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“This is a market for surfers and not for the faint-hearted.”

                           Roberto Mialich, UniCredit MIB

FX Trading – The famous “Hodgepodge” …

After yesterday’s risk-taking rocket ride the obvious reaction is to sit and watch for a reaction. Will traders take the opportunity to sell after yesterday’s strength? And if so is it profit-taking or simply an opportunity to get short?

Or is yesterday’s strength a sign that traders and investors are done pricing in double-dip recession potential?

While risk assets are mostly flat as we get going here in the US, the New Zealand dollar is the standout thanks to what seems to be a signal from stronger dairy prices that demand is picking up. Australia’s GDP and PMI numbers out yesterday are likely helping, as well. The Australian dollar, however, is stuck at around yesterday’s highs after trade data showed a surprisingly smaller surplus than expected.

Turning to crude oil, up nicely yesterday with the risk-on mood, daily support at about $71 per barrel seems to be holding so far … after the tone in August was dominated by double-dip talk.

Crude Oil Futures Daily:

Dairy prices may be an indicator for New Zealanders, but crude holding above support is
an indicator we can all understand.

A recent survey done by Trim Tabs reveals that Hedge Fund managers are becoming
increasingly bearish. “Only 17% of the 104 managers we surveyed in the past two weeks
are bullish on the S&P 500, sharply lower than 34% in our previous survey.” They also
note that US equity mutual funds have posted outflows for 18 straight weeks.

Considering this relatively extreme bearish outlook, perhaps we have to ask again: Is
yesterday’s strength a sign that traders and investors are done pricing in double-dip
recession potential?

Some recent data out of the Eurozone might bolster such a move toward optimism, or
at least a step in that direction. Eurozone Q2 year-over-year GDP numbers were revised
higher; corporate spending across the zone rose for the first time in nine quarters;
producer prices are up while exports are surging at levels (4.4%) not seen since data began being kept in 1995.

The euro’s plumbing of the $1.20 level may have helped spark foreign demand for
relatively cheaper goods within the zone. If the euro finds reason to run higher from
here—relative growth and yield differential compared to the US dollar may be two of
them—it may lead to a softening of next quarters’ export numbers. That doesn’t even
reflect the impact austerity measures will have on the economy in coming quarters.

Expecting much more “gangbuster growth” out of the Eurozone in H2, similar to what I
mentioned above, seems a little crazy. Ireland hit the austerity button and was met with
a downgrade on their debt from S&P. Greece, well … they’re supposedly getting
austere. And Germany just tapped on the brakes. From The Economic Times …

“The German cabinet has approved drastic spending cuts to rein in the national budget despite a stronger than expected turnaround in the economy.

“The centre-right coalition government of Chancellor Angela Merkel plans to save more than 80 billion euros over the next four years to comply with the new "debt brake" in the constitution and to meet the euro zone stability criteria.”

Jean Claude Trichet has said that it will be tough for the zone to remain as “buoyant” in the second half of this year. That’s not exactly saying the same as calling euro bulls crazy, but it’s somewhere along those lines.

EURUSD Daily: the slide that bottomed out in August marked a 50% retracement of the June/July rally. It also broke uptrend support. A test from underneath would take EURUSD to about a 50% retracement of that slide. Maybe a jump to $1.30 is in the cards. But this stuff keeps morphing fast…stay tuned.