Tough Love finally for the EUR

Month-end requirement is distorting some of the price action, especially when it comes to the JPY. Economic releases O/N showing that Japan’s growth slowed and unemployment rising should not be capable of pushing the currency to trade at new yearly highs vs. the dollar. Even the bond market was busy, selling the belly of the curve to the Japanese, again pushing prices out of whack. Price action involving month end requirements is always confusing. The market is caught flat-footed. It had been anticipating further broad based dollar selling for US hedge rebalancing. The EUR nosedive will be attributed to the markets nervous reaction to global bourses back peddling. Will the US 2nd Q GDP confirm the markets bearish view of their economy? No matter what, the color red is prominent on dealers trading books already this morning.

The US$ is weaker in the O/N trading session. Currently it is lower against 111 of the 16 most actively traded currencies in another ‘whippy’ trading range.

Yesterday’s US jobless claims came in bang on market expectations (+457k). Many had believed that ‘the seasonals’ would push claims slightly above the trend last week. The four-week average for claims (a stronger gauge of employment trends) fell -4.5k to +452.5k, the lowest level in three months. Even continuing claims came in line with expectations. The seasonally adjusted series for claims happened to advance by +81k to +4.565m vs. a forecast of +4.6m. Digging deeper, the Fed benefits fell by -269k vs. a projected decline of -300k. It’s worth noting that initial claims are about -21% below last years level, while continuing claims is about -26% less. After yesterday’s claims data analysts expect the labor force participation rate will increase, which should push the US unemployment rate higher to +9.7% vs. +9.5% next week. Market consensus for payrolls stands at +110k thus far.

The USD$ is higher against the EUR -0.18% and lower against GBP +0.14%, CHF +0.40% and JPY +0.55%. The commodity currencies are mixed this morning, CAD +0.17% and AUD -0.17%. Yesterday’s Canadian Industrial Product Price Index (IPPI) unexpectedly slipped -0.9% last month, led by petroleum and coal products (-2.3%) and primary metal products (-2.9%). The Raw Materials Price Index (RMPI) also happened to decline -0.3%, largely due to lower prices for non-ferrous metals and animals products. It was the second consecutive monthly decrease. For the IPPI, the 3-month moving average suggests that core-producer prices (ex-food and energy) continue to trend sideways.
The CAD weakened vs. its southern neighbor as equities and crude happened to reverse its earlier advances and in turn temporarily reduced the appeal of higher-yielding currencies. For most of this week the loonie has performed better on the back of stronger commodity and equity prices. Last week the BOC tightened rates 25bp. The interest rate differential scenario seems to be getting the biggest support for now, despite it being a ‘dovish hike’. Governor Carney stated that there was no pre-ordained path for interest rates in Canada. According to his dovish communiqué ‘the global economic recovery is proceeding, but, is not yet self-sustaining’. The 25bp hike last week will ‘leave considerable monetary stimulus in place’, with both the core and total inflation to advance at about a +2% annual rate through 2012 (within their target zone). Some will argue that with signs of a significant slowdown underway in the US, it’s possible that the BOC may be persuaded to move back to the sidelines on the Sept. go-around. Carney has given himself the latitude to step back and assess global growth for the 3rd Q. Medium term momentum points to a stronger loonie, but, that all depends on whether the big dollar is coveted for risk aversion trading strategies again. On dollar rallies there are CAD buyers.

It seems that the JPY has dominated all trading sessions thus far and the higher yielding commodity currencies have managed to be included. The AUD happened to pare more of this weeks gain on future reports expected to show that China’s growth is slowing and on last nights data showing that bank lending grew last month at the weakest pace in seven months. China is Australia’s largest trading partner. Overall, there is still a sign of concerns that the world economy is in a fragile recovery phase. The Kiwi has been under pressure since and falling against all its major trading partners. Earlier this week and after a surprisingly weaker than expected CPI headline print (+0.6% vs. +1%), the AUD was pressurized as the futures traders priced out an RBA tightening next week. This does not rule out the possibility that Governor Stevens will not hike further in the calendar year. Recently, policy makers stated that they are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. Because of equities actions, the market is a cautious buyer on pullbacks, wary that the recent strong rally technically may be overdone (0.8987).

Crude is little changed in the O/N session ($77.76 down -60c). Crude prices happened to ‘too and fro’ yesterday. At one point it aggressively advanced on the back of a weaker dollar and an upbeat equity market. But, that scenario changed and pared the commodity’s advances caused by the signs that a slowing economic recovery in the US will limit fuel consumption in the world’s second-largest energy user. The weekly EIA report happened to add to the commodity’s bearish sentiment. The inventory data stumped all market expectations with its surprising increase. The headline print had stocks increasing +7.3m barrels vs. a market expectation of +1.7m. Couple this with last weeks +3.1m gain and we have a market flushed with the ‘black-stuff’. Despite global demand slowly improving it’s currently have little effect on supplies. Somewhat of a surprise was the lower than expected fuel inventory gains. Gas stockpiles rose by +100k barrels, below expectations for a build of +500k, while distillate fuels advanced by +900k barrels. Analysts had been expecting an increase of +2.1m barrels. The refinery utilization rate also happened to fall to 90.6%, below the expected 91%. The build in inventories even with some weather related production shut downs continue to paint a bearish fundamental picture for the energy sector. Of late, the commodity has been trading in a tight $5 range. The ‘historical’ US summer driving season is over, coupled with a lack of tropical activity in the Gulf are ingredients for justifiable weaker energy prices.

Gold gained for a second consecutive day on speculation that prices near a three-month low will spur increased physical and investment demand. Technically some believe that this week’s decline has been overdone. All week investors have been caught wanting higher risk and seeking higher returns, and owning gold is currently not the answer. With the EUR continuing to stabilize against most of its trading partners had the market selling the asset class. Bigger picture, technically, the bullish sentiment had been on hiatus with profit taking testing the medium term support levels. Fundamentally, in the short term the metal will find it difficult to rally as this is the ‘slowest’ season for physical demand. Technical analysts are trying with might to convince the market that these levels provided a good buying opportunity. The current problem is that the market has built in a large insurance premium over the past few months and with some market stability nervous investors will want to lighten their positions even more. Year-to-date, the commodity has gained +5.8% and is in danger of further losses ($1,171 -60c).

The Nikkei closed at 9,537 down -159. The DAX index in Europe was at 6,112 down -22; the FTSE (UK) currently is 5,295 down -19. The early call for the open of key US indices is higher. The US 10-year eased 4bp yesterday (2.97%) and is little changed in the O/N session. The last of this week’s $104b auctions disappointed. The $29b 7-year sale was 2.78 times subscribed, weaker the four auction average of 2.83. Even the indirect bidders disappointed, taking down 42% as opposed to the 50.9% four-auction average. The direct bidders happened to take down 9% vs. the 10.4% average. Historically, the 7-year basket is always a difficult sell and lying on top of historical low yields does not make it any easier. However, recently the 5-7 year basket has been somewhat attractive to risk adverse trading strategies as traders do not want to be caught too far out the curve. Demand is there if equities underperform. The market will take its cue from this mornings GDP numbers.

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Boom Time for Forex

It has been three years since the Bank of International Settlements’ last report on foreign exchange was released. Since then, analysts could only speculate about how the forex market has evolved and changed.

The wait is now over, thanks to a huge data release by the world’s Central Bank, which showed that daily trading volume currently averages $4.1 Trillion, a 28% jump since 2007. Trading in London accounted for 44% of the total, with the US â€" in a distant second â€" claiming nearly 19%. Japan and Australia accounted for 7% and 5%, respectively, with an assortment of other financial centers splitting the remainder.

This data is consistent with a recent survey of fund managers, which indicated a growing preference for investing in currencies: “Thirty-eight per cent of fund managers said they were likely to increase their allocations to foreign exchange, while 37 per cent named equities and 35 per cent commodities. Currency was most popular even though this was the asset class where managers felt risks had risen most over the past 12 months.” In short, the zenith of forex has yet to arrive.

There are a few of explanations for this growth. First, there are the inherent draws of trading forex: liquidity, simplicity, and convenience. Second, investors are in the process of diversifying their portfolios away from stocks and bonds, which have underperformed in the last few years (on a comparative historical basis). As investors brace for a long-term bear market in stocks and low yields on bonds for the near future (thanks to low interest rates), they are turning to forex, with its zero-sum nature and the implication of a permanent bull market. Additionally, programmatic trading and risk-based investing strategies are causing correlations in the other financial markets to converge to 1. While there are occasional correlations between certain currencies and other securities/commodities markets, the forex markets tend to trade independently, and hence, represent an excellent vehicle for increasing diversification in one’s portfolio.

There is also a more circumstantial explanation for the rapid growth in forex: the credit crisis. In the last two years, volatility in forex markets reached unprecedented levels, with most currencies falling (and then rising) by 20% or more. As a result, many fund managers were quite active in adjusting their portfolios to reduce their exposure to volatile currencies: “The volume growth was really a result of the volatility and the fact that you had real end users actively hedging their exposures.” Another contingent of “event-driven” investors moved to increase their exposure to forex, as the volatility simultaneously increased opportunities to profit. Moreover, these adjustments were not executed once. With a succession of mini-crises in 2009 and 2010 (Dubai debt crisis, EU sovereign debt crisis) and the possibility of even larger crises in the near future, investors have had to monitor and rejigger their portfolios on a sometimes daily basis: “If you have a big piece of news, such as the Greek debt crisis, there’s more incentive to change your position,” summarized one strategist.

What are the implications of this explosion? It’s difficult to say since there is a chicken-and-egg interplay between the growth in the forex market and volatility in currencies. [In theory, it should be that greater liquidity should reduce volatility, but if we learned anything from 2008, it is that the opposite can also be the case]. As I wrote last week, I think it means that volatility will probably remain high. Investors will continue to adjust their exposure for hedging purposes, and traders will churn their portfolios in the search for quick profits.

It will also make it more difficult for amateur traders to turn profits trading forex. There are now millions of professional eyes and computers, trained on even the most obscure currencies. As if it needed to be said, forex is no longer an alternative asset.

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Da Bears EUR offside

It’s back to the drawing board for ‘da bears’ as the EUR has gained +6.6% against the dollar since hitting a four-year low in the first week of June. Sitting on its recent highs, glancing back, the lows are looking further and further away. The EUR buoyed by seasonal earnings, stronger European debt auctions and weaker US data seems to want to test its upper technical resistance levels of 1.2950-1.3000. The market remains apprehensive about today’s data. Will this morning’s US retail sales print and the FOMC minutes detract from the latest optimism about growth? The sales figures are expected to provide further evidence that the economy lost momentum towards the end of 2nd Q. While the FOMC communiqué did provide a more downbeat statement, reflecting the weaker tone of the incoming economic data, most likely did not warrant a discussion on quantitative easing. After this, the focus is back to China and GDP print this evening.

The US$ is mixed in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Yesterday’s widening in the US trade deficit from -$40.3b in Apr. to an 18-month high of -$42.3b in May was all due to an increase in the non-petroleum deficit. The real trade deficit, which is what matters for real-GDP growth, widened from $44.2bn to $46.0bn. Analysts project that if it were to remain broadly steady last month, net trade would subtract more than -1% from annualized GDP growth in the 2nd Q. That print, would certainly throw a ‘cat amongst the pigeons’ on the market’s estimate of a -0.2% decline. That been said, analysts will wait for this morning US retail sales data before laying claim to any predictions. One should remember that the trade data was for May, and does not reflect the slowdown in activity that other indicators have highlighted of late.

The NFIB (National Federation of Independent Businesses) small business survey reported a decline in the headline optimism index, from 92.2 to 89.0 in July. This has reversed most of the gains witnessed over the past two months. Digging deeper, the weakness was widespread, with the expected capital expenditure, inventories, earnings and sales sub-categories all falling. Consumer confidence is the key component in driving growth. Of late, global confidence indicators are experiencing a weakening bias.

The USD$ is lower against the EUR +0.01% and GBP +0.42% and higher against the CHF -0.33% and JPY -0.46%. The commodity currencies are stronger this morning, CAD +0.33% and AUD +0.38%. Owning the loonie is like a winning lottery ticket. It continues to pay out. Stellar fundamental reports of late have traders increasing bets that the BOC will hike rates for the remainder of the year. It seems to be a done deal that Governor Carney will raise +25bps next Tuesday and perhaps another +25bps in Sept. At +1%, Carney has the latitude to step back and assess global growth for the 3rd Q, which in fact could persuade policymakers to ‘skip a beat’ and pause, so that they do not get too far ahead of their southern neighbors. With risk appetite being better than it has been over the last trading week favors growth yield sensitive currencies like the AUD and loonie. Any dollar rallies will only give speculators a better ‘average’ opportunity to own the CAD. It’s difficult to find any technical or fundamental reason to ‘not’ own the currency, whether it’s growth, the BOC attempt to normalize rates somewhat (+0.50%) or as a safer-haven proxy. Couple this with commodities has speculators wagering bets that the CAD will outperform other economies whose monetary policy is expected to experience a prolonged period of near-zero benchmark rates. For most of this month, the loonie has followed equities, in fact, the currency has a +85% correlation with the Dow. On the crosses, CAD is holding its own and under normal conditions is seen as a safer way to play a global economic recovery with links to commodities and less banking.

The AUD is trading within proximity of its three week high on the back of buoyant regional bourses and confidence reports. Thus far, stronger reported earnings in the US is pressurizing the ‘must have’ risk-aversion currencies and promoting the growth sensitive, higher yielding and commodity based ones. It seems that the only immediate concern for the currency could be the looming federal election to be called by new PM Gillard. Currently, there is little evidence that the overall positive sentiment is running out of momentum. Last week we saw that there was nothing better to drag a currency higher than strong employment numbers. This week, economic sentiment seems to rule the coop. Last week, Governor Stevens left the cash O/N rate unchanged for a second consecutive month (4.50%). In his following communiqué, the RBA stated that consumer spending and business investment are expanding. Policy makers are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. Because of equities actions, the market is a cautious buyer on pullbacks, wary that the recent strong rally technically may be overdone (0.8833).

Crude is little changed in the O/N session ($77.10 -5c). Crude prices rose yesterday, erasing some of this weeks earlier declines on earning’s optimism that is fuelling an equity rally that may signal an economic recovery in the US. With the dollar also declining vs. the EUR has increased the appeal of commodities as an alternative investment. Last week, the black-stuff had a + 5.5% gain, the biggest rally in six weeks, as a drop in jobless claims ‘bolstered speculation that the country would sustain its economic recovery’. Later this morning the market expects another weekly draw down on stocks, however, the headline print is ‘not’ expected to be as negative as the last report. It revealed a drawdown of -5m barrels, somewhat inline with market expectation because of hurricane Alex, but, it was the other subcategories that were capable of reining in the price advance. Data showed an increase of +1.3m barrels for gas stockpiles and an increase of +300k for distillates stocks (heating and oil). While the headline for crude was bullish, the numbers for gas was bearish. Analysts believe that the gas markets numbers continue to show ‘lackluster demand and will put pressure on the entire energy complex in the days to come’. The EIA revealed a larger than expected increase in natural-gas stockpiles to +78 bcf vs. +60 bcf’s. We continue to remain range bound with the price action as the market is looking for stronger evidence to tackle the technical support and resistance levels.

A number of factors are supporting the ‘yellow metal’s’ largest rally in over a month. Gold is rallying on the heels of positive sentiment expressed by a rally in the equity market, a weaker dollar and finally a Portuguese 2-notch downgrade by Moody’s. Strength in commodities has a positively strong correlation with equities. Pick your poison, as every excuse is legitimate to wanting this commodity to be a part of ones portfolio. Technically, the bullish sentiment had been on hiatus with profit taking testing the medium term support levels. Fundamentally, in the short term the metal will find it difficult to rally aggressively, as historically, this is the ‘slowest’ season for physical demand. Despite this, longer term view, market concerns over global economic growth is supporting the ‘yellow’ metal prices on pull backs. Year-to-date, the commodity has gained +12.5% as investors have been content in using the commodity as a hedge against any European holdings ($1,213 +40c).

The Nikkei closed at 9,795 up +258. The DAX index in Europe was at 6,207 up +16; the FTSE (UK) currently is 5,272 up +1. The early call for the open of key US indices is higher. The US 10-year backed up 7bp yesterday (3.12%) and are little changed in the O/N session. Treasuries extended their losses to a fifth day as the market prepares to take down the last of the $69b’s worth of new product this week (3’s $35b, 10’s $22b and Bonds $12b) and on the back of a global bourse rally, reducing the demand for the safe heaven asset class. Throw in a revised IMF forecast for global growth, warrants dealers to cheapen up the curve and push 10-year yields to threaten the 3.15% resistance level. Yesterday, the 10-year note sale came in at a yield of 3.119%. The bid-to-cover ratio was 3.09, compared with the average of 3.06 over the past 8-auctions. Overall, the auction generated a healthy demand for the benchmark. The indirect bid (proxy for foreign buyers) was 42% compared to an 8-auction average of 38.3%. The direct bid (non-primary dealers) was 10% vs. an average of 15.5%. Current market sentiment has dealers wanting to sell product on up-ticks.

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Portugal Downgrade!

« US Earnings On Tap! | Home

By Mike Conlon | July 13, 2010

In the European session, Moody’s ratings agency downgraded Portugal two notches to A1 but maintained a “stable” outlook while citing weak growth prospects.  ECB President Trichet maintained that monetary policy is appropriate in an attempt to assuage the market.  Meanwhile, investor confidence figures in Germany weakened, as did wholesale prices.

In the UK, higher than expected CPI figures showed that inflation may not be subsiding as the BOE had expected which halted the Pound’s 3-day decline as expectations for normalized monetary policy have picked up for the second half of 2010.  In addition, home prices expanded to the highest reading since 2007, adding further support for the normalized monetary policy view.

Earnings season in US kicked off yesterday after the bell and generally speaking have been viewed as positive.  Stock index futures are higher in the pre-market, so we are seeing some Dollar weakness generally in line with risk-taking.

In the forex market:

Aussie (AUD):  Overnight, Australian business was unchanged as businesses reported improving sentiment.  However, there is some pressure on the Aussie as concerns over a slowing Chinese economy have increased.

Kiwi (NZD):  The Kiwi is rebounding from earlier lows due to Chinese slowdown concerns as the market is anticipating higher CPI data later this week.

Loonie (CAD):   The Loonie is higher this morning as both US corporate earnings and commodities are higher.  The Loonie will be in focus this week as Canada stands to benefit from good earnings in the US more so than the Aussie and Kiwi as the US is the largest importer of Canadian goods and services.

Euro (EUR):   The Euro is lower this morning on the Portuguese debt downgrade, though Greece had a successful bond auction which has pared losses.  Both German and Euro zone economic sentiment figures came in less than expected, showing a deteriorating outlook for the economy.   Wholesale prices in Germany were also lower, with the index showing a decline of .2% for the month vs. an expectation of a .2% rise, also taking the year-over-year figure down to 5.1% from an expectation of 5.5%.

Pound (GBP):   The UK reported CPI data showing a 3.2% gain, less than the BOE was hoping and still above its target limit of 3%.  The BOE has a dual mandate to keep inflation in check and encourage employment, so it may have its hands full trying to balance economic growth and taming inflation.  Nevertheless, the market sees this as reason to support the view that the BOE may return to normalized monetary policy in the second half of 2010.  In addition, house prices rose 11% to the highest levels in almost 3 years.

Dollar (USD):   The Dollar I slower this morning as corporate earnings season has started and the initial reports are positive for the economy.  Stock futures and commodities are higher in the pre-market, and the inverse correlation of the Dollar to the equity markets appears to be intact this morning and risk appetite is increasing.

Yen (JPY):  The Yen started the morning higher but is giving back gains as the US market becomes the focal point of the trading day.  Risk due to the debt downgrade in Portugal had provided the Yen with a bid, but that appears to be reversing.  This took the Nikkei lower, despite the fact that Japanese consumer confidence advance for the sixth straight month.

The two major themes in the world market right now are US corporate earnings and the continued EU debt crisis.  While US earnings have started out on a positive note, the downgrade of Portuguese debt has counter-acted the positive sentiment.

It is important to note that certain news carries more weight in different market sessions.  For example, the earnings news was initially viewed as positive in the overnight session….until the debt downgrade reversed sentiment in the European session.  Now that the US session is about to begin, the market has returned its focus to the positive news in the US.

This is a familiar pattern that we see time and time again.  Since the majority of the risk in the marketplace stems from the Euro session, there will be times when seemingly good news can be derailed by bad news only to be outweighed by the good news again as the US session begins.

This can provide traders with numerous opportunities to get into positions based on the opening of the US session!  For those who prefer to hold trades overnight, you really need to be careful with stop placement as the potential for swings from risk taking to risk aversion are increased as each trading session opens.

So today will be interesting to see which news today is more favored by the market.  My guess is the good news wins!

If you are not familiar with the different trading sessions and how they affect the forex market, be sure to check out our currency trading courses!

To follow these events live with a free, real-time practice account, click here!  Don’t miss out on the world’s fastest growing market!

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Topics: What To Look At In The Market |

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Japanese Yen and the Irony of Debt

Since my last update in June, the Japanese Yen has continued to creep up. It has risen a solid 5% in the year-to-date against the Dollar, 12% against the Pound, and an earth-shattering 20% against the Euro. It is closing in on a 15-year high of 85 Yen/Dollar, and beyond that, the all-time high of 79. According to the Chicago Mercantile Exchange, “Long positions in the yen stand at $5.4bn. This is the highest level since December 2009 and represents the biggest bet against the dollar versus any currency in the market.”

As to what’s propelling the Yen higher, there is very little mystery. Two words: Safe Haven. “The yen’s attractions lie in its status as a haven from the turmoil that has engulfed financial markets as, first, the eurozone debt crisis unfolded and, then, fears about a double-dip recession have intensified.” To be sure, there are a handful of currencies that are arguably more secure and less risky than the Yen. The problem is that with the exception of the Dollar, none of them can compete with the Yen on the basis of liquidity. In addition, thanks to non-existent inflation in Japan and low interest rates in other countries, there is very little opportunity cost in simply holding Yen and simply taking a wait-and-see approach.

According to some analysts, interest rate differentials will probably remain narrow for the foreseeable future: “Global bond yields will fall, reducing the incentive of yen-based investors to place funds abroad.” In fact, thanks to low interest rate differentials, the Yen is not even the target funding currency for carry traders. Suffice it to say that investors are not bothered by the fact that Japanese monetary policy is extraordinarily accommodative and that Japanese long-term interest rates are the lowest in the world. For those who are concerned about rising interest rate differentials, consider that this probably won’t become a factor until the medium-term.

On the fundamental front, there are a couple of risks for the Yen. First of all, there is the stalled Japanese economic recovery and the possibility that the strong Yen could further erode the competitiveness of Japan’s export sector, the mainstay of its economy. Yen bulls respond to this by noting both that Japan’s economic recovery has already stalled for 25 years and that should the Yen’s rise actually crimp economic growth, the Central Bank would probably intervene. By all accounts, “The government will continue to keep a close eye on the yen.”

A greater concern, perhaps, is Japan’s massive debt. Near $10 Trillion, public debt is already 180% of GDP, and is projected to grow to 200% over the next few years. Total public and private debt, meanwhile, is by far the highest in the world, at 380% of GDP. The Japanese government is planning to implement “austerity measures,” but political stalemate and election pressures will make this difficult to achieve.  All three of the rating agencies have issued stern warnings, and downgrades could soon follow. Here, Yen bulls retort that as unsustainable as this debt might appear, the majority (90%) of it is financed domestically, through the massive pool of savings. The remaining 10% is eagerly soaked up by foreign investors, who view the debt as a more attractive alternative to cash and stocks. [This is the great irony that I alluded to in the title of this post - that more debt is viewed positively as "liquidity" and does nothing to hurt the Yen].

Speaking of which, the Japanese stock market has risen by only 5% this year, and some analysts are predicting that a long bull market is inevitable. Adding to the fervor, Central Banks have begun to build their positions in the Yen, for the first time in 10 years. It seems everyone is excited about the Yen, even economists: “Within the developed economy space, Japan looks relatively good as an economy that’s likely to be growing faster than Europe or America, and it’s generally considered to have low risk of capital flight.” In other words, the consensus is that there is a very low chance of a “Greek-like debt crisis.”

At this point, the Yen can only be toppled by Central Banks: either foreign Central Banks will hike interest rates and make the Yen unattractive in contrast, or the Bank of Japan will intervene directly to prevent it from rising further.

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Less Money Needed!

« The Party’s Over! | Home

By Mike Conlon | June 30, 2010

There was encouraging news overnight as the ECB said it would lend banks less than analysts had predicted, showing signs that the European banking system may not be in as weak a state as the market thinks.   In addition, German unemployment changed less than expected and the unemployment rate remained steady showing signs of economic stability.  Euro zone CPI figures fell back to 1.4%, slightly better than analyst expectations.

In the UK, consumer confidence figures fell to 6-month lows as residents prepare for budget cuts, and BOE policy-maker Adam Posen said that UK recovery is tentative and could risk sliding back into recession.  Look for continued loose monetary policy unless inflation figures really heat up.

In the US, the ADP employment change came in less than expected and could serve as a harbinger of Friday’s Non-Farm Payrolls report.

In Australia, bank lending and house price gains showed that the economy has been resilient in the face of rate hikes but whether that trend continues remains to be seen.

Canadian GDP figures came in flat, showing neither growth nor contraction but missing analyst expectations of a .2% gain.

So today is a bit of a mixed bag, with earlier risk-taking on the European bank news giving back some gains.  Stocks are mixed to slightly lower with commodities relatively flat.  Today is the last day of the second quarter, so we could see some window dressing which could mean volatility in stocks.

In the forex market:

Aussie (AUD):  The Aussie is giving back some gains after bank lending and home price figures showed how strong the Australian economy has held up despite the RBA’s rate hikes to cool the economy.  While the trading day started off in risk-taking mode, the Aussie may decline if we flip to risk aversion.

Kiwi (NZD):  The Kiwi is lower this morning as the RBNZ said in its annual Statement of Intent that it will continue to remove economic stimulus as the NZ economy recovers.  Part of this statement has been construed as backing away from tighter monetary policy, citing global economic conditions.

Loonie (CAD):   A bit of a reversal for the Loonie this morning as well, as risk-taking waned and GDP figures came in lower than expected.  GDP stalled after gaining for 7 straight months as retail sales declined as the government removed temporary tax relief measures.

Euro (EUR):  The Euro is higher across the board this morning as the ECB said it will lend less to banks to cover their debt payments than the market was expecting.  This shows that the financial health of European banks may not be as bad as expected and that they are largely able to meet debt obligations.  There has been major fear about the sovereign debt exposure of these banks, and this announcement took that fear down a notch.

Pound (GBP):   The Pound is lower this morning as comments from the BOE said that recovery is tentative and consumer confidence figures fell to 6-month lows as budget concerns weighed heavily.  However, house price figures rose to 2-year highs in a sign that the property market may be stabilizing.

Dollar (USD):   The Dollar is mixed as the ADP employment change showed a gain of 13K vs. an expectation of 60K jobs gained.  Friday’s Non-Farm Payrolls report will really show how far along we are in the employment picture and economic health, but this worse-than-expected figure may be foreshadowing.

Yen (JPY):   The Yen is showing some strength against all but the Euro as risk aversion appears to winning the morning battle.  Yen started the trading lower as Asian stocks continued to sell-off, but then reversed on the Euro bank news, only to reverse again on the ADP jobs report.

Yesterday’s sell-off may have been an over-reaction to negative sentiment in the market but the important thing to remember is that global economies are still fragile.  As various governments remove stimulus, economies will now be forced to stand on their own.

In the US, it’s all about jobs, jobs, jobs.  As long as people are unemployed and unable or unwilling to spend, economic recovery is going to be fragile.  Part of the problem is that we don’t have policies in place that encourage private sector growth, as looming tax hikes to support out of control spending weigh heavily on private business.

So this most recent scare is all about confidence.  It is obvious that people don’t have confidence in their government’s ability to improve conditions.  It doesn’t matter what the policy is, there is NO confidence right now.

However, there are pockets of economic strength around the globe and those who are employed are experiencing a MUCH different economy than those who aren’t.  Some are beginning to say that this is the “new normal”; where we will have economic growth AND high unemployment.  I beg to differ.

I understand that emergency stimulus measures were necessary to prevent us from going over the cliff but enough is enough.  The sooner the government removes the training wheels from the economy, the sooner citizens will learn how to ride again.  Because at this point, the US government is holding us back, and not letting us move forward.  Friday’s NFP will either confirm or deny this assertion, and the market will respond accordingly.

To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!

To follow these events live with a free, real-time practice account, click here!  Don’t miss out on the world’s fastest growing market!

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Krugman Uses the "D" Word

It has only been two days since the wrap-up of the G20 meeting, but already, second-guessing has shifted into high gear. Two statements in particular caught the attention of the markets; the first of these, officially removed the concept of a global “bank tax� off the table. The second, put forward a timeline for reducing government stimulus spending.

The axing of a coordinated bank tax came as no surprise. It was clear that some countries wanted to move forward on charging a levy, while others were vehemently against it. As it stands now, individual countries will act as they see fit. The agreement around spending and deficits on the other hand, presents a far more interesting story line; interesting because some big names are lining up publically to trash the idea.

In his article published earlier this week in the New York Times, economist Paul Krugman argued the point that this is the worst possible time to worry about deficits. In his view, moving too quickly from undisciplined spend-thrifts (my words) to fiscally-responsible penny-pinchers (again, my words), is the very formula that led to the depression of the 1930s. Krugman believes that failing to maintain spending levels, can only result in one outcome.

“We are now, I fear, in the early stages of a third depression,� writes Krugman, a depression brought about by a “failure of policy�.

Seriously? A depression?

According to Krugman, there have been two previous depressions. One in the 1870s, and the “Great Depression� of the 1930s. Krugman believes we are following the same path that preceded the last depression. So, at the risk of oversimplifying the causes of the last depression, let’s look at the major contributors that brought about the depression, and look for commonality with today’s situation:

1. Loss of Market Valuation and Bank Failures

As the stock market lost value â€" approximately $40 billion within the two months following the so-called “Great Crashâ€� â€" a series of bank failures were triggered. Even by today’s standards, $40 billion is a lot of cash â€" imagine what it meant to the economy in 1930 when US GDP was just over $91 billion.

2. Decline in Public and Government Spending

Naturally, a loss equal to about 43 percent of the country’s total yearly GDP, resulted in severe deflation. The lower demand for goods and services had a devastating impact on employment, and as more people found themselves out of work, spending fell even further.

3. American Economic Policy

In order to protect businesses in America’s important manufacturing sector, the government introduced the Smoot-Hawley Tariff in 1930. The intent was to impose duties on imported goods in a bid to make US products more attractive for domestic consumers. As should have been predicted, other countries retaliated with similar tariffs, making American goods less competitive globally. The domestic market lacked the capacity to pick up the slack of the lost foreign sales, reducing further, overall demand.

The common theme these three contributing factors share is that they all lead to reduced spending. In his book “Essays on the Great Depression�, Bernanke placed much of the blame for the depression on economic policy that neglected to protect failing banks, while at the same time, allowing the supply of money and credit to contract.

Despite the public backlash sure to follow, Bernanke was not about to allow the same thing under his watch. Banks were rescued and stimulus money was spent. Given his recent remarks committed to the continuance of an expansionary policy, it is obvious that Bernanke and Krugman are in agreement that governments must continue to support the recovery.

After Years of Spending, Why the Sudden Swing Now to Deficit Cutting?

Of course, not everyone agrees with this approach. Several countries in Europe find themselves face to face with out-of-control deficits. Spooked by the sovereign debt crisis in Europe, Germany, and most recently Great Britain, have opted to follow a self-imposed austerity path to reduce government debt. Germany’s budget last month, includes 80 billion euros (US$107 billion) in spending cuts, while the David Cameron-led coalition in Britain, has also announced significant spending reductions as well as steep tax increases.

I don’t believe anyone an argue against the need to reign in deficits; rather, I think it is the timing that concerns critics. Certainly, countries cannot continue to rack up massive deficits each year, but nor is it to anyone’s advantage to choke off a recovery before it has chance to gain greater traction. This would, to use Krugman’s words, be a “failure of policy�.

“Around the worldâ€�, notes Krugnam, “most recently at last weekend’s deeply discouraging G20 meeting â€" governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.â€�

In the end, a compromise was reached that enabled all the G8 countries, with the exception of Japan, to find language they could support. The solution proposed by Canadian Prime Minister Stephen Harper, and supported by President Obama, called for a continuation of the planned stimulus spending in the short-term, with a longer-term goal of reducing deficits by 50 percent within three years.

It is hoped I’m sure, that the pledge to maintain spending to be followed by deficit cutting later on, sends a positive message to the markets. However, I fear that what is still missing, is a stronger commitment to a coordinated approach to ensuring sufficient stimulus over the next six to eight months.

The UK has already passed a budget to reduce spending, as has Germany. Greece has had austerity measures forced upon it in exchange for receiving emergency funding, thereby setting a precedent for other EU countries like Spain and Portugal on the brink of needing their own emergency bail-out. No matter what was promised in Toronto, it appears that Europe is determined to scale back on spending.

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Emerging Markets Rally, Despite Eurozone Debt Crisis

It looks like emerging market investors took my last post (“Investors” Shouldn’t Worry about the Euro) to heart, since emerging markets (EM) have continued to rally in spite of the Euro’s woes. To be sure, EM stocks, bonds, and currencies all dipped slightly in May when the crisis reached fever pitch, but they have since recovered their losses and are once again en route to record highs.

That’s not to say that that surge in risk-aversion wasn’t justified. In fact, investors are continuing to punish the Eurozone as well as a handful of other risky areas. However, analysts have concluded that in the case of emerging markets as a whole, this mindset doesn’t really make sense.

Simply, the fiscal and economic condition of is stronger than in developing countries. Whereas previously crises were known to originate in developing countries and spread to industrialized countries, this latest series of crisis turned that notion on its head. The credit and housing crises were largely the product of speculation in the West, and the sovereign debt crisis originated in Europe. While it’s possible that investor concern would self-fulfillingly cause the crisis to spread to emerging markets, any impact would probably be muted.

“There is recognition that emerging market balance sheets are strong and the debt to GDP ratio is below 40 per cent compared to the western world, where it is over 100 per cent in many countries,” summarized one analyst. “The vast majority of emerging market countries ‘have the tools to tackle inflation and will succeed, having reasonable independence from their central banks,’ ” added another.

Thus, the funds continue to pour in. “Net inflows into emerging market debt totalled $30.6bn (£20.7bn, €25bn) from the beginning of the year to late May compared with $33bn for the whole of 2009.” Here’s another sign of EM confidence: “IPOs in developing countries raised $29.3 billion this quarter, almost three times the amount in industrialised nations.” Meanwhile, the MSCI Emerging Market Stock Index has just finished its strongest rally since 2005, and the JP Morgan Emerging Market Bond Index (EMBI+) is closing in on another record high. This is frankly incredible when you consider that around half of the countries with the largest weightings in the index have experienced debt crises of varying severity over the last decade.

As far as forex investors are concerned, the confidence in EM capital markets should also extend to currencies. The carry trade is heating up (thanks to the cheap Euro), and will probably only expand as EM Central Banks move to raise interest rates to combat inflation, as alluded to above. If the Eurozone debt crisis intensifies, then you can expect some kind of pull-back. As with recent retracements, however, it will be only temporary.

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Be Careful What You Wish For!

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By Mike Conlon | June 25, 2010

Overnight, the US Congress unexpectedly came to a deal and has agreed on bill regarding financial reform and regulation.  The uncertainty surrounding this bill has been weighing on the markets, as it was unclear what the outcome might be.

As news trickles out of the 2000+ page document and what it means for the banks and the market in general, at least the uncertainty has been removed.  Uncertainty= volatility.  Now, whether or not this bill will actually accomplish what it is intended to remains to be seen.  What my experience tells me is that no matter what is in the bill; Wall St. has already prepared for likely scenarios and has already devised ways to circumvent regulation.  In addition, enacting legislation of this magnitude always comes at a cost, and the brunt of that cost is likely to be paid for by consumers, and not the banks themselves.  Banks will simply pass through the new cost so that executives can still buy beach houses.  If you don’t believe this will happen, take a look at bank stocks that are trading higher in the pre-market.

This comes ahead of this weekend’s G-20 meeting, where the US will push other nations to consider enacting similar reform.

Economic data is out showing that US GDP grew 2.7%, vs. an expectation of 3% and personal consumption figures were at 3% vs. an expectation of 3.5%.  This falls in line with what the Fed said the other day that we are seeing growth, albeit moderate.

Overnight, Japanese CPI figures came in at -.9% vs. -1.1% showing signs that deflation may be subsiding.

The market started out in risk taking mode, but it appears that may be reversing.

In the forex market:

Aussie (AUD):  New Australian PM Gillard has backed away from the mining tax that was the eventual downfall of her predecessor and is open to discussion and negotiation.  The tax was largely seen as anti-investment in one of Australia’s biggest industries.

Kiwi (NZD):   The Kiwi is lower despite a widening trade balance surplus but the market is concerned about a potential Chinese slowdown which could hamper demand for exports.   However, this figure fell short of expectations (814M vs. 850M).

Loonie (CAD):  The Loonie is higher this morning as its major trading partner (the US) appears to be the only country not entertaining the idea of reduced spending.  Unlike the other commodity currencies which are more tied to China, expect the Loonie to benefit as long as the US maintains its spending spree.

Euro (EUR):  The Euro is lower continuing the trend of heightened fear from the debt crisis.  Today marks the fourth day in a row that European stocks are lower as we head into the G-20 weekend.

Pound (GBP):  The Pound is mixed this morning and it will be interesting to see what (if anything) comes out of the G-20 meeting.  The UK “tax and axe” strategy is diametrically opposed to the US strategy of “spend, extend, and pretend”.

Dollar (USD):    The Dollar is somewhat mixed today as the market figures out exactly what this new financial regulation means.  In addition, GDP figures were lower than expectations, but showed that growth, while moderate, is occurring.

Yen (JPY):  The Yen is higher this morning, as CPI data showed that deflation came in less than expected.  In addition, minutes from the rate policy meeting showed that there was actually talk of inflation.  The Nikkei was down overnight, and speculation that the G-20 will not come to a consensus over global economic policy has strengthened demand for the safe-haven of the Yen.

All of my years on Wall St. have taught me one thing:  that politicians in Washington DC cannot compete with the brainpower of Wall St.   Today, champagne is flowing as the uncertainty over the worst-case scenario from financial regulation has been lifted.  True, this isn’t a “home-run” for Wall St.; but I can tell you that they have been prepared for EVERY possible scenario to come out of this and already have plans in place to line their pockets at the expense of the general public.

While regulation is good in theory, it always brings about unintended consequences and in the end it is always the consumer that gets hurt.  Now that this is out of the way, the G-20 meeting will be the focus of the weekend but don’t expect anything of substance to come out of it.

The major problem here in the US is jobs.  Period.  Next week’s Non-Farm Payrolls report will show if we are gaining any jobs in the private sector.  If this is a bad number, look out below.

So there is potential for risk over the weekend, but my guess is the G-20 will be a non-event.

To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!

To follow these events live with a free, real-time practice account, click here!  Don’t miss out on the world’s fastest growing market!

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US Lowers GDP Estimate

The US government has lowered its Gross Domestic Product estimate from 3 percent, to 2.7 percent for the second quarter of the current year. A reduction in consumer spending levels was the main reason given for the downgrade. Despite the reduction, this marks the third straight quarter that the economy has expanded and somewhat eases concerns of the possibility of a “second-dip” recession.

On a more negative note however, the result is weak when compared to the growth levels experienced in the aftermath of previous recessions. This, together with ongoing problems in Europe, has some analysts concerned that the global economy will continue to struggle for some time yet.

High unemployment also continues to place a damper on any recovery. The number of new jobless claimants did decline by 19,000 new claims last week, but still, nearly half a million people filed for benefits. The number of people receiving extended benefits also rose.

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Investors Should Not Worry about EURO

With today's post, I want to take off my currency trader hat and put on my investor hat.

You might be tempted to argue: But wait, these two aren't mutually exclusive. Isn't it possible to wear both hats? While itâ's theoretically plausible for a trader to take a long-term view of the markets based on fundamental analysis, I don't think it's likely in practice. In the end, a good investor will always have a longer time horizon than a good currency trader. In short, someone who bought shares in Apple 20 years ago is now probably a millionaire. Someone who went long the USD 20 years ago has probably since lost his investment due to inflation.

But seriously, currency traders must adapt to the zero-sum nature of forex markets by shortening their time horizon. Stock market investors, on the other hand, are not bound by this constraint. In fact, by holding stocks for a long enough time period, investors can actually turn this into an advantage.

As a result of the Eurozone sovereign debt crisis, for example, some analysts are calling for foreign (i.e. not using Euros) investors to dump their European. investments. This recommendation is not necessarily a dismissal of European companies (though an argument could be made on this basis as well), but rather is a reflection of concerns that returns will be negatively impacted by the declining Euro. Since foreigners can only purchase shares using their home currencies indirectly (through ADRs and ETFs), they feel the effects of currency fluctuations every time they enter and exit a position. Those that entered into a position prior to the Euro’s decline, by extension, will naturally be hurt if they try to exit before the Euro has had a chance to recover.

But therein lies the problem with this approach. Those that dump their shares now solely over exchange rate concerns are simply locking in their losses, just like American stock market investors who sold their stocks in March 2009 when the DJIA was below 7,000. By instead waiting a year (or longer!) such investors could have at least partially neutralized the impact of these crises. Of course, if recovery in the Euro was perceived as inevitable, then portfolio investors naturally wouldn’t think about divesting from EU capital markets. The concern is that the Euro will continue to decline, perhaps to the point of breakup.

I don’t want to dig myself into a hole by making a 5-year prediction for the Euro, especially since there is a part of me that is concerned that it will continue to decline. Based on history, however, there is very little reason to believe that will be the case. I’m not talking about economic fundamentals â€" about how the US fiscal position is equally precarious and how currency markets might recognize this and turn on the Dollar â€" but rather about the nature of forex markets.

Simply, currencies fluctuate. Since its introduction 10 years ago, the Euro has fallen, then risen, then fallen, then risen, then fallen again to its current level. If you initially invested in Europe 2 years ago, the exchange rate would erode your returns if you tried to sell now. If you invested 5 years ago, you would break even. If you invested 10 years ago, you would come out ahead. In the end, it’s only a question of perspective. Still, if you maintain your positions for long enough, either you will break-even from the exchange rate or it will only marginally affect your returns (on an annualized basis).

Consider also that you can hedge your exposure to a falling Euro by simply buying Dollars. If you are concerned about exchange rate risk, you can do this every time you open a position. For example, if you were to buy European shares today and simultaneously short an equal quantity of Euros, you would be perfectly hedged against any further decline in the Euro. The cost of the hedge is the sum of any transaction costs, management fees, and negative carry that you incur as part of the currency trade.

In short, unless you deliberately want to speculate on exchange rates, don’t worry about them! If your investing horizon is long enough, their fluctuations will neither help nor hurt you in a meaningful way.

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Oil Falls on Growth Fears

Fears that a faltering recovery could weaken demand for energy, pushed prices back down towards $76 a barrel in Asia on Friday. The benchmark crude for August delivery was down 13 cents to $76.38 a barrel at late afternoon Kuala Lumpur time in electronic trading on the New York Mercantile Exchange.

Oil was lower after lacklustre data Thursday from the U.S. that renewed concerns over a slower-than-expected global economic recovery that may hurt crude demand, said Clarence Chu, a trader with market maker Hudson Capital Energy in Singapore.

“Oil is trading sideways and may continue to do so next week amid the economic uncertainties,” Chu said.

Source: Associated Press

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Be Careful What You Wish For!

« Moderate Growth Ahead! | Home

By Mike Conlon | June 25, 2010

Overnight, the US Congress unexpectedly came to a deal and has agreed on bill regarding financial reform and regulation.  The uncertainty surrounding this bill has been weighing on the markets, as it was unclear what the outcome might be.

As news trickles out of the 2000+ page document and what it means for the banks and the market in general, at least the uncertainty has been removed.  Uncertainty= volatility.  Now, whether or not this bill will actually accomplish what it is intended to remains to be seen.  What my experience tells me is that no matter what is in the bill; Wall St. has already prepared for likely scenarios and has already devised ways to circumvent regulation.  In addition, enacting legislation of this magnitude always comes at a cost, and the brunt of that cost is likely to be paid for by consumers, and not the banks themselves.  Banks will simply pass through the new cost so that executives can still buy beach houses.  If you don’t believe this will happen, take a look at bank stocks that are trading higher in the pre-market.

This comes ahead of this weekend’s G-20 meeting, where the US will push other nations to consider enacting similar reform.

Economic data is out showing that US GDP grew 2.7%, vs. an expectation of 3% and personal consumption figures were at 3% vs. an expectation of 3.5%.  This falls in line with what the Fed said the other day that we are seeing growth, albeit moderate.

Overnight, Japanese CPI figures came in at -.9% vs. -1.1% showing signs that deflation may be subsiding.

The market started out in risk taking mode, but it appears that may be reversing.

In the forex market:

Aussie (AUD):  New Australian PM Gillard has backed away from the mining tax that was the eventual downfall of her predecessor and is open to discussion and negotiation.  The tax was largely seen as anti-investment in one of Australia’s biggest industries.

Kiwi (NZD):   The Kiwi is lower despite a widening trade balance surplus but the market is concerned about a potential Chinese slowdown which could hamper demand for exports.   However, this figure fell short of expectations (814M vs. 850M).

Loonie (CAD):  The Loonie is higher this morning as its major trading partner (the US) appears to be the only country not entertaining the idea of reduced spending.  Unlike the other commodity currencies which are more tied to China, expect the Loonie to benefit as long as the US maintains its spending spree.

Euro (EUR):  The Euro is lower continuing the trend of heightened fear from the debt crisis.  Today marks the fourth day in a row that European stocks are lower as we head into the G-20 weekend.

Pound (GBP):  The Pound is mixed this morning and it will be interesting to see what (if anything) comes out of the G-20 meeting.  The UK “tax and axe” strategy is diametrically opposed to the US strategy of “spend, extend, and pretend”.

Dollar (USD):    The Dollar is somewhat mixed today as the market figures out exactly what this new financial regulation means.  In addition, GDP figures were lower than expectations, but showed that growth, while moderate, is occurring.

Yen (JPY):  The Yen is higher this morning, as CPI data showed that deflation came in less than expected.  In addition, minutes from the rate policy meeting showed that there was actually talk of inflation.  The Nikkei was down overnight, and speculation that the G-20 will not come to a consensus over global economic policy has strengthened demand for the safe-haven of the Yen.

All of my years on Wall St. have taught me one thing:  that politicians in Washington DC cannot compete with the brainpower of Wall St.   Today, champagne is flowing as the uncertainty over the worst-case scenario from financial regulation has been lifted.  True, this isn’t a “home-run” for Wall St.; but I can tell you that they have been prepared for EVERY possible scenario to come out of this and already have plans in place to line their pockets at the expense of the general public.

While regulation is good in theory, it always brings about unintended consequences and in the end it is always the consumer that gets hurt.  Now that this is out of the way, the G-20 meeting will be the focus of the weekend but don’t expect anything of substance to come out of it.

The major problem here in the US is jobs.  Period.  Next week’s Non-Farm Payrolls report will show if we are gaining any jobs in the private sector.  If this is a bad number, look out below.

So there is potential for risk over the weekend, but my guess is the G-20 will be a non-event.

To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!

To follow these events live with a free, real-time practice account, click here!  Don’t miss out on the world’s fastest growing market!

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China Revalues Its Currency By 4 Percent

It was only last week that I mused about “Further Delays in RMB Revaluation.� Lo and behold, over the weekend, the Central Bank finally budged, by pledging to the members of the G20 that it would � ‘proceed further with reform‘ of the exchange rate and ‘enhance’ flexibility.� Upon reading this, I suppose I should have felt stupid.

Still, I wondered whether the move was aimed as a political sop designed to appease Western countries, rather than a meaningful change in China’s forex policy. My suspicions were confirmed on Monday, when the markets opened, and the RMB jumped by a pathetic .4%. All of those who had been hoping for an expecting an instant revaluation a la the 5% jump in 2005 were sadly disappointed.

Most commentators shared my cynicism about the move. According to Goldman Sachs Group Chief Global Economist Jim O’Neill, � ‘It’s pretty astute timing. The timing of it is clearly aimed at the G-20 meeting, which indirectly links to the whole renewed thrust in Congress with protectionist steps against China.’ � If this was in fact China’s intention, it backfired, since it only succeeding only in bringing increased attention to the still-undervalued Yuan. Senator Sherrod Brown called the appreciation � ‘a drop in a huge bucket….We’ve seen China take actions like this before when the spotlight is on, and then revert back to old tricks.� Thus, he and Senator Charles Schumer have announced that they will move forward with a bill to punish China, unless the RMB is allowed to significantly appreciate.

By the Central Bank of China’s own admission, this is unlikely. Instead, it will continue to “keep the renminbi exchange rate at a reasonable and balanced level of basic stability.� In other words, the RMB is still pegged squarely to the US Dollar. It is neither freely floating nor is it pegged to a basket of currencies (in which case it could conceivably appreciate faster against the Dollar, due to the weak Euro). It is technically allowed to rise and fall on a daily basis within a .5% ban, but even this is controlled tightly by the Central Bank, via the so-called Central Parity Rate. If the rate fluctuates too much, state-owned companies often intervene in the markets at the behest of the Central Bank. Legitimate market participants are heavily constrained by a rule that requires them to square all of their positions at the end of every trading session, such that making long-term bets on the RMB’s appreciation would be impossible.

Not that it matters. In the US, where it is legal to make long-term bets on the RMB (via futures contracts), investors are still only projecting a 1.8% appreciation (2.2% relative to the RMB’s pre-revaluation level) over the next year, and a 2.9% appreciation by the end of 2011. In the end, there just isn’t a lot of confidence that China will voluntarily act in a way that is contrary to its own short-term economic interests.

To be sure, there is a possibility that the RMB will be allowed to steadily appreciate, in which case there would be real implications for other financial markets. If the past is any consideration, however, the RMB will rise only modestly against the Dollar, and even more modestly on a trade-weighted basis. Its economy will remain overheated and imbalanced, and if it was headed towards collapse prior to this latest change, it certainly still is.

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BOE Not Unanimous!

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By Mike Conlon | June 23, 2010

Minutes released from the Bank of England’s rate policy meeting showed that the vote was not unanimous to keep rates unchanged at .5%, for the first time in nearly 7 months.  Inflation concerns were the cause of the dissenting vote, as CPI figures in the UK have been above targets.  While the BOE expects inflation to subside in the ensuing months, that may not necessarily be the case.

This comes a day after the emergency budget which was announced yesterday, calling for a reduction in spending and an increase in taxes.

In the US, the FOMC rate decision is due out later today, so expect to see some volatility in dollar-related pairs.  It is widely held that there will not be a change in policy, but some market participants are betting that we may see a change in the language regarding policy.  This would give credence to the rising sentiment that the Fed may raise rates later this year.  Personally, I don’t see this happening and I think the Fed will be on hold for the remainder of the year.
Yesterday’s abysmal housing data confirmed that deflationary forces in the housing market may be the start of another leg down.

In the Euro zone, German consumer confidence came in slightly better than expected and PMI figures were largely in line.  However, concerns over Greek debt have perked up again.

Overnight, the Yen was higher as the Nikkei was down taking its cues from yesterday’s sell-off in the US stock market.

This morning will bring US new home sales figures as well as Canadian retail sales figures.  Any major deviations could send the respective currencies lower.

But expect volatility going into the FOMC announcement at 2:15 EST.

In the forex market:

Aussie (AUD):  The Aussie is lower as stocks sold-off in the overnight session but it is gaining back some ground heading into the US session.  Risk aversion has driven the Aussie lower, and there is some concern that Chinese demand for metals and energy is causing a rift in the Australian economy.

Kiwi (NZD):  The Kiwi is higher this morning in anticipation of GDP figures which are due out later tonight.  The expectation of .5% growth will likely be exceeded as demand from China for raw materials has the NZ economy picking up steam.  Should the number best expectations, then the likelihood of a rate increase at July’s policy meeting will increase.

Loonie (CAD):  The Loonie is lower this morning as oil prices are pulling back from the $78 level, and retail sales figures came in worse than expected.  Analysts were expecting a decline of .4% and the figure showed a decline of 2.2%, a big miss.  Canada is to the US what Australia and New Zealand are to China.  If recovery here in the US is floundering, then it may not bode well for the Loonie and the Canadian economy in general.

Euro (EUR):   The Euro is a mixed bag this morning, as it is up against the North American currencies but down against the rest.  The EU is considering a bond levy on countries that don’t adhere to debt-to-GDP guidelines which of course brings the Greek debt crisis back to center stage.  In addition, business confidence was down in France, though consumer confidence was higher in Germany.  Go figure.

Pound (GBP):  The Pound is higher across the board, giving a vote of confidence to both the government for their budget and the BOE.  The lone dissenter in the rate policy meeting is concerned about inflation, as growth targets may exceed expectations.  That’s a “nice” problem to have, considering the economic condition of the US.

Dollar (USD):   The Dollar is mostly lower prior to today’s FOMC meeting.  Yesterday’s poor housing data sent stocks lower, and today’s new home sales aren’t expected to be much better.  This should be enough to keep the Fed unchanged in both language and policy, and the market is starting to catch on to the fact that the smoke and mirrors of government spending may not be enough to stoke the economy.  Go back and take a look at my discussion of biflation from a few days ago.

Yen (JPY):  The Yen is mixed as well, trading higher vs. USD and CAD (both showing weakness) and the Euro (debt concerns) but lower vs. GBP, AUD, and NZD.  So today can neither be classified as risk-taking or risk-aversion, but much of the yen strength was derived from weakness in the Nikkei, which sold off following the US stock market decline.

I think today really shows the difference to how the market reacts to different policy pursuits from around the globe heading into this weekend’s G-20 meeting.  On the one hand, you have the EU and the UK who are committed to reducing deficits and trying not to raise taxes too much to discourage business (in fact the corporate tax rate was lowered in the UK), and the policies taken by the US.

The US is going the other way, expanding deficits and throwing good money after bad at our financial problems which can only result in higher taxes when it comes time to pay the piper.  President Obama was rebuffed by Chancellor Merkel of Germany with regard to how to best combat the global financial crisis, and it appears as though the market agrees with the EU.

Weak housing data here in the US show that the stimulative effects of government spending may have slowed a decline in the economy, but have not fixed the problem.  Now taxpayers (and their children and grandchildren) face an enormous burden for what adds up to temporary conditions.

The change people voted for was for less government spending and indeed we’re seeing changeâ€"even more and more spending!  Hopefully this course can be reversed before it’s too late.  I never thought I’d say this but now is the time we should be taking our economic cues from Europe, and not their prior policies that landed them in this mess.

Those who don’t learn from the past are doomed to repeat it.

To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!

To follow these events live with a free, real-time practice account, click here!  Don’t miss out on the world’s fastest growing market!

Tags: account, AUD, Aussie, Australia, bank, cad, canada, China, course, crisis, currenc, currencies, currency, currency market, currency trading, data, decision, dollar, dow, economic, economy, EUR, Euro, Europe, fed, forex, forex market, free, fx, fxedu, gbp, home, Il, jpy, Kiwi, live, loonie, lower, Mike Conlon, money, new zealand, nzd, oil, pair, pound, practice, practice account, rate, retail sales, RSI, sentiment, ssi, stock, stocks, time, USD, Yen

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US New Home Sales +300k vs. +424k, last month also revised down to +446k

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SNB Abandons Intervention

The Swiss National Bank (SNB) has apparently admitted (temporary) defeat in its battle to hold down the value of the Franc. ” ‘The SNB has reached its limits and if the market wants to see a franc at 1.35 versus the euro, they won’t be able to stop it.’ ” The markets have won. The SNB has lost.

Still, the SNB should be applauded for its efforts. As you can see from the chart above, it managed to keep the Franc from rising above €1.50 (its so-called line in the sand) for the better part of 2009. Furthermore, by most accounts, it managed to slow the Franc’s unavoidable descent against the Euro in 2010. While the Dollar has appreciated more than 15% against the Euro, the Franc has a risen by a more modest 10%. ” ‘Without that €90 billion [intervention], it’s fair to say that the euro would be closer to $1.10,’ ” argued one analyst. In fact, as recently as May 18, the SNB manifested its power in the form of 1-day, 2% decline in the Franc, its sharpest fall in more than a year.

Overall, the SNB has spent more than $200 Billion over the last 12 months, including $73 Billion in the month of May alone. ” ‘To put the figures in perspective, there have been only two months when China, the world’s largest holder of forex reserves with $2,249bn in assets, saw its reserves increase more.’ ” The SNB now claims the world’s 7th largest foreign exchange reserves, ahead of the perennial interveners of Brazil in Hong Kong, the latter of whose currency is pegged against the Dollar.

While the SNB can take some credit for halting the decline in the Franc, it was ultimately done in by factors beyond its control, namely the Eurozone sovereign debt crisis and consequent surge in risk aversion. At this point the forces that the SNB is battling against are too large to be contained: “We’re talking about a massive euro crisis, so no single central bank can prop it up on its own,” summarized one trader. As a result, the Franc is now rising to a fresh record high against the Euro nearly every trading session.

Still, the SNB remains committed to rhetorical intervention. “The central bank has a ‘clear aim‘ to maintain price stability and this is what guides its policy actions, SNB President Philipp Hildebrand said…The bank will act in a ‘decisive manner if needed.’ ” That means that if economic growth slows and/or deflation sets it, it may have to restart the printing presses. Given that its economy is slated to grow at a solid 1.5% this year, unemployment is a meager 3.8%, and the threat of inflation has largely abated. On the other hand, the prospect of a drawn-out crisis in the EU means the Franc will probably continue to appreciate â€" without help from the Central Bank: ” ‘The SNB may continue to intervene in the currency markets until 2020,’ ” declared the head of forex research for UBS.

The implications for currency markets are interesting. Not only has the SNB prevented the Euro from falling too fast against the Franc, but it may also have prevented it from falling too quickly against other currencies. ” ‘To suggest that the SNB has been the savior of the euro is too much. But one could imagine that if the euro starts to decline again, the market may blame the fact that the SNB isn’t buying,’ ” said a currency strategist from Standard Bank.

This episode is also a testament to the limits of intervention. It has always been clear (to this blogger, at least) that intervention is futile in the long-term. The best that a Central Bank can hope for is to stall a particular outcome long enough in order to achieve a certain short-term policy aim. When enough momentum coalesces behind a (floating) currency, there is nothing that a Central Bank can do to stop it from moving to the rate that investors collectively deem it to be worth.

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Yuan Gone!

« Scared of the Weekend? | Home

By Mike Conlon | June 21, 2010

In a move that the market was anticipating and hoping for, the Chinese government announced that they would loosen the peg on its currency and allowing it to float more freely.  This hopefully will allow for greater balance in the global economy and help China curb inflation.

However, expectations for Yuan gains fall anywhere in the 3-5% range, as any appreciation will be gradual.  This news sent stocks and commodities higher, as this is seen as a vote of confidence by the Chinese.  But there is still much work to be done, as China needs to increase domestic demand to support balanced growth.

China has always been the “X factor” in the forex marketplace, as their currency peg and government intervention have created imbalances and uncertainties and have essentially impacted every financial market.  There has been increasing pressure on China to make this move, and perhaps recent dollar strength vs. the Euro has encouraged this change.

So this news is very welcome by the markets, and risk appetite is the theme of the morning.   Oil is higher this morning to $78.25 and gold reached a 1260 handle earlier.  The commodity currencies are higher as a stronger Yuan will increase Chinese purchasing power.

This week is pretty light for news, with the FOMC meeting and the UK budget report due out ahead of this weekend’s G-20 meeting.  The timing of the Chinese announcement is somewhat conspicuous, as it was expected that Yuan valuation was to be a major topic of discussion.

In the forex market:

Aussie (AUD):  The Aussie is higher on risk appetite, as the Chinese news has the market betting that Australia will be a major beneficiary of a stronger Yuan.  There’s no real news for the Aussie this week, so expect it to trade on risk themes this week.

Kiwi (NZD):  The Kiwi is higher for the same reasons as the Aussie, though we are going to get some economic data from NZ this week.  The current account balance and GDP figures are due out mid-week, which should reveal how the economy is faring and what the RBNZ may be thinking with regard to interest rates.

Loonie (CAD):   The Loonie is moving closer to parity with USD, as higher oil prices and risk-taking are drivers behind gains.  There is data due out from Canada this week, with CPI and retail sales figures expected to show the state of the economy.  In addition, Canada hosts the G-20 meeting this weekend.

Euro (EUR):   The Euro is lower this morning against all but Japanese yen, as potential benefits from the Chinese news is out-weighed by the austerity measures to be enacted to deal with the debt crisis.  European banks have agreed to publish the results of bank stress tests in July, which may or may not be a good thing.

Pound (GBP):  The Pound is mixed this morning trading lower vs. the commodity currencies and USD but higher vs. Euro and Yen.  This comes in advance of the emergency budget report due out tomorrow, which is causing increased volatility as the “fear factor” of measures to be enacted leaves the market both hopeful and concerned.

Dollar (USD):   The Dollar is lower on risk taking, as equity futures are up big time this morning and stocks are going to open higher.  This week’s FOMC meeting is expected to yield no change, but GDP data due out on Friday with other data could tell a different story.

Yen (JPY):   Yen is trading lower as selling in order to buy higher yielding assets is taking place.  In addition, the Nikkei was up some 2.5%.  The Yuan news is widely expected to be positive for Asian countries as a stronger Yuan should benefit other Pac-Rim exports.

I cannot underscore how big this news out of China is.  The market has been begging for this for some time to help re-balance the global economy.  However, the actual effect of this announcement and how it will play out is highly uncertain.

While it is widely expected that the Yuan will appreciate, I’m hearing rumblings that some analysts thing it could depreciate because of Euro zone issues.  While I think this is highly unlikely, the Yuan has been gaining ground as dollar strength due to the Euro debt crisis has lifted its relative value higher.

In addition, the timing of this announcement ahead of the G-20 meeting has bought China time and shifted the focus of the meeting back onto Europe.  How and when this actually occurs remains to be seen.

But this could end up being a case of “be careful what you wish for”, as unexpected outcomes could cause market uncertainty and increased volatility.  So don’t break out the Champagne just yet; as this move is both necessary and desired, but still a long way away from fixing the global economy.

To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!

To follow these events live with a free, real-time practice account, click here!  Don’t miss out on the world’s fastest growing market!

Tags: account, AUD, Aussie, cad, course, currenc, currencies, currency, currency trading, dollar, economy, EUR, Euro, forex, free, fx, fxedu, gbp, Il, interest, market, Mike Conlon, news, nzd, practice, ssi, time, trade, USD, Yen

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Corporate Bond Sales Gaining

As worries over the European debt crisis subside somewhat, investors are turning again to corporate bonds. As a result, sales of these securities have rebounded to levels not seen since early April.

“We could see further issuance in the next month if the overall tone of the market stays positive,” said Felix Freund, a money manager at Frankfurt-based Union Investment GmbH who helps oversee 160 billion euros.

Source: Bloomberg

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Euro Rally only Temporary

Something incredible has happened: The Euro has reversed is 16.5% decline (from peak to trough), and since bottoming on June 7 at $1.1876, it has risen by an impressive 4%. I guess that means the Euro has been rescued from parity (which I characterized as “inevitable” on June 5)?

Not exactly. While financial journalists have interpreted this as a recovery in risk appetite, and mainstream investors dismiss all of it as mundane fluctuations in exchange rates, currency traders â€" both fundamental and technical â€" know better. They know that this rally is merely a correction, the product of the Euro falling too much too fast against the Dollar and a consequent short-squeeze. They know that there is nothing underpinning the Euro rally, and that since the bad news continues to emanate from the Eurozone, a further decline is inevitable. ” ‘We could be one or two headlines away from a crisis again. This problem didn’t occur in a couple of days, nor is it going to resolve itself in a couple of days,’ ” summarized one trader.

According to Brown Brothers Harriman, ” ‘The recent euro rally is a corrective phase in a bear market and not a change in trend.’ National Bank Financial added, ” ‘Ultimately, when the market is this short a particular currency and a pullback happens, it results in some price volatility. It doesn’t necessarily reverse the longer-term trend.’ ” Given that so-called net-short bets against the Euro rose to a near record high in the beginning of June, it was inevitable [to borrow my favor word of the moment] that traders would eventually “cut positions when momentum in a currency [the Euro] shifted.”

From a fundamental standpoint, the last two weeks have brought further indications that the crisis is still mounting. The credit rating on Greek sovereign debt was cut to junk (A3) by Moody’s, following a similar move by S&P in the spring. Fitch, while arguing that the Euro has already declined “too far” is simultaneously threatening to do the same.

Meanwhile, Spain managed a successful debt auction, but at interest rates nearly 1.5x what it had to pay the last time around. Still, it’s in a more favorable position than Greece, which is now paying a yield premium of more than 600 basis points on its debt, compared to Germany. The implications for currency markets are clear enough: “There is a little bit of a disjuncture between what the currency is doing and what these bond markets are doing, and that’s a problem for the euro.”

Politicians, for their part, are still struggling to convince investors that they are serious about trimming their budgets and uniting for the sake of the Euro. “I see good news from the current euro-dollar rate, French Prime Minister Francois Fillon told reporters…’and I have been saying for years that the euro-dollar rate didn’t reflect reality and was penalizing our exports.’ ” With comments like that, is there any cause for believing them?!

Even putting politics and economics aside, there is a force that will continue to punish the Euro regardless of what happens: the carry trade. According to the WSJ, there is “some evidence that investors are indeed using euros to finance their bets. That is important because it means there may be structural reasons in the investment world why any lift in the euro will simply be quashed.” Thanks to the promise of continued low interest rates and confidence in its decline, ” ‘The euro is the clear-cut funding currency of choice.’ ”

At this point, then, the only issue is when the Euro will resume its decline. Those with a technical bend think that the Euro will fail to breach a psychologically important level (perhaps $1.25 or $1.27) after exhausting the rest of its momentum, at which point it will resume its precipitous decline. Those who see things in fundamental terms argue that when this happens, it will likely be due to more bad news about the crisis and/or a recovery in risk appetite (the contradiction between the two notwithstanding).

Rest assured, Euro bears. Your friend, the trend, is still intact.

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Who’s Next?

« Greek Junk! | Home

By Mike Conlon | June 16, 2010

Greece Forgotten, Spain Next?

You knew it had to be too good to be true.  The Euro had been on a multi-day climb higher and had shaken off news of the Greek credit downgrade.  So the mood yesterday was that all is well and that somehow this Euro zone debt crisis was magically resolved.

Not so fast, folks!   Rumors are floating around that Spain may be the next domino to fall into crisis mode, as denials of an emergency credit line sent the Euro lower.  Meanwhile, inflation in the Euro zone was higher, but in-line with expectations.

Contributing to risk in the market is news that housing starts here in the US came in way lower than expected and building permits declined to a one-year low.  In addition, PPI figures showed a decline in a sign that deflation may be a bigger worry than inflation.

In the UK, a decline in jobless claims was a positive.

So this morning starts out in risk-aversion mode, with Yen and Dollar strength, and commodity currency weakness.

In the forex market:

Aussie (AUD):  The Aussie is lower on risk-aversion as it is giving back some recent gains.  The Westpac index of leading economic indicators fell to its weakest pace in nearly 10 months after building starts slowed more than expected.  This is indicative of a slowing pace of growth in Australia, which isn’t necessarily a bad thing.

Kiwi (NZD):  I moving the Kiwi back to the second position in my “risk ladder” as an improved outlook for the economy and potential rate hikes make the Kiwi a more desirable destination than the Loonie.  Consumer confidence in NZ increased as a decline in the jobless rate boosted optimism.  This could induce greater consumer spending which has been a weak spot for the economy.

Loonie (CAD):  Oil is lower this morning taking the Loonie with it as risk-aversion is prevalent to start the day.  There is a report out that Russia could be looking to buy Loonies in order to diversify away from the Euro, and the swaps market is indicating an increasing bet that Canada will continue to raise interest rates.

Euro (EUR):   The Euro is mixed this morning, trading higher against the commodity currencies but lower against the rest in a classic pattern of risk-aversion.  Much of the fear in the market is coming from the Euro zone, as rumors that Spain is in trouble have been lingering.  Consumer prices came in as expected, showing that inflation rose 1.6%, well within the Euro zone target range of 2%.

Pound (GBP):   The Pound is also falling in line on the risk hierarchy and showing mixed results today.  Consumer confidence figures came in lower than expected, but so did jobless claims providing a silver lining that the jobs picture may be improving in the UK.

Dollar (USD):    The Dollar is higher on risk aversion this morning, but may give back some of those gains as its own weakness is factored into the market.  Housing starts fell 10% as the government homebuyer tax credit expires and building permits which are a sign of the future declined as well.  Meanwhile, PPI figures showed a decline, but not as much as expectations.  The saving grace today for the stock market may be the industrial production figures which rose 1.2% vs. an expectation of .9%.  This is causing a pullback in Dollar gains, and may be the catalyst needed to flip from risk-aversion to risk-appetite.  Stay tuned.

Yen (JPY):   The Yen is showing the most strength today as risk-aversion is causing an un-wind of carry trades.

The market started out in risk aversion mode, but appears to be giving back as some of the fear in the market abates.  As of right now, there is no news from Spain but many will tell you that where there’s smoke, there’s fire.

News here in the US was mixed, and it will be interesting to see if good manufacturing numbers can offset bad housing start numbers.  The stock market is lower at this point but investors have not been discouraged as of late.  And while oil prices are lower this morning, yesterday they reached just under $77 which is a recent high.

I would not be surprised to see a reversal today, as US market participants shake off the Spain rumor and continue to push prices higher.  The decline in building permits should not have come as a surprise, as the removal of housing stimulus was bound to have negative effects.

So take your clues from stocks today, and trade what you see and not what you think you know!

To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!

To follow these events live with a free, real-time practice account, click here!  Don’t miss out on the world’s fastest growing market!

Tags: account, AUD, Aussie, Australia, cad, canada, carr, carry trade, commodity, course, crisis, currenc, currencies, currency, currency market, currency trading, dollar, dow, economic, economy, EUR, Euro, fear, forex, forex market, free, fx, fxedu, gbp, home, Il, index, interest, interest rate, interest rates, invest, investor, IRA, ISM, jpy, Kiwi, live, loonie, lower, market, Mike Conlon, news, nzd, oil, pound, practice, practice account, RSI, spot, ssi, stock, stocks, time, trade, trades, USD, Yen

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