Defining the Yuan as 'Freely Usable'

On the last day of November, at the conclusion of its five-yearly review of the composition of the Special Drawing Rights (SDR), the IMF elevated the renminbi to its SDR basket. The RMB is now one of five major ‘freely usable’ reserve currencies in the international monetary system.

Yen and Aussie Exposures Buck the Speculators' Reduction Trend

Speculative activity in the CME currency futures picked up in the latest reporting period. There were six significant gross position adjustments, which in our work is more than 10k contracts. 

The gross short speculative euro position fell by 17.9k contracts, leaving 209.6k. Since early December, 53k gross short euro contracts were covered.  During the same time, about 17k gross long contracts were added. 

The U.S. Dollar Seesaw

The US dollar remains strong against most currencies.  The exceptions are the Japanese yen, Swiss franc and euro though the franc and euro pulled back in the US afternoon before the weekend.  The greenback is still appreciating on a trade-weighted basis, which is the metric that counts in assessing its impact on the overall economy. 

Don't Hold on to the S&P 500-Oil Correlation

The US stock market and the oil market appear joined at the hip. The Great Graphic here, created on Bloomberg, shows the correlation of the two markets.  It is near 0.77, which is the highest since September 2013. 

The correlation was conducted on the level of the S&P 500 and the level of the front-month light sweet crude oil futures contract.  It tells us that the two markets have been moving in the same direction nearly eight of ten sessions over the past 60 sessions. 

Latin America's Smooth Economic Ride Jeopardized by Commodity Crisis

Much of Latin America has seen an unusually long period of relative political stability since the early 2000s. With the exception of Cuba, democratically elected governments seem embedded throughout the region. The political rules of the game largely seem to be followed. Indeed, the international outcry following the 2009 coup that removed Honduras' president, Manuel Zelaya, served to reinforce how much Latin American politics had changed since the 1970s, when military dictatorships were the dominant form of government.

What is Driving Sterling Lower?

Sterling fell 4.25% from the high on December 28 to yesterday.  It has been confined to yesterday's range today.  After finishing below the lower Bollinger Band yesterday, it has moved back into the band today.

The Bank of England meets tomorrow.  It is way too early to seriously look for a change in policy.  At most, MPC member McCafferty may abandon his formal call (dissent) for an immediate rate hike.  He has done this before.  We suspect if the hawk does rejoin the majority; it will have no more significance than his dissents.

Are We Still Watching the January Effect?

So far, it has not been a happy new year for equity market investors. The Australian equity market lost A$100 billion in market value in the first week of trading, mirroring a dire global trend.

If we are to believe the “January barometer”, things may be about to get worse. The basis for the January barometer is the belief that when the equity market ends in the black for the month of January, the subsequent year will be prosperous for equity markets, while a negative equity market return in January signals a bearish year for stocks.

Dollar-Yen Relationship Quirks

Since the initial spike higher when the BOJ provided some operational tweaks to its asset purchase program on December 18, the dollar has fallen 5.6% against the yen through Tuesday's low near JPY116.70.  We had warned that the break of JPY120 would spur a move to JPY118, and the move below JPY118 targeted the August low near JPY116.20. 

Use Your Illusion

I was canoeing recently.  When I looked that oar in the water, it looked bent.  It wasn't my equipment, and I am a novice.  I cursed to myself and quickly pulled the oar from the water.  I smiled.  It was not bent.  It was an optical illusion.

There is a chart making the rounds.  It shows the S&P 500 moving in tandem with the Shanghai Composite.  I have tried to recreate the Great Graphic on Bloomberg.