t Shadow Capitalism

MARKET COMMENTARY BY NAUFAL SANAULLAH

Sunday, October 17, 2010

Is the dollar selloff poised to reverse?

Busy day on Friday in newsflow, as all eyes were on

Bernanke’s 8:15am speech. More of the same from the Fed
chairman, but a later speech by Chicago Fed president
Charles Evans on Saturday introduced a price level target-
based approach to interest rate policy, implying a higher-
than-desired inflation rate in the near term to normalize
inflation to the 2% target could be another tool the Fed uses.
Because of the means by which money velocity and inflation
pick up, above-trend inflation may be less controllable (as far
as normalizing back to target rates) than Evans believes, and
inflation target posturing should be a very interesting Fed
policy issue going forward, especially as QE II is now all but a
given. Beyond Fed member speeches, Chinese property
prices beat again, coming in at +9.1% YoY in September vs
+8.8% expected. The China-Australia complex seems to be I remain short the for-profit education sector via APOL, STRA,
going nowhere but up, for now. US retail sales beat last & ESI, fins(ish) via BAC, PNC, WFC, & COF and cloud sector via
month, rising 0.6% vs 0.4% expected, but September CPI VMW ahead of its earnings, but decided to go long MSFT (one
underwhelmed, at 1.1% YoY vs 1.2% expected (0.8% vs 0.9% of my favorite longer-term buys) and AMZN on the tech
expected ex-food & energy). University of Michigan consumer breakout. I also remain short AKS, ISRG, BLK, and long MEE,
confidence also declined to 67.9 in October vs 69.0 expected TBT, and AGU to round up equity positions.
and the US budget deficit missed $32.0b deficit expectations,
coming in at a balance of -$34.5b. In FX, the lack of clarity from Bernanke’s speech catalyzed a
strong rally in USD, right off of the long-term triangle support
The S&P ended the day marginally up, as the rally off August level I mentioned in Thursday’s piece. The move was strong
lows continues but is losing momentum. The triangle but not enormous, but I did re-establish a short EURUSD
breakout a month ago targets 1300, but I won’t get back long position into it. The measured move target from mid-August
equities unless/until April highs are broken to the upside or lows is around 1.41 (using this summer’s 1460 pip rally as the
we retrace to 1150 and bounce with some bullish volume. basis), so considering that as well as the potential cycle low in
The 1150 breakout continues to hold, but 1180 will have to USD (as per DXY index) makes EURUSD look extended here. A
clear before this summer’s breakdown level (and incidentally break below the 1.39 level (61.8% Fibo retracement from
flash crash trigger level) is fully reversed. However, the November 2009 highs to June 2010 lows) should confirm.
Nasdaq powered ahead another 2%+ after Google’s $7.64 EPS
beat estimates by almost $1.00, with impressive top-line
growth bringing back buy-sider inflows after overcoming
recent suspicions that GOOG had lost its “growth stock”
stature. The Nasdaq’s own triangle breakout last month
incidentally targets October 2007 highs so it will be
interesting to see how the tech-heavy index moves from
here. Russell 2000 finished down about a third of a percent,
however.
 resistance in the 1.29-1.30 zone, so there is some good
confluence to be short AUD in the near-term.

As QE II gets priced into USD, GBP looks increasingly like a

good short, as it has its own imminent QE on the horizon
(although admittedly further out), and was as recently as this
past summer moving off of hawkish sentiments from BoE. NZD also is selling off of significant resistance vs USD around
The double-threat of looming inflation and necessary further 0.76, so I’m starting a short NZDUSD/long EURNZD pair trade
easing is bearish pound, especially in the cable cross if the to express a bearish positioning in NZD but not go overboard
USD selloff does indeed reverse like I expect it to. I remain in being bearish EUR (yet).
short GBP vs SGD (as well as EURSGD for that matter) but in
small size after giving back recent gains and sitting around
breakeven PnL presently. The 1.60 level in cable may end up
marking a double top when all is said and done.

To round up FX, USDCAD is bouncing off parity with some

conviction so far, as crude fell about 1.70% on Friday. If 1.01
gets taken out with some conviction, USDCAD’s bottom may
be in, especially considering the longer-term chart of DXY that
I posted above. I’m not shorting CAD vs USD yet (waiting for
the 1.01 breakout with follow-through) but I went short
CADCHF because of its bearish chart, imminent support
test/breakdown (around 0.94), and the USDCAD
developments referred to above. CADCHF presents a nice
risk/reward scenario with the sell-off trigger level so close
below. I will also consider shorting CAD vs USD if $80/bbl is
broken in crude prices. For now, however, the trend remains
a bit ambiguous, especially as it relates to future price action,
although the diamond pattern breakout in oil has to be
respected unless and until the 80 level is taken out on the
downside, which still requires a solid amount of selling from
After briefly trading above parity, AUDUSD sold off on Friday
current levels.
about a full big fig as its channel resistance trendline loomed
directly above. I went short AUD vs USD and SGD to start a
risk-neutral AUD-bearish position. AUDSGD has significant

Lastly, I went short EURCHF again as the downtrend remains
intact and the 61.8% Fibo retracement level from the most
recent cycle high to cycle low provided strong resistance and
a good zone to short into. Stops are tight in this cross.
I remain long the 10s30s steepener, although my core 10yr
position is now gone and my 30yr short is proportionally
larger in size than my 10yr long, and am quite bearish on long
bonds going forward now that Friday provided some follow
through in the breakout in 30yr yields. Thursday’s bearish
30yr auction remains the potential canary in the coalmine for
a disappearing long bond bid resulting from the current
currency war policy being executed by the United States.
With a bid-to-cover under 2.50 (representing a third
sequential decline and the lowest since February), a paradigm
shift in long bond investing may be arriving soon. The QE
trade may also be extended, considering even the belly and
short-end of the curve are finally seeing outflows. This would
be bullish USD (and bearish PMs, which is a trade I’m holding
in my trading account [see contrarian catalyst here], although
I remain long my long-term position in gold bullion), and as
IMM positioning remains very short-skewed at -$33.8b,
although EUR positioning finally dipped a modest €840m
(though about €530m of it was longs closing positions).
Finally, the foreclosure crisis is in full swing and for real, as
JPM is raising $4b and banks shares are selling off and
forming very bearish patterns. The TLGP rolls starting late this
year are going to be particularly telling, and it appears fins
may be headed for another possible liquidity crunch. And lest
we forget the pseudo-banks who benefitted from low
taxpayer-funded debt spreads but are still in pain, like GE and
COF, they too look primed for continued selloffs, especially if
equity indices turn back down.
OPEN TRADES
Long /ZN | 125’15 | stop 124’20 | +0’25
Short APOL | 51.90 | stop 54.00 | +29.52%
Long AGU | 80.00 | stop 75.00 | +8.81%
Short STRA | 160.00 | stop 165.00 | +17.83%
Short ESI | 67.31 | stop 73.15 | +16.13%
Long MEE | 35.35 | stop 34.30 | -0.37%
Long TBT | 32.65 | stop 31.80 | +4.66%
Short /ZB | 133’24 | stop 135’15 | +2’23
Short BAC | 13.32 | stop 13.75 | +10.06%
Short WFC | 26.00 | stop 27.00 | +9.31%
Short ISRG | 285.10 | stop 295.00 | +1.86%
Short BLK | 179.89 | stop 182.20 | +2.25%
Short COF | 40.04 | stop 41.20 | +7.94%
Short VMW | 80.00 | 83.20 | +2.97%
Short PNC | 51.94 | stop 53.75 | +1.19%
Short AKS | 14.20 | stop 14.95 | +1.41%
Short EUR/SGD | 1.8220 | stop 1.8330 | +105 pips
Short GBP/SGD | 2.0740 | stop 2.0900 | +25 pips
CLOSED TRADES
Long EUR/CAD | 1.3860 | sell 1.4170 | +310 pips
Short USD/JPY | 83.35 | cover 81.15 | +220 pips
NEW TRADES
Short GE | 16.73 | stop 17.50
Short /SI | 24.30 | stop 25.10
Long MSFT | 25.40 | stop 25.00
Long AMZN | 159.10 | stop 152.00
Short EUR/USD | 1.4060 | stop 1.4210
Short AUD/USD | 0.9935 | stop 1.0005
Short AUD/SGD | 1.2865 | stop 1.2955
Short NZD/USD | 0.7575 | stop 0.7610
Long EUR/NZD | 1.8530 | stop 1.8300
Short CAD/CHF | 0.9500 | stop 0.9610
Short EUR/CHF | 1.3435 | stop 1.3510
Long ZSL | 17.58 | stop 17.15
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DISCLAIMER: Nothing contained anywhere in this commentary, including
analysis and trade ideas, constitutes or should be construed as investing or
financial advice, suggestion, or recommendation. Please consult a financial
professional and do due diligence before engaging in any purchase or sale of
securities.