By Martin Tillier
There was a time when sniffing out trepidation in the global financial community was relatively easy: When both the US Treasuries and gold rose together, big money was getting nervous.That isn’t the case these days. Both of these previously reliable indicators are caught up in their own dynamic.
The US Treasury market is incredibly distorted right now. Four years of the Federal Reserve Bank buying US Government paper and mortgage backed securities has created a situation where those like me who were taught that all things flow from the real value of treasuries have a problem. What is the true value of the paper?
It is hard to assess and, as long as the Fed is buying $85 Billion of bonds each month, will remain so. Add to that the fact that there is an increasing risk of inflationary pressure and a devaluation of the Dollar the longer that situation continues, and you can see that the role of Treasuries, and therefore the US Dollar, as an indicator of global sentiment is less reliable than in the simpler days of yore.
The same could be said of gold.
The five year chart for the yellow metal would seem to indicate that, while the de-leveraging process is well underway, the inability to break above the $1400 level suggests that the bubble may still be deflating. Gold is caught in a technical trap, where the fundamentals that have driven it in the past are much less relevant.
So, if we can’t trust Treasuries or gold, what tells us if there is worry around, and, more importantly, is there anything that would suggest this is true?
From a currency perspective, given Euro-zone uncertainty and the distorted US and Japanese Treasury markets, a new “safe haven” has emerged. To me, the Swiss Franc has become a better indicator of uncertainty than either of the old faithful gauges. The last time there were serious worries about a “double dip” and a global slowdown was in the summer of 2011, as evidenced by the chart for the S&P 500.
Now take a look at what happened in Dollar Swiss (USD/CHF) at the same time.
As you can see, USD/CHF started to fall dramatically in May, foreshadowing the drop in the S&P. (If USD/CHF falls, it means that the CHF is gaining in value relative to the USD ). The Swiss Franc then began to lose favor as it became clear that things weren’t as bad as many feared. Again, this happened before the move in stocks.
Okay, so I don’t want to be a party-pooper or one of those people who plays on readers’ fears to get a reaction, but the last few weeks have also seen significant strength in the CHF.
Let’s be clear, my long term bullish view for the US stock market and the global economy is still in place, but when money moves around the globe in amounts significant enough to result in large FX moves, we should take note.
At the very least, I believe that smart investors will watch the currency pair and see if the bottom established at the end of last week holds. Any sustained move back below 0.89 should be taken as a warning sign that there is some nervousness around. That is not to say that if 0.89 breaks you should sell everything, but, should that happen, trimming your exposure to the US stock market may be a wise thing to do.
Nothing has complete predictive powers in the financial world. Even back when Treasuries and gold were considered the best indicators, they weren’t 100% reliable.
The same will undoubtedly be true of the Swiss Franc, but given the way it predicted the move in stocks in 2011, it can’t hurt to at least keep an eye on it.
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Martin Tillier has a wealth of experience in Foreign Exchange. He started working for a major interbank Forex broker in London in the 1980s, rapidly acquiring more responsibility and the authority to run larger positions. After several years, he was asked to go to Tokyo to develop the cable (USD/GBP) desk there. He returned to London at a time of turmoil in European currency markets and helped build the company's Sterling Mark (GBP/DEM) desk into the world's most profitable, in the years leading up to the Euro. Highlights included a 36 hour unbroken stint at the desk during black Wednesday, when the Pound was forced out of the European Monetary System. Because of his success in London and his ability to teach new recruits the complex world of Forex trading, Martin was asked to establish Spot FX desks in new markets for the company, first in Moscow, Russia, then in Warsaw, Poland. He left the market in 2002 and moved to the US, following the loss of a family member in the tragic events of September 11th 2001. He spent some time out of the markets, starting and running a successful wine store, but the lure of the financial world was still strong, leading to him selling that business and accepting a position as a financial advisor with a major firm. The frustration he felt while there is what led him to his current position as a writer and educator on markets, particularly Foreign Exchange. The markets were more accessible than ever, but it seemed Wall Street was still doing fine. It was obvious that the retail trader and investor were at a disadvantage, and education could close that gap. Martin now writes regularly for Nasdaq.com and other financial sites, trades Forex and other markets successfully and, in his spare time, plays golf badly. |
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