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Playing Tug of War With the Dollar Carry Trade and Risk Aversion


Who's got a tight grip in these capital markets?

Editor's Note: This article was written by Richard Suttmeier, chief market strategist at, which is a fundamentally-based quant research firm in Princeton, New Jersey, that covers more than 5,000 stocks every day.

Today the "dollar carry trade" is back on as market strategists claim no contagion from Dubai.

This perception is wrong, just as most strategists were wrong about saying that Subprime was contained. Problems at Dubai World aren't a lingering effect of "The Great Credit Crunch" but a clear warning that "The Great Credit Crunch" is far from over. (See also The Great Credit Crunch Is Deepening)

It's naïve to think that there aren't many more time bombs in the $206 trillion US-based notional amount of derivative contracts in the US and up to $800 trillion globally.

Yesterday I talked about 8.7% of all hotel loans being delinquent, but that's just a part the contagion in the real-estate loan meltdown. (See Financial Time Bombs Keep Ticking)

The overall default rate for commercial mortgages in the US was at a 16-year high in the third quarter as commercial real estate wilts under the heat of tight credit, falling rents, and rising vacancies.

The FDIC Quarterly Banking Profile clearing shows this risk, which caused most of this year's 124 bank failures. Commercial loans fell $89 billion, or 6.5%, in the third quarter to 1.276 trillion, down 15.1% year over year. Sources say that commercial real estate values have declined 37% year over year.

This chart from the FDIC clearly shows that "The Great Credit Crunch" is intensifying.

The yield on the 10-Year Treasury remains below its 200-day simple moving average.

Risk aversion pushed the 10-Year yield below its 200-day simple moving average, now at 3.305. This yield was above the 200-day since May 18. Today's support is 3.263 with the Oct 2 low yield at 3.10.

Source: Thomson Reuters

Comex gold
reached a new all-time high at $1200.5 this morning, testing this week's resistance at $1200.4. Last week's correction held my quarterly pivot at $1135.

Source: Thomson Reuters

Comex copper
reached a new high for the move at 318.55 last week. The 200-week simple moving average is support at 295.85 with weekly resistance at 329.86.

Nymex crude oil
has seen lower highs for the past six weeks after peaking at $82 on October 21. The 200-week simple moving average at $75.64 has become a pivot, and there's a negative divergence in MOJO. My annual pivot is $68.81 with my quarterly resistance at $83.16.

Source: Thomson Reuters

The Dollar Index
tested $74.21 last week, which was below the uptrend connecting the lows of April and July of 2008. This week's pivot is $74.26 with quarterly resistance at $78.65. Lower monthly support is $70.62. Negative divergences in crude oil MOJO is a shift from the dollar carry trade to risk aversion.

The Euro
traded to a new high for the year at 1.5143 last week with quarterly support at 1.4787 and resistance this week at 1.5174. This is a sign of a dollar bottom at least versus the euro.

The dollar versus Japanese yen
traded as low as 84.92 last week and is now above my new monthly pivot at 85.62. This is a sign of a dollar bottom against the yen.

The Dow
remains positive on its weekly chart, staying positive but overbought on a close this week above its five-week modified moving average at 10,090. Ascending Wedge Resistance is 10,612 with down trend resistance at 10,581. A breakout above resistances ends the multi-year bear market.

Source: Thomson Reuters

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No positions in stocks mentioned.

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