Your forexlive.com ENewsletter

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• North Korea launched 3 short range missiles into the sea on Saturday
• Japan earlier today – An M5.9 earthquake shook northeast Japan, no tsunami warnings necessary
• Japan PM Abe announces the next step in his growth strategy
• If you have $US625,000 of gold, the FBI would like a word with you
• Point and shoot just got a whole lot more accurate: algorithm rifles (nope, not kidding)
• Handbook of technical analysis from Merrill Lynch – link to free PDF
• The UK economy is edging toward a turning point, unless it has already turned
• Jon Hilsenrath: Not a lot of pressure on the Federal Reserve to begin dial-back of quantitative easing right now
• ForexLive Americas wrap: The dollar doesn’t quit
• Gold ending the week on the floor
• Speculators betting against the Australian dollar for the first time since June 2012
• Something screwy going on in Germany
• CFTC speculative futures positioning data out at the bottom of the hour
• Technical analysis: AUD/USD bottom with a time machine
• Fed’s Kocherlakota says Fed has not lowered real interest rates enough
• The case for continued dollar bullishness – WSJ
• Long AUD/NZD is the flavor of the day
• Fitch downgrades Slovenia
• The weekend playlist is set
• Australian dollar two-week decline is the swiftest since 2011

North Korea launched 3 short range missiles into the sea on Saturday Posted: 18 May 2013 02:03 AM PDT North Korea launched three short-range guided missiles into the sea off its eastern coast on Saturday No further details at this stage (link to article, but little more to read on the launches)

Japan earlier today – An M5.9 earthquake shook northeast Japan, no tsunami warnings necessary Posted: 18 May 2013 01:58 AM PDT Off the northern coast of Japan’s main Honshu island Estimated it as 5.9 at a depth of 50 kilometres No reports of damage or injuries so far

Japan PM Abe announces the next step in his growth strategy Posted: 18 May 2013 12:46 AM PDT An article from the Japan Times with very little more detail on Abe's announcement yesterday: Will double the number of full-time non-Japanese lecturers at eight national universities to 1,600 To create a fund to help more Japanese study overseas Measures to increase foreign tourists by easing visa requirements, in particular for people from Southeast Asia Abe said: it is difficult to launch a venture in Japan because the founder of a new company is often asked to guarantee the debts of the business. The government will draw up guidelines to separate founders' assets from those of the company and urge lenders not to have individuals guarantee corporate debts New goal to increase exports of infrastructure systems to ¥30 trillion by 2020, up from ¥10 trillion Japan Times Also at Abe Seeks to Get Japanese Businesses to Spend (The Wall Street Journal is often gated, so if you're unable to access the article try a a Google news search using the headline)

If you have $US625,000 of gold, the FBI would like a word with you Posted: 18 May 2013 12:44 AM PDT Someone, somewhere is having a big weekend: A shipment of gold with a declared value of $625,000 has gone missing in a suspected heist at Miami International Airport Gold shipment valued at $625,000 goes missing at Miami airport

Point and shoot just got a whole lot more accurate: algorithm rifles (nope, not kidding) Posted: 18 May 2013 12:43 AM PDT The algos are into rifles now: The shooter locks a laser on the target by pushing a small button by the trigger. It’s like a video game. But here’s where it’s different: You pull the trigger but the gun decides when to shoot. It fires only when the weapon has been pointed in exactly the right place, taking into account dozens of variables, including wind, shake and distance to the target. The article uses a 'novice shooter' as an example, who hits a target at 500 yards on the first try, "Normally it takes years of practice to hit something at that distance". A New ‘Smart Rifle’ Decides When To Shoot And Rarely Misses

Handbook of technical analysis from Merrill Lynch – link to free PDF Posted: 18 May 2013 12:41 AM PDT Catching up on some of the blogs I didn’t get to during the week I came across a post on The Big Picture with a link to a 57-page handbook on the basics of technical analysis from Merrill Lynch. I haven't read the book, but thought I'd post it up for anyone who wants a low-cost (well, no-cost) introductory text. Its from 2007, and apparently there is an updated version somewhere (feel free to post a link to later editions if you have one): Merrill Lynch: Market Analysis Technical Handbook (PDF) ADDED: OK, here's a link to the 2010 version (PDF again)

The UK economy is edging toward a turning point, unless it has already turned Posted: 18 May 2013 12:00 AM PDT British Chancellor Norman Lamont famously spoke of the "green shoots" of economic recovery in October 1991.  At the time he was widely criticised for being out of touch with the electorate's recessionary pain. But in hindsight, his comment was remarkably prescient.  GDP troughed in the fourth quarter of 1991 right at the time of his remark. So Norman Lamont actually did an extraordinary thing.  He accurately predicted the inflection point of the economy at the time.  Doing so is notoriously difficult as the official data tends to lag the real economy and most commentary and analysis is still negative.  And yet the inflection point is a highly significant moment – it is the beginning of an increase in confidence in both companies and consumers that drives future growth. Did Mervyn King signal this week that the UK economy was at a turning point?  For his last inflation report he made his most optimistic speech since the start of the crisis predicting a "modest and sustained recovery".   He increased his GDP estimates, with the economy expected to grow 0.5% in the second quarter’ he also reduced his inflation forecasts.  He was "Saving the best for last" as one newspaper writer dubbed it, with his exit from office pending. Apologies to Mervyn and his vast team analysing all the data, but I have a healthy distrust of economic forecasts.  Many years studying the theory of finance has taught me that economists, like many professional forecasters, significantly over estimate their own skills at predicting the future.   They tend to suffer from being both unskilled (inaccurate forecasting) and unaware (overly confident in their predictive powers).  I will note just one of the many papers on this.  By and large economists missed the credit bubble and have under estimated its effects since.  GDP forecasts have proved to be wildly over optimistic in the UK and Europe for many years. Thus I treat economic forecasts with much skepticism. However history has much to teach us.  And I have gone back to Reinhart and Rogoff thorough analysis of past financial crises in the book "This Time Is Different" (an excellent if none-too-easy read).  To quote "recessions surrounding financial crises are unusually long compared to normal recessions which typically last less than a year". The historical average peak to trough GDP for financial crises according to their work is a fall of 9.3% and a duration of 1.9 years.  However this financial crisis is global unlike all of the other post World War II crises.  And so, they argue, the better comparison for the current troubles is the Great Depression. Reinhart and Rogoff's analysis of the post 1929 period shows that the average peak to trough GDP was about 4.1 years (Figure 14.7 page 234).  Now the UK economy peaked at the beginning of 2008 and so May 2013 is just over four years past the peak.  Using Reinhart and Rogoff's historical analysis, then  the trough of UK GDP will have just passed.  Of course, the 4.1 year figure should not be taken as exact as there are differences between countries, the policies pursued now are different to then etc. But it reminds us that crises (even global financial ones) are slowly overcome and the further  through it, the closer to the end we are. Yet only a month ago, UK headlines were still screaming of a "triple dip" recession . First quarter GDP growth of 0.3% prevented that.  And, thanks to revisions to past data that tend to get little media coverage, the double dip may not even have occurred. The 2012 data – the double dip – was confused by the Queen's Jubilee and the Olympics. But already that data has been revised upwards and the updated and minimal 0.1% contraction in the 4Q of 2011 and the 1Q of 2012 is likely to be revised up again. Result? No double dip…. So much of the initial estimate of GDP is guesswork and it is based on easily measurable industries, which be definition are the older ones.  The faster growing, but unmeasured "new economy" is invisible in a much economic analysis and data.  Recently I was sitting at a conference listening to a panel of big name middle aged economists but not one was on Twitter.  And yet there is a vibrant social media economy developing.  Tweetdeck was sold by its founder to Twitter for reportedly £25mn.  Wimbledon teenager Nick d'Aloisio sold Summly to Yahoo reportedly for $30mn.  That is a not insignificant wealth creation for an industry that much economic analysis ignores. Clearly confidence is key to coming out of any slump and there are signs that British consumers are becoming more hopeful.  Anecdotally many Britons are choosing to spend their thousands of compensation for being mis-sold payment protection insurance (PPI). The UK's most popular tabloid, the Sun, ran a piece this week on how its readers are spending their cash (kitchen, conservatory, wedding, Disneyland if you're interested). The Citizens Advice Bureau clearly is concerned that consumers are spending and not saving PPI cash as it has issued advice to use the windfall to repay debt.  And total PPI could provide a big boost to the economy.   The total amount banks expect to have to compensate victims could reach £16bn. One of the reasons given by the car industry for strong UK car sales is that consumers are using PPI cash to help them buy a new car. If Britons are so fearful of their future, why are they spending this windfall?  The PPI spending spree suggests their confidence is returning (as do strong results this week from electrical retailer Dixons and last week's strong trading from travel group Tui). A renewed and more vigorous British consumer may prompt companies to become more confident too.  Then the party can really get started.  They are the players at the table with money to spend.  Some economic vibrancy may prompt the cheque books to open.  And if that happens all at once, there could be a stampede to spend. Economists always under estimate the fall in GDP in bad times and always underestimate the recovery. The consensus view is that the recovery in the UK will be sluggish.  There is always a risk to the consensus.  Maybe Mervyn is not optimistic enough – maybe the turning point is gone and the green shoots are already unfurling into leaves.

Jon Hilsenrath: Not a lot of pressure on the Federal Reserve to begin dial-back of quantitative easing right now Posted: 17 May 2013 04:04 PM PDT Jon Hilsenrath was on Wall Street Journal TV (available on YouTube, not gated). It goes for 3:50, so if you can squeeze it in over the weekend, you can hear his latest take on what’s happening at the Fed. Former Morgan Stanley-Asia chairman Stephen Roach describes Hilsenrath as “actually the chairman of the Fed” because of his track record in revealing policy discussions and decisions before Fed officials. For those without 3:50 to spare (hey, it is the weekend), here’s a summary of the video: Prior QE programs ended abruptly and, in retrospect, prematurely The Fed is trying to decide when to start dialing back on QE But not a lot of pressure on them to do this right now because inflation is so low, but it looks like the unemployment rate is improving, which gives them incentive to start dial down The Fed has a plan on how they are going to withdraw from QE They are in a discussion and debate about when to start The rising stockmarket pushed the conversation in the Fed away from worrying about goods-price inflation and pushes the conversation towards risk of asset price inflation/bubble. We’ve heard from Jerome Stein (one of the Fed board of governors and FOMC voter) about this, and we could hear more talk about this. Indications are they are not concerned about it yet, but are watching it closely   Fed is happy to see a recovery in the housing market, good for household balance sheets, as house prices rise, owners more willing to spend money On prospects for who will be the next Fed governor: To the extent that Geithner wants to be, the scandals this week have hurt him Also hurt Larry Summers chances, though not as much Janet Yellen still front runner   Another loser from this week’s scandals is the prospects for long-run deficit reduction (the deficit is improving currently in the short-run, but not in the long run)

ForexLive Americas wrap: The dollar doesn’t quit Posted: 17 May 2013 01:39 PM PDT Forex trading headlines for May 17, 2013: U Michigan May preliminary consumer sentiment 83.7 vs 78.0 expected Canadian April CPI 0.4% y/y vs 0.6% expected Mersch: ECB has ammunition, both conventional and unconventional Mersch says ECB won't rule out negative deposit rates Kocherlakota says Fed has not lowered real interest rates enough US leading indicators +0.6% vs +0.2% expected US March durable goods orders revised lower Fitch downgrades Slovenia CFTC speculative positioning data USD/CAD rises to highest since March Dollar Index hits highs since 2010 S&P 500 up 1% to 1667 S&P 500 up 2.0% on week On the week, USD leads and AUD lags On the day, USD lads and NZD lags

Gold ending the week on the floor Posted: 17 May 2013 12:50 PM PDT …or maybe carried out on a stretcher is a better description. Gold is at the lows of the day heading into the close, down $27 to $1359. It has been 7 straight days of declines for the yellow metal and it’s now within striking distance of the April 16 crash low of $1321. It’s not a good time to be selling but I think it will be a long while before it’s a good time to be buying, aside from the odd short-term bounce.

Speculators betting against the Australian dollar for the first time since June 2012 Posted: 17 May 2013 12:41 PM PDT Futures market speculative positioning data from the CFTC as of the close on Tuesday: EUR net short 47K vs short 34K prior JPY net short 88K vs short 79K prior GBP net short 65K vs short 63K prior AUD net short 13K vs long 6K prior CAD net short 44K vs short 52K prior NZD net long 23K vs long 29K prior CHF net short 15K vs short 4K prior Dollar Index net long 35K vs 32K prior The smart money was loading up on EUR and AUD shorts through Tuesday. It’s been a good trade since then. Note the change in CHF positioning as well, showing that I’m not the only one who is starting to see CHF shorts as a good trade.

Something screwy going on in Germany Posted: 17 May 2013 12:32 PM PDT Futures on the German DAX jumped 0.8% in the past hour and no one seems to know why. I’m at a loss to even speculate on what could be behind it but if there turns out to be a story behind it, then it could also boost the euro. At this time of the week, sometimes it’s best to head to the sidelines and ask questions later.

CFTC speculative futures positioning data out at the bottom of the hour Posted: 17 May 2013 12:08 PM PDT AUD positioning is likely to switch to net short from +80K just 5 weeks ago. I’ll have all the details here when the numbers are published at 3:30 pm ET.

Technical analysis: AUD/USD bottom with a time machine Posted: 17 May 2013 11:47 AM PDT The RSI in AUD/USD is at the lowest level since 2010. Looking at the past three years in AUD/USD, declines to 25 in the RSI have been followed by some impressive bounces. I have highlighted 5 instances where the RSI gets close to 25 and they all result in average rallies of 1300 pips in the subsequent months. Sounds tempting, right? The first thing you should notice is that all those red arrows are on a slight angle, meaning that the RSI bottomed below the market. Put another way, AUD/USD continued to go lower even after the RSI bottomed. The best example might be from May 20, 2013 — which will be exactly three years from Monday. Here is a closer look. I want to emphasize the shape of the rebound, which began May 21. First there was a blowout to a fresh 10 month low but it was followed by a 200+ pip turnaround.Two days later, the low was retested but the buyers charged in again. Finally, on June 8, there was a third test of 0.8100 and rejection and the finally set a bottom. Always look for a sign of capitulation if you’re trying to pick a bottom but never rush into the trade. The Australian dollar rallied 2100 pips from this low over the next few months but the guy who bought it on May 20 didn’t make any more money than the guy who bought it on May 24 or June 8. And he was a lot more likely to be shaken out. AUD/USD also bottomed on Aug 8, 2011 as it fell more than 200 pips early in the day (it was the ninth consecutive day of losses at that point) then it turned around more than 400 pips. Other times, the RSI has skirted the bottom for a number of days and AUD/USD continued to make new lows before it bounced. I believe that the fundamentals have changed for AUD and that it will continue to fall. That said, AUD/USD has fallen in 9 of the past 10 trading days so a bounce is overdue. If you want to buy the bounce, there is no need to rush in today. It’s hard to identify capitulation in the moment but look for a 200+ pip drop on news that isn’t overly bearish.

Fed’s Kocherlakota says Fed has not lowered real interest rates enough Posted: 17 May 2013 10:50 AM PDT Comments from the Minneapolis Fed President: Sees inflation and employment over the next 2-3 years as ‘too low’ compared to Fed’s goals Worries about financial stability risks aren’t a good enough reason to reduce accommodation Gains from tightening policy are slight; losses are tangible and significant Kocherlakotahas shifted to the extreme dovish side of the FOMC in the past 8 months so these comments are no surprise. If Bernanke says something similar on the weekend, look for USD weakness on Monday.

The case for continued dollar bullishness – WSJ Posted: 17 May 2013 10:26 AM PDT The Wall Street Journal’s Vincent Cignarella writes today that the dollar is flat-out undervalued and another leg of dollar buying will be spurred by risk aversion as bond investors get shaken out of high yielding junk. What is now a “dash for trash” by yield seekers will see investors “bashed by trash” as risk premiums rise. For currency traders, that will mean a much higher dollar as global investors return to U.S. Treasurys as the safest place to store their cash.

Long AUD/NZD is the flavor of the day Posted: 17 May 2013 10:00 AM PDT Analysts at both SocGen and BNP Paribas are recommending AUD/NZD longs today. BNP targets 1.25 with a stop at 1.1845, saying the pair is overstreched SocGen targets 1.2350 with a stop at 1.1900 saying the RBA won’t cut in June, Australian exports are recovering and 1.2000 provides a base of support

Fitch downgrades Slovenia Posted: 17 May 2013 09:29 AM PDT Fitch lowers Slovenia’s rating one notch to BBB+ from A- and maintains a negative outlook. Fitch said the cut reflects a deterioration in the macroeconomic and fiscal outlook. Slovenia has been out of the news for the past couple weeks but this could be a reminder of the precarious state of the periphery however there has been no immediate euro reaction.

The weekend playlist is set Posted: 17 May 2013 09:11 AM PDT It will be all Daft Punk this weekend after the release of Random Access Memories this week.

Australian dollar two-week decline is the swiftest since 2011 Posted: 17 May 2013 08:53 AM PDT AUD/USD is the biggest moving trade this week, falling 2.87% or 289 pips. The decline comes on the heels of a similar drop last week. The nearly 6% straight-line fall is the largest two-week decline since November 2011. The short-AUD trade has been a beautiful blend of fundamentals and technicals. Fundamentally, the RBA cut rates and there was this ForexLive story that was widely circulated around FX desks at the start of the swan dive. In the past week, speculative trades have pushed the downside as a number of FX desks recommended selling the pair and long-term longs rush to the exits. Technically, it was a simple breakout of a range trade. I highlighted this chart on Monday but cautioned against chasing before a pullback to 1.01. The pullback never came, proving that you can’t lose money by being patient but sometimes you’re stuck on the sidelines of a great trend.

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