an impressive moved upward to touch the weekly Pp.

By Friday the grossly overbought currencies as anticipated corrected downwards. Right from the open. through the Asian session, European session and the American session. At around the 8.30 ET announcements of worst retail sales, the currencies inched upward but with the DOW open at 9.30 ET and moved south, the currencies crosses followed suit. By noon the Dow and three currencies crosses decide to reversed themselves upward before reversing downward again one hour before the Dow closed.

Before the close, the EURUSD reversed downward sharply and carried it to close at the lowest for the day. The weakness in euro zone also pulled the EURJPN cross.

For weeks, the market had been discussing how risk appetite, or the lack of it, has been the driving action of currencies against the dollar with the exception of the yen. The strength of the dollar has been amusing given the dismal status of US economy, but since the dollar has managed to hold on its status as “safe haven” asset, fundamental take a back seat. Since risk trends is the lead, it is best to watch the stock market’s reaction as pessimistic turn sentiment could lead equity lower and thus lead US dollar higher given their negative correlation.

The yen another “safe haven” currency with a low yield has been choppily lately. The yen is sensitive to fear and greed in the currency market that leads to breakout and revived trends therefore could make yen as the barometer of the market. One of the key tools to gauge the consistency of the trend in yen is the US stock market, i.e. the inverse correlation between the Dow and the yen.

Looking for a bottom!

Without a doubt to consistently and correctly forecast the direction of financial markets either stocks, futures or currencies is a hazardous task. Therefore, rather than building our own bullish or bearish bias, we should continue to gather the facts, conduct research, and form an opinion while conceding we could be wrong. Be patient and observant and have an educated and open mind to what has happened and what is happening rather than emphasizing on forecasting. What we know and can do is process the information we have now with an understanding that the information will change in the future.

The simplest and popular analysis to discern between a bull and bear market is using simple moving averages. Look at the 5 years chart of KLCI below.

From 2004 to January 2008 bull run, the slope of 200 day EMA (the black line) is never negative, the 50 days EMA(the purple line) is above 200 days EMA vast majority of time.

The crossing from above of 200 days EMA by 50 days EMA in mid March signal the trend change from bull to bear. From that golden cross, the slope of 200 days EMA is never positive and 50 days EMA is always below 200 days EMA which denotes that the bear has taken over.

During the bull run, the market has crossed the 50 days EMA in a few occurrence indicating a correction but rebounded on the 200 days EMA with the exception in March 2008 where the golden cross occurred (the crossing of 200 EMA by 50 EMA).

Presently, we remain in a bear market, which means principal preservation is the primary objective. However, the recent declines in stocks have dropped valuations to levels where buyers will be more inclined to step forward. At some point, stocks will begin to transition from a bear market back to a bull market. It could occur relatively soon or may not happen for an extended period of time. Regardless of when the shift occurs, it is prudent to prepare for the transition.

On my previous post, I indicated there is a bearish head and shoulder pattern forming in late 2007 and early 2008 with a target support low of 830. In the previous post I also did mentioned that the Fibonacci retracement of 61.8% is at about 750 level.

Look at the 3 months chart of KLCI above with the 200 days EMA in black, 50 Days EMA in purple while the 20 days SMA is in red.

The index or market fall sharply with a gap to a lowest point at 801 on October 28th in line with around the globe market heavy slide downward. The market rebound or maybe corrected itself to 926 level on November 5th. At this level the index closed above the 20 days SMA indicating a minor rally but the subsequent two days before end of the week it fall and moved below the 20 days SMA.

Is the bear market going to be over i.e touch bottom?
The market first have to cross the 50 days EMA but please be reminded that past history shows how bear markets have trouble staying above the 50-day and 200 day moving averages. This what is term as false rallies.

It is important to keep our mind in perspective for all possible outcomes, even outcomes which are contrary to your view of the world. During a bull market, it is dangerous to become blindly bullish, especially after spectacular gains. Likewise, during a bear market, it is dangerous to become blindly bearish, especially after significant declines. . While the current bear market could continue for years, it could also be closer to its end than many are willing to even remotely concede. An open mind is an investor's best friend.

Charts are a good way to keep tabs on the human emotions of greed and fear. Often we made mistakes during the bear market by remaining fearful for too long as assets became attractively priced. We rather moved our money tucked safely in the bank (although currently it might not be a safe bet) than considering starting some cautious buying. People want to buy at the top and sit on their hands at market bottoms. It has always been that way and it will always be that way. Bottoms do not occur when conditions are perfect and it feels comfortable to invest.

The Modern Finance

THE Fall Season of 2008 marks the end of an era in American and European banking environment. For so many years, their respective government have been stood at the sideline from the finance business, but now have  been forced to step in to rescue banking systems and the markets. In America, the bulwark of free enterprise, and in Britain, the pioneer of privatisation, financial firms have had to accept rescue and part-ownership by the state. 

The changing scenarios of the finance or banking world has evolved for the past decades. Expansion and diversification of finance/banking players and products has change the finace landscape from the conventional finance to the new finance or modern finance. Technological advancements have changed the face of the world of finance. It is today more a world of transactions than a world of relations. Most relations have been transactionalised. Modern finance its widest sense implies every such process which converts a financial relation into a transaction. 

The financial derivatives that is already hard to grasp for a layman such as option, future contracts, interest rate and currency swaps has become more complex such as credit-default swap (CDS).

Securitization which began with a stright forward of bundling loans into packages that are then sold to outside investors, with the first big market was for American mortgages. These asset-backed securities became ever more complex. Securitisation eventually gave rise to collateralised debt obligations (CDO), sophisticated instruments that bundled together packages of different bonds and then sliced them into tranches according to investors’ appetite for risk. Securitisation opened a new route to growth for banks. They will no longer dependent on the slow, costly business of attracting retail deposits. Securitisation allowed them to borrow in the markets. In 2007 Northern Rock, a British mortgage lender, was the first spectacular casualty of this false assumption; many more banks have been caught out in 2008.

The end results of modern finance saw the dismantling of the fundamental finance with plenty of cautionary lessons to be drawn -- recklessness, greed, ridiculous lending standards, the disappearance of risk management ...and so on.

Do we in Malaysia have been aware of the modern or structure finance products.

I have been out of finance industry since the Asian Monetary crisis of 1997, but I am aware that some of the dervatives products such as option, futures and swaps are being offered but public participation is at minimal level. 

Malaysia’s securitization product originated in 1986 when the Government set up a mortgage financing body called National Mortgage Corp  (Cagmas Bhd) formed on the model of Fannie Mae and Freddie Mac of USA. As Cagamas bond expanded and with  have full recourse to the originators of the loans, the market has not reached a maturity stage where it can stand on the rating of the underlying portfolios unlike the USA counterpart.

The introduction of new securitization instruments (such as asset-backed securities-ABS), and improvements to the regulatory structure such as the 2004 Bank Negara Malaysia’s revised guidelines on the Offering of Asset-Backed Securities and the 2006 issuance of  additional guidelines for bond pricing agencies and electronic booking systems and the 2007, revised its Guidelines on the Offering of Structured Products contributed to a vibrant market. Fortunately our securitization plays is mainly Islamic finance centric. For example, the first Islamic sovereign securitization in Malaysia was issued in February 2005 by Pasir Gudang Local Authority as a mudharabah sukuk and  Time Engineering Bhd  issuing the first ABS using the Musyarakah - or joint venture – concept in the world.

Furthermore, the  banks mainly had the upper hand over the  “classical”  real estate and as for the other types of securitizable credits (mostly ABS) is still low and these products moreover ran a lower risk than their American counterparts and were traded mainly in the domestic market.

A different securitization structure and that has a significant progress in Malaysia is real estate securitization. Its principle, identical to that of securitization, consists in splitting the real estate portfolios into small parts (securities), to make investment accessible to any type of operator and make transactions easy. The most successful formula is the Real Estate Investment Trusts (REIT), which buys and manages buildings by raising capital at the Stock Exchange. The REITS securities issued by these companies are affordable by any individual.

Not surprisingly the initial REIT funds were raised in the United States, before pursuing their progression in Europe in the 1980s. They penetrated Asia under cover of the 1997 crisis. 

The significant progress of the REITs in Malaysia until 2007 are attributable to the low levels of interest rates and the  growth potential of  Bursa Malaysia where the REITs are listed. Apart from their advantage as alternative investment product, the REITs accounted for a new financial source for property developers, which can henceforth finance a major part of their real estate projects by raising funds at the Stock Exchange.

Will the subprime and credit crisis result in at least an iota of realization on the dangers of securitization in Malaysia ? It is not sure that all the lessons will be taken from the American debacle. Financial players historically have a short memory, for example the Asian Monetary crisis is only a decade old but the same situation is recreated in Eastern Europe and Iceland.

Investment banks with a commercial bank based such as CIMB, Arab-Malaysian and Maybank are currently the major player in the securitization market. Competition and demand might bring in the incompetent non-commercial bank based investment banks into play. Just to get a hint how incompetent those non bank based investment bank is, we peek into their commentaries on current market development. For example, one such investment bank appear amateurish in dishing commentaries on three issues last months;(1) HSBC Holdings plc's willingness to pay a high premium for an Indonesian bank,Bank Ekonomi to justify that Malayan Banking Bhd's  Bank Internasional Indonesia (BII) deal is too pricey, (2) The current fall market fall and to sell on the rebound (the dead cat bounce) and (3) The recovery of current malaise in US stock market   depend on the rebound of property market. This as though the current world market downturn is mainly due to the US property market. This is similar to the simplistic reasoning by the Limp of the impending economic  downturn and uninspiring economic stimulus dished out yesterday. Worst still, he is still in denial stupor.

Ouch..October

Traditionally, the month October has been bad for stocks. But not only U.S. stocks that could not only detach themselves with past records., emerging markets, currencies, commodities and bonds all made their way into the history books for having turned in mostly negative performances with past records.

1. The Dow Jones Industrial Averages has a 14% drop over the past four weeks is the biggest
October decline since 1987, when the Black Monday crash sent the blue-chip benchmark
down 23% for the month. It had the most down days in a month since August 1973. During an
eight-day losing streak at the beginning of the month, it racked up a total drop of 2,396
points. In October, the Dow kaput is the 15th worst monthly decline since 1900.

2. The S&P 500 has not had such a volatile month since November 1929, as measured by moves
of at least 1% higher or lower. The Dow posted its two biggest point gains on record, climbing
by 936 points on Oct. 13 and by 889 on Oct. 28. But it also posted its second-biggest point
drop on record, of 733 points. By end of the month S&P 500 recorded the 8th worst one-
month decline since 1930 with 16.9% fall.

3. Shares of Germany's Volkswagen set a new standard for huge price moves among non-penny
stocks. The automaker's shares surged 348% on Monday (27th) and Tuesday(28th), to 945
euros ($1,233), giving it a brief run as the largest company in the world by market
capitalization, after hedge funds scrambled to cover their short investments. By the end of the
week, the stock had given back nearly half of those gains.

4. Crude-oil futures closed by end of October with the biggest monthly loss ever in New York.
Crude's front-month contract drop of 32.6%, or $32.83, for the month -- the biggest monthly
decline recorded on Nymex since trading began in 1983. Crude is now more than 54% lower
than its record high of $147.27 hit in July. Year to date, it's lost 29.4%.

5. Gold futures ending October's trading with their worst monthly record since early 1983, as a
strengthening U.S. dollar and fund liquidations pounded the precious metal and other
commodities. Gold for December delivery closed down $20.30 at $718.20 an ounce on the
Comex division of the New York Mercantile Exchange. The metal lost 18% in October, its
biggest percentage loss since February 1983, according to Comex data. Gold is now 28% lower
than its high above $1,000 an ounce hit in March.

6. In other metals, December copper fell 3.3% to $1.8290 a pound, extending its monthly loss to
35%. December silver slid 0.6% to $9.73 an ounce. Silver surrendered 20% this month.
With the fall on commodities and the stock market, the dollar gets a lot of credit. The 7.8%
jumped of the index is the 4th best one-month improvement since 1967. The greenback
gained an astonishing 14.3% against the euro from the close of September to the dollar's peak
a few days ago. Those healthy gains, however, pale next to its advances of 22.3% against the
Canadian dollar and 31.8% against the Australian dollar.

7. The Japanese Yen, another safe-have currency recorded a 16% rise against the the Euro and
7% against the dollar for the month of October.

8. All around the globe stock market went bunkum , with MSCI Word Index loss 19.1% in
October i.e. the largest monthly decline since the Index started in 1969, beating October
1987’s -17.1%). MSCI Emerging Markets Index fall 27.1% , the worst monthly loss since
Russia’s debt default in August 1998.

9. The fall in; London’s FTSE -10.7% while the German’s DAX -14.5%.. In Asia, China’s
Shanghai Composite fall by 24.6%, India’s Sensex -23.9%. The Australian’s all Ordinaries -
14%, Singapore’s STI -23.9%, Hong Kong’s Hang Seng -22.5%, Korean’s KOSPI -23.1% and
Tokyo’s Nikkei -23.8%. Our local Bursar comparatively performance better with the Composite
Index fall by only 15.2%.

10. The ringgit performance against other currencies is as per charts below.

Against our major trading partners, the Ringgit appreciated vis-a-vis the Euros and Pounds. The Yen appreciated more markedly versus our Ringgit as compared to the US dollar or the Chinese Renminbi in October. However by late October the ringgit strengthened against the the Yen.













As against the Asian currencies, the Aussie Dollar and the Rupiah fluctuated widely against our Ringgit. The two currencies with the Korean Won suffered badly during the American and European credit crisis.

Unrelenting Mess

It seem that by early  yesterday morning session Wall Street will decouple itself from the bad day of Asian bourses with a September rebound in new homes sales. But in the afternoon U.S. stocks are slammed again at the close to end sharply lower. See the chart of intraday S&P 500.

The EURUSD was steadier during the Asian session but fall on the wayside during the European trading period and recovered at American trading time and closed lower than the previous day. See the daily chart of EURUSD below.

Heavy buying by a Swiss bank has helped carry EUR/US through the 1.25 level during the early US session.

The financial crisis spreading through the former Soviet bloc is setting up  a second  banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump.

A few of analysts rated the upcoming banking crisis in Europe to be the biggest currency crisis the world has ever seen.

The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the Eastern Europe  market bubble..

They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of  current US credit problems.

Iceland’s financial difficulties foretaste of what the crisis may mean. Iceland’s demise has left them nursing likely losses of $74bn (£47bn). The Germans have lost $22bn.

Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.

Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc.

Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn). 

The low interest rate in US and Japan sat out the emerging market credit boom. The lending spree was followed eagerly by the Europeans – often using dollar and yen balance sheets, adding another ugly twist as global “deleveraging” causes the dollar and yen shot upward.

Note: This was written during lunch break of Bursa Saham Malaysia.

The morning session, Asian bourses was badly wacked especially the Bursa Malaysia and Singapore exchange.

It seem that the financial crisis is far from over or in fact is not yet stabalised.

Mr. Limp.....catch any falling durians?..ouch..ouch  ouch...

Ringgit And US Dollar

The US Dollar Index (USDX) is an index or measure of the value of the United States dollar relative to a basket of foreign currencies(the euro(EUR), Japanese yen (JPY), Pound sterling (GBP), Canadian dollar (CAD), Swedish krona (SEK) andSwiss franc (CHF).

The chart below is a weekly US Dollar index since July 2005. It clearly depicted that US dollar was in despaired from third quarter 2005 to March 2008.

The next chart show the daily movement of US Dollar Index from October 2007.
It indicates that the dollar went sideway from March 17 to end of July 2008. Technically, a classic W bottom or double bottom was formed indicating a reversal of price trend.

It was widely speculated that the reversal of dollar downward movement was initiated through currencies intervention by US, European and Japanese governments to check the downward slide of the dollar. The intervention was partly helped by the Chinese government forcing its commercial banks to hold more dollars and also by a huge buying American treasury bills by foreign central banks, especially the Chinese and the Middle Eastern Countries. It was reported that in August, the increase in Treasury bill buying far exceeded that which is needed, to offset the huge U.S. trade deficit. The Treasury bill buying happened right before the value of the U.S. dollar started surging.

At the dollar gained a momentum upwards of its own in August despite the first sign of the credit crisis, people who were previously short, and “stopped out”, decided that the wind was blowing in favor of the dollar. These opportunistic speculatos converted their funds to go long on the dollar and short on euros, yen, and whatever

EURUSD WEEKLY

GBPUSD WEEKLY

USDJPY WEEKLY

USDSEK WEEKLY

From the above weekly charts which are the charts of Euro against USD (EURUSD), UK Pound against USD (GBPUSD), USD against the Japanese Yen (USDJPY) and USD against Swedish Krona (USDSEK) by March the dollar stalled and reversed its direction by end of July. With the exception of the Yen all currencies continued its reversed direction.

And The Ringgit moved in similar fashion. From March to June the Ringgit formed a cup and saucer pattern.

USDMYR

Let us examined what financial disaster is unfold in March?.

In March 2008, the Federal Reserve Bank of New York provided an emergency loan to Bear Stearns to avert a sudden collapse of the company. The company could not be saved, however, and was sold to JP Morgan Chase for as low as ten dollars per share, a price far below the 52-week high of $133.20 per share, traded before the crisis, although not as low as the two dollars per share originally agreed upon by Bear Stearns and JP Morgan Chase on March 17, 2008. This is when the start of the bull run of the dollar.

The dollar moved upward uninterrupted until September and corrected itself upon The US Government takeover Fannie Mae and Freddie Mac in September 2008.

On Sunday, September 14, it was announced that Lehman Brothers would file for bankruptcy after the Federal Reserve Bank declined to participate in creating a financial support facility for Lehman Brothers.

The same day, the sale of Merrill Lynch to Bank of America was announced. The beginning of the week was marked by extreme instability in global stock markets, with dramatic drops in market values on Monday, September 15,

On September 16, the large insurer American International Group (AIG), a significant participant in the credit default swaps markets suffered a liquidity crisis following the downgrade of its credit rating.

The Federal Reserve, at AIG's request created a credit facility for up to US$85 billion in exchange for an 79.9% equity interest,

Toward the end of the week, short selling of financial stocks was suspended by the Financial Services Authority in the United Kingdom and by the Securities and Exchange Commission in the United States.

From the week of September 15, the dollar and the Yen become a safe-haven currencies as both currencies appreciated against all other countries’ currencies.

-The Yen remains boosted by capital fleeing back to Japan from all major currencies while Japanese investors are keeping capital at home as the Nikkei hits 26-year lows,

- While the dollar enjoyed its safe-haven status of its own, boosted in part by repatriation as U.S. investors flee emerging markets and other overseas investments.

The UK Pound was pounded due to the similar problems that has besetting the US financial industry while the Euro Zone countries have their problems with their banks exposure in Emerging market of Europe and Latin America which is to a greater degree than US banks are exposed to the sub-primes.

As for the ringgit....against our Southie neighbour, the Aussie Dollar. We can get about One Aussie Dollar for RM2.20 as against RM3.10 three months ago.