A risk-on window is perhaps the best way to bid farewell to trading year ’11, especially one not triggered by the usual Merkozy market talk-up that proves hollow two days into risk trading. But there is something eerie about upbeat US data suddenly de-linking the cross-Atlantic nosedive. Should I be concerned that my crystal ball just does not agree with currency strategists on Bloomberg, that the domino theory no longer holds going into the new year? That what happens in Europe will no longer immediately impact commodity currencies like the aussie and loonie? Fine, we will likely see a risk rally in early year trading, but will that owe more to holiday season job trends than idle money rounded off at year end making its way back into the market?
I expect Europe to stay centre-stage for some time, not least because one, its failing banks can cause a money hemorrhage in the US in no time. Two, even in the best case scenario, where sovereign debt problems can be wished away, cut-throat austerity across the eurozone is sure to plunge the continent into a steep recession in ’12, depressing export activity in emerging markets, with a pronounced effect on commodity currencies just like the aussie and loonie. Three, ECB’s loan window is little more than another form of quantitative easing, condemning the single currency to prolonged depression. And four, there is no guarantee banks will not hold the cash for refinancing needs, especially when less than a month after coordinated central bank initiative to lower dollar borrowing cost, European banks have wiped out most intervention gains. Allied Irish Bank, Banco Santander, Credit Agricole and Commerzbank, to name a few, are deeply distressed.
Going into the last week, though, US numbers are indeed driving the market. ECB’s easy money will stitch Europe’s wounds for now, and minus a game changer, overall sentiment in the three-day trading week is expected to stay positive. Still, best see whether euro breaks off from range bound trading upwards to 1.3200/50 level or drops to the 1.2940/50 range. Remember, the failed summit and the desperate funding did not budge rating agencies from the downgrade threat.
The pleasant surprise in the US job market, and subsequent impact on oil is interesting. Black gold advanced the most in three weeks, up 3.2 per cent at the slightest window of opportunity in the world’s largest economy. I still believe oil is over-bid, and has not priced in a potential thunderbolt from the many problems in the Gulf – war clouds darkening over Iran, renewed unrest in Saudi’s oil-rich eastern provinces, Libya unable to restore Gaddafi-era production level and Iraq-Kuwaiti tension over the same reason that pushed Saddam’s national guard across the border in ’91. Oil will fly at the slightest hint of increased tension. How higher prices will impact signs of recovery in the US needs little elaboration.
The international economy remains too tightly intertwined to give a clean chit on account of improved US sentiment, that too when American job numbers are known to be dodgy at year-end. In a year when markets remained event driven and technical analysts and chartists suffered the fate of uncertain markets in uncharted territory, best wind up on event trading too. The ’11 endgame is buy risk. But in the longer term, the euro-short, with all its implications, holds. All said and done, things have not changed enough to warrant the ‘no longer the domino theory’ position.
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