Author: Lior Alkalay

Too Late To Short The Dollar?

Posted on by Lior Alkalay

Lior Alkalay - INO.com Contributor - Forex


The US consumer is under pressure. Consumer Confidence level fell to 89 in April, and retail sales fell by -0.3 MoM in March. And as if that weren’t enough, GDP growth missed the mark for a second consecutive quarter, with Q1 growth falling to as low as 0.5% annualized, well below expectations.

Naturally, those developments are not bringing a Fed rate hike any closer, and it leaves the Dollar widely exposed to short selling. It’s the catch-up game, where Dollar peers such as the Euro, Yen, and Aussie are gaining lost ground. The relative advantage of the US economy is narrowing, and the prospect of a tightening cycle from the Fed seems even more remote.

This isn’t the first time the Dollar has been hit by the catch-up game. Here’s how the game plays out: The Dollar turns weaker, shaving its value by several percentage points only to come back stronger in the end as the US economy regains momentum. That’s why one should tread lightly before pouncing on a Dollar short. After a series of disappointments, the chances of an upward surprise in US data is much greater. There’s a very real chance that shorting the Dollar at this stage, after a 6.5% correction, will be too late. Continue reading "Too Late To Short The Dollar?" →

LATAM: Watch Brazil But Buy The Peso

Posted on by Lior Alkalay

Lior Alkalay - INO.com Contributor - Forex


LATAM currencies are back in the game. Optimism over Brazil’s political future is growing and commodities, a key driver of regional growth, are recovering. Together, much of the uncertainty looming over the region has been removed and put regional currencies -the Brazilian Real, Mexican Peso and Chilean Peso into favor.

One important gauge of rising optimism is the price of Credit Default Swaps. Credit Default Swaps, or CDS for short, measure the cost of insuring against a bankruptcy. When the price of Credit Default Swaps falls, it points on lower risk and higher optimism. As the chart below indicates, Credit Default Swaps have fallen dramatically across the region since February, signaling a surge in optimism in the LATAM space.

LATAM CDS Chart
Chart courtesy of Deutsche Bank

But the CDS chart illustrates another very interesting picture. While the fall in risk is across the board, Brazil, the largest economy in the region, is deemed as the most probable to default on its debt by a wide margin compared to much smaller regional peers. Continue reading "LATAM: Watch Brazil But Buy The Peso" →

Israeli Shekel Turning Japanese?

Posted on by Lior Alkalay

Lior Alkalay - INO.com Contributor - Forex


The Israeli Shekel has gained roughly 6% since mid-January. The Shekel has also been more resilient than other currencies when the dollar was gaining, and it has been performing well even when the dollar was weakening. All the while, Israel has been plagued with continual deflation, which is a classic case for unconventional measures. The Bank of Israel responded by slashing its benchmark interest rates to 0.1%. However, no “unconventional” measures were taken; no quantitative easing and no negative interest rates.

Investors, both local and foreign, reacted as they have in similar cases. That is by buying government bonds. Israeli government bonds yield 1.8% and in real terms, yield 2.5%, because Israel’s annual inflation rate is at a negative -0.7%. And with the demand for Israeli bonds high, the Israeli Shekel has strengthened as well, and so the cycle continues.

Demand for Israeli government bonds has been so high, in fact, that net foreign investment in Israeli government bonds over the past 3 months has been higher than it has been at any time in the past three years. Continue reading "Israeli Shekel Turning Japanese?" →

What's Really Happening With The Japanese Yen?

Posted on by Lior Alkalay

Lior Alkalay - INO.com Contributor - Forex


The Japanese Yen is making headlines, again. The Dollar-Yen trade pierced through the 110 support level and the Bank of Japan's credibility is at stake. It's only a matter of time before the BoJ swings its "sword" and slice rates again, or at least, so it seems. But while Yen strength has caused quite a stir in Japan, its origins, this time around, are rooted elsewhere.

Wall Street is flat, European bourses are falling and China isn’t out of the woods just yet. Japanese corporates keep hoarding cash and, of course, they need to park it somewhere. That “somewhere” is their default choice; i.e. repatriate the cash and buy into the safety of Japanese Government Bonds.

Chart of the Japanese Yen
Chart courtesy of Bloomberg Press

As illustrated in the chart, when comparing the Bloomberg Japan Sovereign Bond Index with S&P500 and Nikkei 225, demand for Japanese Government Bonds has been strong. Japanese Government Bonds beat both the S&P500 and the Nikkei 225 for the passing year. And that’s even more interesting when you consider the negative yields—it actually costs to hold Japanese Government Bonds.

How long can Japanese corporates keep repatriating funds and pay for the "privilege" to hold Japanese Government Bonds? Continue reading "What's Really Happening With The Japanese Yen?" →

China's Policy About To Hit The Dollar?

Posted on by Lior Alkalay

Lior Alkalay - INO.com Contributor - Forex


China has resorted to its old habit of stimulating the economy by allowing the Yuan weaken. But while the "remedy" has yet to work its wonders. The side effects, are already emerging—inflation is on the rise.

The People's Bank of China, China's central bank, ought to decide - support China's manufacturing or curb inflation.

What will the Chinese central bank do? And equally important, how will the dollar respond?

China's Central Bank: The Logic

In order for us to try and gauge the next move by China's central bank, we must delve first into the logic. In other words, what is the central bank considering? Now, that's not an easy undertaking, by any stretch of the imagination. Nevertheless, the task has turned a tiny bit simpler. Last month, in an interview with the Caixin Weekly, the Governor of the People's Bank of China, Zhou Xiaochuan, outlined the central bank's policy.

Here are the points to focus on: Continue reading "China's Policy About To Hit The Dollar?" →