Currencies and Equity Indices

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Sally Limantour
February 12, 2007

The G7 meeting is behind us and those wishing to ride the carry trade train still have a green light as there was little in the way of direct criticism, but certainly ongoing warnings of the risk. At what point these warnings become an outright threat is tough to determine. It seems it is business as usual unless we either get intervention by one party or another, coordinated intervention or some type of regulation/taxation of carry trades.

Given the continued sell off in the Yen, the seasonal weakness into April and the Commitment of Traders on the neutral side, there is still more downside with 81.50 the next target. However, March madness is set to begin and this is the time of year when traders say the yen always rises at the end of the fiscal year due to repatriation flows. It is not necessarily true, but the perception gets a lot of attention. A bear trap rally coming soon? Stay tuned…

The dollar is well bid this morning following Treasury Secretary Paulson’s message in Germany, “a strong dollar is in the interest of our country.” Here we go again, echoing the mantra of other Goldman Sachs folks who moved into the Treasury. The dollar is also reacting to Finance Minister Kamal saying Qatar is not going to turn away from the dollar and price energy in terms of Euro. Finally, we had the Fed’s Poole and Pinalto both voicing concerns about inflation which has bonds on the defensive and the dollar strengthening. We are once again flirting with the 85.00 level in the dollar index and my guess is we may push through it this time.

The stock market finally had a slight move in volatility and a decent reversal/sell off on Friday. My short-term model is still on a sell signal. Medium and long term indicators do not warn of a wave of risk aversion, but they are building towards a high level. Short positions were established in different indices (ES, NQ, ER2) as we hit my resistance area stated last Tuesday ( 1458-1460). The high was 1457.75 and that was close enough. The fact that early Friday morning proved the 1457 area to formidable resistance made the short position a bit more favorable. Possible targets on the downside are 1434, 1425 – 1429.50. A key area coming in today is the 1446 area and closes above 1452.50 should negate the short-term picture.

The HSBC Holdings and New Century Financial news are in the background causing concerns for the housing industry as is the Thursday report from Dresdner, "The Great Unwind is Coming," FT02/09/07, which was a detailed report detailing the negative properties inherent in many hedge funds.

This Wednesday and Thursday, Fed Chairman Ben Bernanke (more affectionally known in our circles as "Uncle Ben") provides the semi-annual report to Congress. We have economic data filtering in starting on Wednesday and more on Thursday and Friday. Given the Fed is “data dependent” I guess we should be too. It will be curious to see if we reject/accept the first resistance area of 1445.50-1446 early today and how the market behaves going into Wednesday.

Here is my favorite quote over the weekend, “We are not selling a meal – we are selling a whole experience. You cannot put a price on it.” This form the manager of Mezzaluna restaurant in Bangkok justifying the 1 million Baht, or $29,240 meal for the Epicurean Masters of the World II dinner. I was not invited, but I love to see the menu.