Hitting the targets
Those crazy yanks definitely managed to pull out a Christmas cracker of a GDP revision for Q3 and with a taper also that sees the US move into 2014 with some optimism. Job gains are booming, the Fed’s happy to cut back on printing. Everything’s coming up rosy in America isn’t it? Not if you look under the surface it isn’t. There’s still plenty off the participation list and this may weigh on the unemployment rate as they return fuelled by optimism themselves. There’s many more who are struggling to make ends meet and are being squeezed further with government policy like Obamacare and the end of benefits. Does the market care though? Not at all! It never does. In any economic situation there’s an underbelly of hardship and differentiation from reality on the streets. It’s hard to understand sometimes but that is the way we have to trade as that is what the market trades. While the US posts good numbers the market will run with it but we need to keep an eye on several factors.
- Just as the jobs side of the economy picks up the housing side starts to slip. That’s strange as they should really go in tandem and alongside economic conditions, afterall you usually need a job to get a house. Either way and whatever the reasons for the recent buoyancy (distressed selling into large investment buying) a falling house market will take some steam out of the jobs gain bullishness if it develops further
- The inflation outlook is looking lower and if we see it falling in early 2014 then the Fed could be in a pickle as a strengthening economy should bring inflationary pressure. If it doesn’t then we could have a fight between the Fed meeting their unemployment threshold while missing their 2% inflation target. That’s likely to throw forward guidance right into the spotlight and raise all sorts of questions about what the Fed will do.
- The knock on effect from a US recovery will likely see the dollar in demand early on but do not underestimate how valued the US still is for pulling the rest of the globe out the bog. It may not have the pull it once did but in a global, low growth environment any signs of US growth will be well received elsewhere as a lifeline. At some point a US recovery will play out in other currencies as sentiment will change. EM’s and smaller economies have been dragged down the falling growth chute but will feel the positive effects from a resurgent US. I think the reaction between what happened in September compared to the taper in December is very telling. We may not get the panic moves out of EM’s that we saw back then. Like many I see EM’s putting on a strong performance in an upwardly global picture. It may not be until mid to late 2014 but I still see it happening if conditions prevail.
- Aunty Janet takes the reins late in January and she’s going to become the most powerful woman in central banking. I’m not looking forward to covering her after her testimony the other week so I hope she comes out her shell a bit as she settles into the role. She’s going to have a big say in the dollar and not just by policy. How she shapes up in testimonies and Fed pressers is going to be very important early on. Any signs of weakness or indecision may get jumped upon so she’ll need to start strongly and show em who’s boss.
So where does the dollar go then?
Against the Yen it’s a 2 vs 1 trade in favour of up. If Japan recovers and meets its targets then the pair goes up further. If the US recovers it goes up anyway so my view is to still play from the long side over the year. Big dips in the pair will see me getting long.
Against other currencies I don’t think the picture is altogether clear. Will we see EUR/USD at 1.25 or less, or cable at sub 1.50? If the European economy doesn’t perform next year then there’s a case to say yes. However, given that the risk of a EU meltdown is off the cards there’s still value in Europe, for example, bond yields at 4+ % (10 yrs) for countries like Spain and Italy still mark decent returns. Such yields won’t be sniffed at by investors in a stabilising global picture and so a steady stream into the euro is likely to continue.
While a European recovery may be a longer drawn out affair it will turn around at some point and if we hit 1.25 (or less) then I’ll be looking to take advantage by building a long term long trade. Subsequently any falls in cable to those levels will give our exporters a boost which will boost our recovery so again, a decent buying opportunity.
It will be a case of picking the big and strong tech levels for entry and exit points but as we know there always comes an opportunity at some point. As one reader pointed out today, cable is very near levels at the end of 2012 and we can all see what happened in between.
