Also the commodity currency Aussie dollar has been hammered massively. It is also signalling bear market ahead.
US treasury however is signalling the current leg as just a normal correction witnessed in Jan/Feb, Oct etc because it is still maintaining its up trend line on the yield and is yet to hit the bottom channel.
Dollar Index:
It is about to hit the Lehman Brother collapse high which is very strange as nothing of that sort has happened yet anywhere. I expect Dollar Index to retrace a bit but before that it should hit the resistance present at 89.3. If dollar Index falls from here, as it should as it is highly overbought and significantly above the trendline from nov which is when it started to move up, equities might get a relief rally. Also another reason why Dollar should fall now is that the smart money is moving from dollar to Gold. They are expecting inflation ahead not deflation. If this is found to be true dollar will fall and gold and silver will rise further. Dollar is no more safer than a Euro or any other currency because the estimated debt in US is about to reach $12 trillion for a population of 330 million that amounts to $35,000 of government debt per person in America add to this the 20% people who are in foreclosure which means 1/5 people in America is bankrupt and can't afford to pay their home loan. The average house price is around $150,000 with a per capita income of approximately $40,000 that is 400% of debt in the economy per person. Well I don't think that is called as sound economy neither I would consider their currency safe.
The reason why USD is rallying in my opinion is that there is lot of unwinding taking place from big banks before the Interest rates go up. Last week Canada became the first G-7 nation to increase the IR. The banks with already stressed balance sheets want to unwind the dollar carry trade as soon as possible. A carry trade is basically a trade in which you borrow money from a country where IR is virtually zero and invest in country where you can get maximum return for your investment countries such as Japan, US etc are the countries where IR is close to zero and India, China, Australia etc are the countries where you get good bang for your buck hence the unwinding of the trade in these countries is pushing the good economic growth countries currencies under pressure India and Australia included. For years Japan was the only country with a carry trade hence famously it is also called as Yen Carry trade however, recently other countries have also brought IR Zero. If further explanation is needed on Carry trade please let me knw will explain in detail.
Here is the dollar index chart:
How does all this impact India?
Well honestly Nifty and German Dax have shown a lot of strength in this fall. Part of the reason for this is German index gets a boost by having a weaker euro which means most of the firms in Dax 30 who earn in foreign currencies gets a boost in income and also Germany use to be the biggest exporter in the world up until Jan when China overtook it however, a weaker Euro has allowed germany to boost its export once more putting pressure on China due to China's Dollar peg Euro has fallen 30% against Chinese Yuan(RNB). This has made German exporters more competitive.
Nifty on the other hand has shown strength because India's fiscal deficit has been substantially reduced. Monsoon is expected to be normal. GDP growth has surpassed estimates and inflation is starting to ease. Also while moving up We had underperformed global markets in 2010. However, if things don't improve globally we will be hit hard and next down move can be very aggressive. Nifty bounced off perfectly from the downward slopping trendline's upper channel as I showed a few days back and the 2 down bars have confirmed the down move. However, 4930 seems a good support and we have bounced of it many times recently so shorters can cover their shorts around this level and again go short with the breach of 4900 for the first level at 4750 levels(+-25 points). 23.8% FIB retracement from march 2009 lows.
I still maintain my bullish stance for the year end and expect nifty to touch 5500-5700 by December 2010. (65% probability). Short term in 1 months time I expect more downside unless 5150 is broken convincingly. Downside can be 4900,4700,4500 all depends how bad this crisis gets. However, If nothing happens in 1 months time we will see the risk appetite returning. I am completely out of the market from past 2 weeks. No short position and no Long positions. However, If we break 4900 I will short banking index and a few banks as they have shown significant strength and usually if market goes down financials have to lead it down and this is yet to be witnessed in the Indian market. The reason I am out is that liquidity is completely dry in the market. Most of the funds are sitting on cash. When liquidity is low markets are volatile and up moves on low volumes followed by sudden down moves. Always when the liquidity and participation by smart money is limited markets tend to rise on low volumes followed by massive down bars hence the market remains range bound for long periods. But participation of smart money can take the market in any direction they want. I would still prefer to stay out of the market sit on cash and keep analysing the market and look for good picks for very long term if market falls a lot more from here.
Nifty Chart
US treasury however is signalling the current leg as just a normal correction witnessed in Jan/Feb, Oct etc because it is still maintaining its up trend line on the yield and is yet to hit the bottom channel.
Dollar Index:
It is about to hit the Lehman Brother collapse high which is very strange as nothing of that sort has happened yet anywhere. I expect Dollar Index to retrace a bit but before that it should hit the resistance present at 89.3. If dollar Index falls from here, as it should as it is highly overbought and significantly above the trendline from nov which is when it started to move up, equities might get a relief rally. Also another reason why Dollar should fall now is that the smart money is moving from dollar to Gold. They are expecting inflation ahead not deflation. If this is found to be true dollar will fall and gold and silver will rise further. Dollar is no more safer than a Euro or any other currency because the estimated debt in US is about to reach $12 trillion for a population of 330 million that amounts to $35,000 of government debt per person in America add to this the 20% people who are in foreclosure which means 1/5 people in America is bankrupt and can't afford to pay their home loan. The average house price is around $150,000 with a per capita income of approximately $40,000 that is 400% of debt in the economy per person. Well I don't think that is called as sound economy neither I would consider their currency safe.
The reason why USD is rallying in my opinion is that there is lot of unwinding taking place from big banks before the Interest rates go up. Last week Canada became the first G-7 nation to increase the IR. The banks with already stressed balance sheets want to unwind the dollar carry trade as soon as possible. A carry trade is basically a trade in which you borrow money from a country where IR is virtually zero and invest in country where you can get maximum return for your investment countries such as Japan, US etc are the countries where IR is close to zero and India, China, Australia etc are the countries where you get good bang for your buck hence the unwinding of the trade in these countries is pushing the good economic growth countries currencies under pressure India and Australia included. For years Japan was the only country with a carry trade hence famously it is also called as Yen Carry trade however, recently other countries have also brought IR Zero. If further explanation is needed on Carry trade please let me knw will explain in detail.
Here is the dollar index chart:
How does all this impact India?
Well honestly Nifty and German Dax have shown a lot of strength in this fall. Part of the reason for this is German index gets a boost by having a weaker euro which means most of the firms in Dax 30 who earn in foreign currencies gets a boost in income and also Germany use to be the biggest exporter in the world up until Jan when China overtook it however, a weaker Euro has allowed germany to boost its export once more putting pressure on China due to China's Dollar peg Euro has fallen 30% against Chinese Yuan(RNB). This has made German exporters more competitive.
Nifty on the other hand has shown strength because India's fiscal deficit has been substantially reduced. Monsoon is expected to be normal. GDP growth has surpassed estimates and inflation is starting to ease. Also while moving up We had underperformed global markets in 2010. However, if things don't improve globally we will be hit hard and next down move can be very aggressive. Nifty bounced off perfectly from the downward slopping trendline's upper channel as I showed a few days back and the 2 down bars have confirmed the down move. However, 4930 seems a good support and we have bounced of it many times recently so shorters can cover their shorts around this level and again go short with the breach of 4900 for the first level at 4750 levels(+-25 points). 23.8% FIB retracement from march 2009 lows.
I still maintain my bullish stance for the year end and expect nifty to touch 5500-5700 by December 2010. (65% probability). Short term in 1 months time I expect more downside unless 5150 is broken convincingly. Downside can be 4900,4700,4500 all depends how bad this crisis gets. However, If nothing happens in 1 months time we will see the risk appetite returning. I am completely out of the market from past 2 weeks. No short position and no Long positions. However, If we break 4900 I will short banking index and a few banks as they have shown significant strength and usually if market goes down financials have to lead it down and this is yet to be witnessed in the Indian market. The reason I am out is that liquidity is completely dry in the market. Most of the funds are sitting on cash. When liquidity is low markets are volatile and up moves on low volumes followed by sudden down moves. Always when the liquidity and participation by smart money is limited markets tend to rise on low volumes followed by massive down bars hence the market remains range bound for long periods. But participation of smart money can take the market in any direction they want. I would still prefer to stay out of the market sit on cash and keep analysing the market and look for good picks for very long term if market falls a lot more from here.
Nifty Chart
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