Happy Easter!
Let me first tell you that as a matter of priorities my concern hinges on a longer term deposition, it is seldom on my part take on short term forecasting.
However, recent developments over the past week have compelled me to issue this outlook.
Figure 1: US Dollar, Gold and Emerging Markets
As the US dollar (trade weighted index) manifests renewed signs of weakening, Gold and emerging markets have lately been showing signs of rejuvenation.
In fact, as shown in Figure 1, emerging market bourses represented by the iShare Emerging Market indices (red candle) have broken into new heights (lower panel) while gold (black line behind) has seen some resurgence and appears to be on its way to test its resistance level at around the 690-695 area.
What these confluences appear to tell us is that the softening US dollar could be providing for the backstop of liquidity in the global financial markets.
Figure 2: US Global Investors/SGS: Commodity prices recover
Where the performances of emerging market assets have shown strong correlation to commodities, Figure 2 shows of how copper prices, steel and the Baltic freight price Index have recently chimed in to exhibit renewed vigor.
These markets appear to contradict expectations of a global economic slowdown or could they imply “decoupling”? Or is it telling us of another message relative to the purchasing power of the US dollar?
Figure 3: Carry Trade Currencies
Our concern of late has been of the liquidity provided for by the carry trade arbitrage, where the recent spike in the low yielding “funding” currencies has served to curtail “liquidity” in the marketplace which prompted for the recent bout of interrelated market corrections.
Today, the current swoon in the both the Swiss Franc and the Japanese Yen on the backdrop of rallying global assets worldwide suggests to us that the speculative ramp has been set for a possible continuity of in favor of asset upside repricing.
Figure 4: Phisix Peso correlation: Peso Nears breakout, will the Phisix follow suit?
As we have noted in the past, the Peso/USD and the Phisix has shown strong correlations, whereby inflection points have been coincidental (declining Phisix- strengthening USD and vice versa).
At Friday’s close, we see the Peso end at its resistance level relative to the US Dollar as shown in Figure 4. Could we be seeing a breakout of the Peso which should similarly reflect on the Phisix?
At the start of the year, I had neutral to bearish with the Peso and the Phisix considering the market’s cyclicality. I had been expecting a decline at around 2,600-2,800 as a global slowdown unfolds with risks from the US diffusing to the world. That slowdown and cyclical correction appears to have been factored in, in contrast to my expectations, while global markets have taken the next step further.
Yes we are aware that the risks from the US credit markets may yet spread and or liquidity concerns from other aspects as the Carry trend phenomenon or geopolitics may work to forestall the recent advances, however, at the moment, momentum appears to have shifted greatly in favor of the bulls.
So in my view, IF the peso closes below the 48 level, one should expect the PHISIX to bolt out of the 3,400 level SOON.
When asked why the illustrious economist John Maynard Keynes changed his stance on a position his reply was, ``When the facts change, I change my mind. What do you do, sir?”
Do your self a favor, call your broker and execute your trading positions.
Happy Trading!
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