Summer Upon Us!

« Appetite For Risk! | Home

By Mike Conlon | May 28, 2010

For now, the Euro zone debt crisis appears to have been averted.  For now.  The Euro is higher for the second straight day as short-covering is taking place.  As I’ve repeatedly mentioned, every day that the Euro can get by without negative news is a positive for world markets in general.  As a result, we’ve seen recent gains in world equity markets and commodities as they rebound from 9-month lows.

However, don’t be lulled into a false sense of confidence as there still is major work ahead for the Euro.  The trend is still clearly down, and there is possible resistance in the 1.245 & 1.26 ranges.

This morning, consumer spending figures in the US came in worse than expected, exhibiting signs that the consumer-led recovery may have stalled.  Heading into the long weekend here in the US, expect volume to be light as the “summer slowdown” officially kicks off.

So this morning started off as a mild risk-taking day, which could flip to risk-aversion as the market hasn’t forgotten the economic challenges that lie ahead.

In the forex market:

Aussie (AUD):  The Aussie is lower this morning as profit-taking and mild risk-aversion appears to be creeping back into the marketplace.  The Aussie had a nice pop off its lows just below .81 vs. USD.

Loonie (CAD):  The Loonie is also turning lower as the consumer spending figures have helped risk-aversion return before the long weekend.  Oil is higher is back to roughly 74.5, after eclipsing 75 in yesterdays run-up.

Kiwi (NZD):  The Kiwi is lower as well, taking cues from risk themes.  Yesterday’s IMF report that the Kiwi may be overvalued is contributing to the selling, despite the fact that home-building approvals jumped to 8.5%, a two-month high.

Euro (EUR):   The Euro had a bid earlier and tested resistance at 1.245 vs. USD, but selling is now taking place as traders clear their books for the long-weekend.  Short-covering had pushed the Euro higher earlier, but bear in mind that the likelihood of any ECB action has been greatly reduced as activity in the common currency appears to have stabilized.

Pound (GBP):  Consumer confidence in the UK fell to a 5-month low, as the “political honeymoon” may be about to end.  Budget cuts in the UK intended to help with the fiscal deficit may mean that the UK is in for protracted growth going forward.  The Pound is lower across the board.

Dollar (USD):   The dollar is meandering around as consumer spending numbers came in less than expected causing it to receive a bid from mild risk aversion.  The Michigan Confidence survey is due out at 10AM, which could help the Dollar find direction.

Yen (JPY):   The Yen is lower this morning although mild risk aversion is driving market direction.  Overnight, Japan reported an increase in its jobless rate indicating that the export-led recovery may not be translating over as business is still cautious about future global demand.  In addition, deflation continued to plague the economy as consumer prices fell 1.6% which means that BOJ will most likely continue accommodative monetary policy as heightened government pressure to do so will like increase.

The return to fundamentals in the market may be increasing as risk drivers abate with every passing day that the Euro doesn’t implode.  And while there is still considerable risk in the marketplace, expect today to be a lighter trading day as traders square their books for the long weekend holiday here in the US.

Going forward, as world economies appear to be committed to deficit reduction, expect economic slowdowns to occur in addition to the normal seasonal patterns.  The challenge will be trying to contain global deflation, which could bring about another set up problem.

But until that happens, I’m going to be happy to get some sun this weekend and officially kick off summer.  It’s been a crazy month, so I advise you to do the same!

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, commodities, course, crisis, currenc, currency, currency market, currency trading, dollar, dow, ECB, economic, economy, EUR, Euro, forex, forex market, free, fundamental, fx, fxedu, gbp, holiday, home, Il, Japan, jpy, Kiwi, live, loonie, lower, market, mie, Mike Conlon, news, nzd, oil, pound, practice, practice account, rate, RSI, short, ssi, time, trade, trader, trend, USD, volume, Yen

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US Consumer Spending Down as Savings Increase

The US Commerce Department released the latest consumer spending results this morning which showed that spending remained flat in April compared to an expected increase of 0.3 percent. This is the first time since last September that monthly spending did not increase.

The report also noted that incomes increased 0.4 percent for the second month, suggesting that consumers are rebuilding savings that many people relied on to make ends meet during the recession. Some analysts however, see an eventual return to spending once employment recovers to more typical levels.

“The consumer is going along for the ride but isn’t really leading the recovery,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. “Because employment is growing, we’re starting to create some labor income and that is positive for future consumer spending.”

Source: Bloomberg

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Appetite For Risk!

« Proceeding With Caution! | Home

By Mike Conlon | May 27, 2010

The US reported growth figures today that while positive, have missed expectations.  US GDP came in at 3% vs. and expectation of 3.4%.  In addition, initial jobless claims were reported at 460K, largely in line with expectations.

This morning has started out in full risk-taking mode, as no additional negative news has come out of the Euro zone.  As I mentioned yesterday, every day without news will embolden the market and encourage risk-taking.   Yesterday’s rumor du jour was that the Chinese government was re-evaluating its Euro zone holdings, which sent the market lower as fears of further selling in the Euro were heightened.  However, the Chinese denied that rumor and the markets have rebounded strongly this morning.

The Dollar has benefited as of late due to the flight to safety trade, so at this point while the fundamentals are improving, the US still has a long road to recovery ahead.

In the forex market:

Aussie (AUD):   The Aussie is higher on risk-taking this morning, as traders aggressively jump back into carry trades.  Because the Aussie had been sold off due to risk-aversion, carry traders buying here are essentially getting a discount which is giving them a better return on investment.

Loonie (CAD):  The Loonie is higher as well, as oil is back above 73.  The market is looking ahead to next week’s rate policy meeting, where the expectation is that they will raise rates.  If the Euro zone can stabilize, then this will most likely happen.

Kiwi (NZD):  The Kiwi is also up on carry trades and NZ reported last night a better than expected trade surplus, showing that demand for imports declined as exports increased.  However, an IMF report said that the Kiwi may be 10-25% over-valued and that a lower valuation would help narrow its account deficit.  So there could be a pause at the mid-year expectation if inflation is contained, though carry traders don’t mind as they are content with the yield differential.

Euro (EUR):  Hooray for the Euro!  They have finally had a day where everyone was on the same page and the message to the marketplace was clear and concise: the Euro is not in danger of failing, and the debt crisis is likely to be contained.  CPI figures in Germany came in on target, showing that inflation is contained despite a weaker Euro.  Growth in the US and China may offset the Euro zone debt crisis.  China did not pile on to the mess, claiming that they are not reviewing their Euro holdings quelling fears that a further sell-off was imminent.

Pound (GBP):  The Pound is higher as risk-appetite in the market has picked up, and the lack of negative news from the Euro zone is providing support.

Dollar (USD):   The Dollar is lower this morning as risk-taking has reduced demand for the safe-haven trade.  GDP figures came in slightly lower than expected, but positive nevertheless.  Initial jobless claims were slightly higher; showing signs that while the US economy is improving, it is moving very slowly.  Some may claim that part of this GDP growth was due to government stimulus programs, which are starting to expire shortly.  Whether or not the economy can remain on this trajectory remains to be seen once the stimulative measures are removed.

Yen (JPY):  As expected, the Yen is the worst performer this morning as risk-appetite has increased the selling of yen as yield-seeking traders put on their carry trades.  Tomorrow will bring a plethora of economic data, from CPI to the jobless rate; however don’t expect these to be market movers unless they are grossly out of line.

Yesterday’s blog article about the market “proceeding with caution” was prescient in that it showed that market was still jittery.  What started out as a positive day quickly reversed as rumors of a potential Chinese sell-off of Euro assets.

However, with an additional day of Euro stabilization due to the lack of negative news, the markets gain confidence in the global economic picture.  As you see, it doesn’t take long for the market to have a “short memory”.

As long as the market believes the Euro debt crisis can be contained, then we should see risk-taking occur.  Whether or not this will be the case is yet to be seen.  So take yesterday’s advice and proceed cautiously, as potential Euro zone landmines haven’t gone away.

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 Jobless Claimants Fall to 460,000

The US Labor Department reported that the number of new jobless claimants fell last week to 460,000. Despite the decrease of about 14,000 from the previous week, this was still higher than expected and provides further evidence that improvements in the US employment market remain tentative at best.

Late last year, the official unemployment tally was 10.1 percent. It fell to 9.7 percent in the first quarter of 2010, but has since crept upwards to 9.9 percent as of April.

Source: Associated Press

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Is Spain Next?

« Possible Intervention? | Home

By Mike Conlon | May 24, 2010

Over the weekend, the Euro debt crisis took an unexpected turn for the worse as the Spanish central bank took over a savings bank after a planned merger had failed.  While in and of itself this is not a big deal, viewing it through the context of overall EU financial health has made the bounce in the Euro short-lived.  The Euro is lower again to start the week, as last week’s short-covering rally has been reversed and the longer-term trend for the common currency is still down.

There’s not a ton of market-moving news on tap this week, with GDP figures due out from the UK tomorrow and the US on Thursday.  Other than that, there are some smaller events that will provide color to the overall economic picture which will either help re-affirm or correct market sentiment.

Perhaps the biggest news is that US Treasury Secretary Geithner is in China and is advocating that China adopt a more free-floating currency.  Because of the Yuan peg to the US dollar, China has been allowed to experience very rapid growth through artificial means that have allowed their goods to remain cheaper around the globe.  However, with the crisis in Europe looming, US dollar strength could cause Chinese Yuan strength via the Dollar if the Euro continues its slide.  With European austerity measure taking place (Germany included); this could slow world demand which would slow China’s growth as well.

So while there have been some “clues” that perhaps China is ready to make changes to Yuan policy, I’m not certain it will take place if their economy slows due to slower exports as a result of a strong dollar buoyed by risk-aversion and global austerity.

This all adds up to risk-aversion in the market today in a continuation of the major trends, but it’s possible that we could see a reversal as US markets open for the week.

In the forex market:

Aussie (AUD):  The Aussie is lower on risk-aversion as fears out of the EU and a potential slowdown in China are reducing demand for higher-yielding assets.  The Aussie is the worst performer this month, down some 10% vs. the US dollar as risk aversion has dominated the marketplace.

Loonie (CAD):  The Loonie, on the other hand, is showing strength this morning as oil is back in the $70 range, showing signs that we may get a reversal this morning.  The Loonie is not really a carry trade destination as it doesn’t provide the yield differential of the Aussie or Kiwi; however it is affected by commodity prices (particularly oil).  The Canadian rate decision is due out in early June so there still is some speculation that they could be the next to hike.

Kiwi (NZD):  The Kiwi is lower for the same reasons as the Aussie, getting hit a bit harder as it does not have as great a rate differential as the Aussie.  Same risk, less reward.  However, should the markets begin to stabilize, then we could see the Kiwi move faster to the upside.

Euro (EUR):  The Euro is lower as the bank of Spain took over a regional lender causing investors to question whether or not the debt crisis is spreading.  There has been a major property bubble in Spain so many banks are holding bad debt which could come to the surface if Spain needs to access the bailout money to stabilize its banks.  In addition, Germany has adopted its own austerity measures, essentially trying to lead by example.  Considering that the market is looking for any excuse to sell the Euro, expect the longer-term downtrend to continue.  The Euro is lower across the board.

Pound (GBP):  The Pound is lower this morning going into tomorrow’s GDP reading as the UK is walking a fine line between trying to grow its economy without incurring inflation, and cutting its public debt.  The new government announced 6 billion Pounds in spending cuts in hope of sending a “shock-wave” through government departments.  While not an enviable position to be in (although EU members may disagree), the government feels these actions are necessary to avoid its own sovereign debt crisis.

Dollar (USD):   The Dollar has been higher on risk themes, and US existing home sales are due out later this morning.  Consumer confidence figures are due on Tuesday, followed by US GDP on Thursday.  These figures will show whether or not the US economy has been jump-started enough to sustain recovery in light of the EU debt crisis and could send fears of further problems down the road.  Expect the Dollar receive support through flight to safety trades if risk-aversion remains high.

Yen (JPY):  The government in Japan said that the economy is picking up steadily leaving its assessment unchanged for a second month in a policy statement today from its monthly economic report.  However, growth in Japan has been driven by world demand and stimulus measures, so it is not a self-sustained recovery.  Like the Dollar, expect the Yen to trade on risk themes until at least Thursday, when a slew of economic data points are due out.

Will overnight risk be counter-acted by the US markets today?  Stock markets are opening lower, though commodities are trading higher.  Risk in the overnight session can sometimes be overcome by decent news from the US.  Existing home sales could be that number if they come in better than expected.

So while the overall mood of the market has been risk-aversion for some time, any pockets of economic strength could help stabilize the situation and perhaps show signs of recovery.

Until that time, expect continued selling of the Euro which will have an effect over all other markets as historical correlations begin to break down.

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, bad debt, bank, cad, carr, carry trade, central bank, China, commodities, commodity, course, crisis, currenc, currency, currency market, currency trading, data, decision, dollar, dow, downtrend, economic, economy, EUR, Euro, Europe, existing, fear, financial, forex, forex market, free, fx, fxedu, gbp, Geithner, home, Il, invest, investor, Japan, jpy, Kiwi, live, loonie, lower, market, Mike Conlon, money, news, nzd, oil, pound, practice, practice account, rate, rate decision, RSI, sales, sentiment, short, ssi, stock, time, trades, Treasury, USD, Yen

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Canadian Retail Sales Jump 2.1%

An unexpected jump in auto sales helped boost Canada’s March retail sales to a 2.1 percent increase over the previous month. This is the largest single-month increase in five years, with eight of the eleven sectors included in the calculation recording a positive result.

Source: Reuters

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Chinese Yuan as Reserve Currency

Even before the sovereign debt crisis in Europe damped confidence in the world’s second most important reserve currency, the Chinese Yuan was on the cusp of being accepted as a global reserve currency.

We’re all familiar with the arguments attacking the Yuan in this context: its currency is pegged, its capital controls are rigid, and its capital markets are shallow and illiquid. Say what you want about the world’s major currencies (volatile, debt-ridden, etc.), but at least none of these factors applies, goes this line of thinking. With the Euro’s future up in the air, however, a potential hole has been created in Central Banks’ respective forex reserves. As replacement(s) for the Euro are sought, such long-held assumptions are being challenged.

The Chinese Yuan is attractive for a number of reasons. First, investors and Central Banks want exposure to China’s economy; its average annual growth rate of 10% over the last 30 years is far-and-away the highest in the world. “China’s economic output will be more than $5 trillion, or around 9% of the world’s economy, according to the International Monetary Fund.” Second, the fact that the RMB is fixed is in some ways a perk: the wild fluctuations that most currencies witnessed as a result of the credit crisis has made some wonder if market-determined exchange rates aren’t overrated. Finally, the widespread consensus is that the RMB will appreciate anyway, so holding it seems like a safe bet.

Therefore, “Central banks or sovereign wealth funds from Malaysia, Norway and Singapore have received special quotas from the Chinese government to allow them to gain a bit of exposure to China’s currency. The bet is that holding yuan-denominated assets is an important feature of a diversified national reserve.” In addition, China has signed Yuan-denominated swap agreements with a handful of its most important trade partners, totaling $100 Billion over the last year.

Still, these are small-scale agreements, and Central Banks are really just testing the waters. According to a recent study by the Reserve Bank of India (RBI), “The Chinese yuan is ‘far from ready’ to gain reserve currency status. Rather, it said China’s yuan was likely first to become a regional currency as trade links with its neighbours expand.” The main issue is not one of stability, but rather of supply. Simply, there are not enough liquid, attractive investments, denominated in RMB. China’s stock and bond markets are filled with unreliable companies, whose primary loyalty is to the State, rather than to investors. Buying Chinese government bonds seems like a safe option, but given, that China finances most of its spending with cash, such bonds are not widely available.

For now, the Chinese Yuan will remain most attractive (from the standpoint of a reserve currency) to regional trade partners, because such countries have a genuine use for RMB. Investors seem to understand this idea, and are using the currencies of such countries to bet indirectly on the RMB. According to one analyst, “On days when trading is especially volatile, the Singapore dollar moves in tandem with the yuan bets. The Malaysian ringgit, Taiwanese dollar and Korean won are also high on the list of currencies affected by the yuan.” In short, the RBI’s assessment of the Yuan seems pretty apt. It will probably be at least a decade before holding the Yuan is as viable (not to say attractive) as the Japanese Yen. For investors who don’t want to wait that long, there are a handful of other regional currencies that they can hold in the interim.

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Canadian Retail Sales Jump 2.1%

An unexpected jump in auto sales helped boost Canada’s March retail sales to a 2.1 percent increase over the previous month. This is the largest single-month increase in five years, with eight of the eleven sectors included in the calculation recording a positive result.

Source: Reuters

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Failed Euro Bailout Would Buoy Yen

Given that only a week has passed since the bailout of Greece was formally unveiled, it’s still too early to determine whether the plan will be success. Regardless of how it ultimately plays out, though, the bailout (not too mention the concomitant crisis) is shaping up to be THE big market mover of 2009. As investors reposition their chips, some early front-runners are emerging. It might surprise you that one such leader is the Japanese Yen.

On the surface, the Japanese Yen would seem to be an excellent candidate for shorting, especially in the context of the the Greek fiscal crisis. Its fiscal and economic fundamentals are abysmal, and by most measures, it’s debt position is among the least sustainable in the world, behind even Spain, Portugal, and the US. At the same time, the Yen has risen by an unbelievable 8% against the Euro in the last week alone, and many analysts are predicting it will emerge as one of the winners of this episode.

Why? First of all, with confidence in the Euro flagging, the Yen (and the Dollar) gain luster as the only viable reserve currencies. Regardless of what you think about Japan’s fiscal fundamentals, the longevity at the Yen means that it is inherently safer than the Euro, which may not even exist (in its current form, at least) in a few years time. Second, the current consensus is that the Euro bailout will fail, and as a result, risk tolerance is running low at the moment. With this in mind, it’s no surprise that traders are unwinding their carry trades and that the Yen â€" “The low-yielding currency of a deflation-prone economy of high savers…entrenched as the world’s funding currency” â€" has rallied.

Analysts have been quick to point out that the rest of Asia (among other regions) are on the other side of this trend. The concern is that the bailout won’t be enough to prevent a repeat credit crunch and that confidence in investments/currencies that are perceived as risky will remain low.

China could be hit especially hard. Since the Chinese Yuan is pegged to the Dollar (and even it wasn’t), it has risen by a whopping 15% against the EUro over the last six months, severely crimping exports to the EU. In addition, “Chinese exporters rely very heavily on bank letters of credit to finance their shipments…When banks have trouble borrowing money themselves â€" as has been happening as a result of worries about European banks’ possible losses from the region’s sovereign debt crisis â€" they tend to cut sharply the issuance of letters of credit for trade finance.” It’s no wonder that the Chinese stock market has tanked 21% so far in 2010, and that the Central Bank continues to delay revaluing the RMB.

Of course, if the plan turns out to be a success, than the opposite will probably obtain. “In this case…the currency of any emerging market or advanced economy exposed to the Asian region’s impressive, China-led economic growth,” will probably rally. “It could be the South Korean won, the Australian dollar, or the currencies of commodity-producing countries like Brazil.” The Japanese Yen, meanwhile, will probably be hit with a dose of reality, followed by a double dose of the carry trade.

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Possible Intervention?

« The Great Unwind! | Home

By Mike Conlon | May 21, 2010

Talk is heating up around the globe that Central Bank interventions could be forthcoming in order to stabilize the currency markets.  Currently, the Swiss National Bank (SNB) has been active in trying to maintain prices for the Franc vs. the Euro, and now the market is jittery that a meeting today of Euro zone finance ministers could produce a similar result.  In addition, the BOJ has been known to intervene in its currency in the past, and there is speculation that Australia may be set to intervene as well.

This is effectively a form of market manipulation, but can be very profitable for investors who are on the right side of the trade.  In this regard, should interventions occur, investors would want to be long the Euro and Aussie, and short the Yen and Swiss franc.  Intervention is already occurring in Switzerland so this trade may be over, but what is important to know is which way policy makers want the currency in question to go.

In addition, German law-makers in the lower house have approved the Euro rescue package, as it is also in Germany’s self-interest to make sure that the Euro doesn’t collapse.

So what we’re seeing this morning is continued short-covering from yesterday afternoon and speculators starting to dip their toes back in cautiously to riskier assets.  Traders do not want to be caught short over the weekend, especially if coordinated action is taken.

In the forex market:

Aussie (AUD):  The Aussie is higher on short covering after aggressively declining for 5 days in a row.  Speculation of possible intervention has led the market to cover their short trades, so don’t mistake today’s action for risk-taking, though early investors may be starting to test the waters to the long side.

Loonie (CAD):  The Loonie is higher this morning as retail sales figures rose the fastest in nearly 5 years, and CPI figures came in slightly higher than expected, showing signs that economic growth is heating up in Canada.  While a June rate hike is still expected for June, much of it will be predicated upon whether or not the Euro can stabilize and whether risk has been reduced in the market.

Kiwi (NZD):  Consumer confidence rose 3.4% in NZ, showing signs of economic life in the country.  In addition, income tax cuts are expected to encourage workers to stay home which will be positive for domestic economic growth.  The Kiwi is higher on short-covering as well.

Euro (EUR):   The Euro touched one-week highs in the overnight session, as German law-makers approved the Euro rescue plan.  The looming threat of intervention has helped push it higher as traders don’t want to be trapped short over the weekend.  In addition, German GDP figures came in as expected, showing a gain of .2% for Q1 after being flat the previous quarter.

Pound (GBP):  The pound is also higher as it has been beaten up with the Euro over the last few sessions.  Expect the Pound to trade somewhat sideways as investors weigh UK policy vs. the threat of continued Euro problems.

Dollar (USD):   The Dollar is weaker this morning as short-covering is taking place.  Expect the Dollar to continue to trade on risk themes, though note that today is not a risk-taking day as both commodities and US stock futures are lower so far this morning.  Global austerity measures could affect US stock growth as demand wanes world-wide.  Especially with blue-chip and technology companies that have large exposure to the EU.  In addition, financial reform bills passed in Congress are adding fuel to the fire.

Yen (JPY):   The Yen is trading lower on short-covering rallies as well, and overnight, the BOJ left rates unchanged at .1%.  In what I would consider as something of an anomaly, the Yen is trading higher against the Dollar further illustrating that this is not a pure risk-taking day.  While the Yen is still far away from levels that the BOJ would consider in order to intervene, they have been known to act in the past.

Because today is a Friday, the market is taking a respite as fear has ruled this week and the potential for central bank interventions have caused uncertainty.  Right now we are at an inflection point; where markets could go one way or another and which way that will be is anyone’s guess.

So in the meantime, I advise taking cues from the market and take profits if you have them, and wait for next week’s action to initiate new trades.  More than one trader has “blown up” by coming in Monday morning to a bit of nastiness in the form of central bank intervention.  And while it is unlikely that this will happen, the threat is enough to cause caution.

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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The Great Unwind!

« German Political OxyMorons! | Home

By Mike Conlon | May 20, 2010

I talk often about carry trades in the currency market which go hand in hand with the risk themes that drive daily price action.  When there is confidence in the financial markets, investors look to take on risk and seek out higher yielding assets.  They can do this by selling the currency of a low interest rate country and buying the currency of a higher interest rate country, thereby capturing interest through yield differentials.  This is known as a carry trade.

The currency pair that represents the greatest “carry” among the most actively traded pairs is the AUD/JPY pair which can also be used as a proxy for risk-taking in the market.  Currently, the positive carry of this pair is roughly 4.4%, as rates in Australia are at 4.5%, and rates in Japan are .1%.  So just by owning this pair, an investor would earn that rate difference.  This is a common trade when there is confidence in the financial markets.

Currently, there is little confidence in financial markets, as the EU debt crisis has brought to light many problems in the global marketplace.  And unless you have been living under a rock for the past few weeks, this should not come as news to you.

So what we are seeing is major risk-aversion in the markets, and no pair is getting hit harder than the above mentioned as investors unwind a risk-taking position.  In addition, global stock markets and commodities are selling off, adding additional fuel to the fire as investors run to the “safety” of the Japanese yen and US dollar.

In the forex market:

Aussie (AUD):  The Aussie is the biggest loser this morning, as risk-aversion is causing the un-wind of carry trades.  It is currently at an 8 month low vs. the US dollar, as gold prices have sold off to the 1178 level.  Gold is often used as a proxy against inflation, which does not appear to be as great a concern as deflation is, as the world prepares for a global slowdown.  Concerns about a Chinese slowdown could really derail the world economy, but all eyes are on the Euro crisis for now.

Loonie (CAD):  The Loonie is also selling off as commodity prices, particularly oil at 68, are lower across the board.  The Loonie does not benefit as much as the Aussie (or Kiwi) from carry trades, as low rates in Canada do not encourage carry trades.  The Loonie may be better off in the long run, as the US is its largest trading partner, and the US keeps throwing money at its financial woes instead of adopting austerity measures that the rest of the globe seems to be taking.

Kiwi (NZD):   The Kiwi is selling off for the same reasons as the Aussie; however in NZ they just announced that they will be cutting income taxes but raising sales taxes to encourage savings and debt reduction.  This will help NZ reduce its foreign debt as financial discipline is needed in the region.

Euro (EUR):  The Euro is higher vs. the commodity currencies above on the carry un-wind as well as risk aversion pervades the marketplace.  Now this may seem counter-intuitive to some as the major risk in the market is the Euro, which appears to be stabilizing as banter about Euro intervention is thrown about.  In somewhat decent news, PPI figures in Germany were higher showing signs that massive deflation has not taken hold.  Yet.

Pound (GBP):   Retail sales were higher in the UK for the third month in a row, in what may be short-lived gains in consumer sentiment.  With the new government looking toward austerity measures and a return to fiscal responsibility, and the BOE pledging to stay the course on monetary policy, the Pound may continue to be weaker vs. the Yen and the Dollar.

Dollar (USD):   US jobless claims came in higher than expected though continuing claims fell, most probably the result of discouraged workers losing their benefits.  This does not bode well for the US economy which, quite frankly is only seeing strength because everything else looks so bad.  US equity futures are lower, though off of their lows of the morning.

Yen (JPY):  GDP figures came in worse than expected to 4.9% vs. an expectation of 5.5%.  The export led recovery did not encourage consumers to spend, and higher yen values due to risk-aversion could derail exports going forward.  Nevertheless the yen is higher on the flight to safety trade, despite the fact that the BOJ may have to do more to combat deflation.

What we are seeing now is a global “ratcheting down” of economic bubbles that ran rampant over the last few years.  As different economies around the globe pare back spending and attempt to get their debt under control; economic slowdown is the natural consequence.

This is going to send a ripple effect through the global market place and fears of a global double-dip recession may not only be founded but likely.  I believe there is much more pain to be felt in the market place and have little confidence that world leaders can come up with a solution.

Because of the fractured nature of the world economy and competing interests, a solution may be impossible.  In my opinion, we are going to start to see either debt defaults or massive money printing which will eventually lead to inflation.  But that could be YEARS away.

So for now, think globally, but act prudently locally.

And take advantage of these extraordinary times by trading forex and shoring up your own personal balance sheet!

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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Canadian Dollar Still on the Slide

Worries that the Greek debt crisis could spread to other European countries, has caused the Canadian dollar to fall almost four cents to its US counterpart in the past week. The dollar was worth about 94.22 cents US Thursday morning in New York, down 1.55 cents from the close on Wednesday.

Investors are worried that a prolonged recession in Europe could lower demand for energy and other resource commodities. This could potentially affect the country directly as Canada is a major commodities exporter.

Source: The Canadian Press

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German Political OxyMorons!

« What Inflation? | Home

By Mike Conlon | May 19, 2010

The German people are known for being hard-working, efficient, industrious people.  They are not known for their charismatic personalities or ability to excel in politics.  While this is not a bad thing, it is coming back to haunt the Euro zone as Germany is making unilateral decisions that affect the financial markets.

Just yesterday, Germany enacted a “naked short-sell” ban on financial stocks and bonds and wants to limit the use of CDS only to those who actually own the bonds.  While in and of itself this is not a bad policy, they needed to get the other members of the EU on board with this action.  They did not consult the other nations, which consequently raised suspicion in the market that they “had something to hide” and sent the Euro plummeting lower to 1.21 and change.

In what many view as yet another political blunder by Germany in the handling of this crisis, the market has started to realize that this ban will largely ring hollow without the other nations on board, and that this announcement was more about dumb German politics than anything financial related.  They really should take a look back to the first few months of Obama’s presidency; the guy was so used to being on TV that every time he spoke the markets tanked!  When he finally learned to be quiet, the markets were able to rebound.

Hey Germany, if you want to save the Euroâ€"just shut up already!  In any event, we are seeing risk taking in the market as the commodity currencies have sold off, as has the Pound as the UK rate policy meeting minutes came out.  The Euro has rebounded from very oversold levels, and US CPI came out slightly negative vs. a slightly positive expectation.

In the forex market:

Aussie (AUD):  The Aussie is down big-time this morning, as the German short ban-induced sell-off caused major risk aversion.  Other factors contributing to the sell-off are (in no particular order): potential slowdown in China, Greek debt concerns, and lower commodity prices.  In addition, consumer confidence levels are at 19-month lows, despite the fact that wages grew at the fastest pace in almost a year.

Loonie (CAD):  The Loonie is lower for the same reasons as the Aussie, especially dragged lower by oil prices which are in the $68.5 range.  Canadian CPI is due out on Friday, but if risk themes persist an increase around the globe, then no amount of inflation will give the market confidence that the BOC will hike rates at the June meeting.  The bottom line is that you cannot raise rates if the threat of a global double-dip recession exists.

Kiwi (NZD):  The Kiwi is the biggest loser this morning on risk aversion, but in addition, RBNZ Governor Bollard came out saying that NZ needs to reduce its budget deficit and should forego growth prospects in favor of austerity to rebalance its economy.  He also said that a gradual depreciation of the Kiwi would be desirable, so investor sentiment has shifted away from a mid-year rate hike as had been previously expected.

Euro (EUR):   Years from now, both economics and poli-sci classes are going to use this EU debt crisis as a case study of what not to do.  The announced bailout was supposed to be the final straw, the end of the play.  And like a bad movie that just won’t seem to end, Germany keeps giving the markets reason to question the credibility of the Euro which in turn inspires risk aversion and a lack of confidence around the globe.  Meanwhile construction output in the region was higher.  So the Euro has bounced back, as the market has realized that it was just German stupidity and not a hidden time-bomb.  If this keeps up, then the Euro could be finished very quickly.

Pound (GBP):  The Pound is lower as but is rebounding a bit as the BOE rate policy meeting minutes were released showing a dovish stance.  Policy-makers voted unanimously to leave rates and bond purchase programs unchanged, which falls in line with the potential austerity measures about to be under-taken.

Dollar (USD):   The Dollar is higher on risk aversion, but is giving back some gains as the market is moving away from the major threat level induced by Germany.  CPI figures came in less than expected showing a decline of .1% vs. an expected gain of .1%.  While not a major difference, this really shows that we are still in a deflationary mode even with all of the tremendous government spending which was supposed to prop-up prices.

Yen (JPY):  The Yen is higher, especially against the commodity currencies as risk-aversion caused a major unwind of carry trades.  In addition, industrial production figure came in better than expected heading into tomorrow’s GDP report which is expected to show positive growth led by exports.  This may help Japan take measures to reduce its extraordinary debt.

The only thing I can say regarding the global economy is that there is major risk in the marketplace right now.  Countries around the globe are preparing to tighten their belts and are looking to return to fiscal responsibility.

The only real country not on this path is the US, as politics rules and economics drools!  So Washington DC is going to continue to re-fill the punch bowl to keep the masses at bay, rather than do what is economically responsible but politically suicidal.

I don’t know how confidence is going to return to the Euro zone and if it will happen anytime soon.  A gradual decline of the Euro is OK, but these break-neck moves need to be stopped if the global economy is going to function properly.

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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Oil Prices Fall on Stronger Dollar, Weaker Demand

Oil prices continue to be a victim as investors flee for the safety of the US dollar. A plunging euro and concern that the EU debt crisis could result in lower demand for energy, have pushed oil to and eight-month low.

By early afternoon trading in Europe today, the benchmark crude for June delivery was down $1.23 to $68.18 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 54 cents to settle at $69.41 on Tuesday. Since the beginning of May, oil has declined more than 20 per cent from $87.15 a barrel on May 3.

Source: Associated Press

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Failed Euro Bailout Would Buoy Yen

Given that only a week has passed since the bailout of Greece was formally unveiled, it’s still too early to determine whether the plan will be success. Regardless of how it ultimately plays out, though, the bailout (not too mention the concomitant crisis) is shaping up to be THE big market mover of 2009. As investors reposition their chips, some early front-runners are emerging. It might surprise you that one such leader is the Japanese Yen.

On the surface, the Japanese Yen would seem to be an excellent candidate for shorting, especially in the context of the the Greek fiscal crisis. Its fiscal and economic fundamentals are abysmal, and by most measures, it’s debt position is among the least sustainable in the world, behind even Spain, Portugal, and the US. At the same time, the Yen has risen by an unbelievable 8% against the Euro in the last week alone, and many analysts are predicting it will emerge as one of the winners of this episode.

Why? First of all, with confidence in the Euro flagging, the Yen (and the Dollar) gain luster as the only viable reserve currencies. Regardless of what you think about Japan’s fiscal fundamentals, the longevity at the Yen means that it is inherently safer than the Euro, which may not even exist (in its current form, at least) in a few years time. Second, the current consensus is that the Euro bailout will fail, and as a result, risk tolerance is running low at the moment. With this in mind, it’s no surprise that traders are unwinding their carry trades and that the Yen â€" “The low-yielding currency of a deflation-prone economy of high savers…entrenched as the world’s funding currency” â€" has rallied.

Analysts have been quick to point out that the rest of Asia (among other regions) are on the other side of this trend. The concern is that the bailout won’t be enough to prevent a repeat credit crunch and that confidence in investments/currencies that are perceived as risky will remain low.

China could be hit especially hard. Since the Chinese Yuan is pegged to the Dollar (and even it wasn’t), it has risen by a whopping 15% against the EUro over the last six months, severely crimping exports to the EU. In addition, “Chinese exporters rely very heavily on bank letters of credit to finance their shipments…When banks have trouble borrowing money themselves â€" as has been happening as a result of worries about European banks’ possible losses from the region’s sovereign debt crisis â€" they tend to cut sharply the issuance of letters of credit for trade finance.” It’s no wonder that the Chinese stock market has tanked 21% so far in 2010, and that the Central Bank continues to delay revaluing the RMB.

Of course, if the plan turns out to be a success, than the opposite will probably obtain. “In this case…the currency of any emerging market or advanced economy exposed to the Asian region’s impressive, China-led economic growth,” will probably rally. “It could be the South Korean won, the Australian dollar, or the currencies of commodity-producing countries like Brazil.” The Japanese Yen, meanwhile, will probably be hit with a dose of reality, followed by a double dose of the carry trade.

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What Inflation?

This week marks the time of the month that the inflationists come out in full-force as a slew of CPI data is forthcoming from around the globe.  Today, data from the EU and the UK show that consumer prices are moving slightly higher, though there are no signs that policy-makers are ready to move on rates in either of those regions any time soon.In fact, both of these governments are hoping to encourage some inflation to get their economies moving again.  The problem with inflation is that it is a stealth tax on consumers.  Nevertheless governments LOVE inflation as it allow them to repay debt with less valuable currency.
Today in the US, PPI figures came in less than expected and tomorrow brings the US CPI data, followed by Canada’s reading on Friday.   At this point, with all of the global economic uncertainty in the markets, combating inflation is becoming a more distant thought on the minds of policy makers.  Outside of an extraordinarily high reading in either country, I don’t expect it to influence policy one way or the other.  Although the market is anticipating a rate hike in Canada in June so that number could hold some more weight.
So today we are seeing some mild risk appetite, though the Aussie is lower as a result of the minutes from its rate policy meeting, and in the EU, Greece received its first bailout payment of roughly $18 billion.
In the forex market:
Aussie (AUD):  The Aussie is lower as the minutes of its rate policy meeting were released overnight showing that monetary policy is “well placed� after previous hikes according to the RBA.  Right now, the major debate for world economies is weighing the threat of inflation vs. the EU debt crisis.  I suspect central banks may err on the side of caution and stronger economies may put up with inflation until they are convinced that the EU is economically stable.  This greatly reduces the chance of a rate hike at the next meeting in June.  The Aussie is near three-month lows vs. USD.
Loonie (CAD):  The Loonie is higher today on risk appetite as well as the fact that the price of oil has halted its previous decline.  Oil traded higher to just over $72 after a two-week sell-off, but is now at 71.75.  The market still favors a rate hike in Canada, and Friday’s CPI figure will either confirm or refute that view.  The inflation vs. debt crisis is on the mind of central bankers, but Canada has extremely low rates, some 4% less than Australia so they have more room to hike.
Kiwi (NZD):  Producer Input Prices came in higher than expected at 1.3% showing signs that higher costs may suggest that the mid-year rate hike is still on target.  The Kiwi is the biggest gainer this morning.
Euro (EUR):  German economic sentiment figures came in lower than expected as the Greek debt crisis caused consternation in the largest manufacturing country in the EU.  In addition, CPI came in at a .5% increase vs. a .4% expectation showing signs that inflation may be held in check.  Right now, inflation is the last thing on the minds of ECB policy makers as the far greater threat of sovereign default reigns supreme.   The Euro is mostly higher.
Pound (GBP):   The Pound is also slightly higher as CPI figures came in higher than expected at .6% vs. an expectation of .4%.  Again, like the EU, debt service is currently trumping the threat of inflation in the UK, and BOE Governor King downplayed the surge as “temporary� as the UK is about to embark on its own budget cutting measures.
Dollar (USD):   The Dollar is low on risk-taking as well as the fact that US PPI figures showed a decrease of .1% vs. an expectation of an increase of .1%.  In addition, while US housing starts were higher, building permits were much lower than expected showing signs that the housing market may still be on shaky ground.  It appears as though the expiration of the first-time homebuyer credit may be responsible for the pick-up in starts, though the lower building permits show a lack of future construction.
Yen (JPY):   The Yen is lower on risk appetite despite the fact that consumer sentiment rose to its highest levels since 2007.  This comes as a result of the export-led recovery which seems to be taking place.  However, low interest rates still keep the Yen as a safe haven currency and the primary funder of carry trades.  This Friday’s interest rate decision shouldn’t change that.  Thursday brings the GDP figures which are expected to be in line with estimates.
Governments and central banks LOVE inflation because it allows them to repay debts with a less valuable currency.  This is known as “inflating the debt away�.  And with all of the debt floating around out there, you can see why they are trying to encourage it.  However, for consumers, inflation acts as a stealth tax as the cost of everything goes higher.  That’s why here in the US, they give you the reading “ex food and energy� to falsely show what’ going on in the economy.  After all, who cares if milk prices or electricity prices are going higher if the cost of the new iPad is going lower!
Well, this is a simplistic and somewhat skeptical view of central banks and government, but if you really think about it, it makes sense.  So that’s why in the UK they are talking down inflation as “temporary�.
Here in the US, they don’t need to talk down inflation as signs of deflation still persist despite all of the government and US Fed-led attempts to keep prices higher.
What this tells me is that we are still on fragile economic footing and that central bankers have no plans to raise rates anytime soon.  So keep an eye on your currency and a keen eye on prices of things you use daily, as you can no longer count on the government to do that for you!
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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EU Finance Ministers Set Sights on Hedge Funds

Despite protests from the UK’s new government, a majority of European Union Finance Ministers have approved draft legislation of a new bill that will force additional regulations upon hedge fund managers operating within the EU. The Alternative Investment Fund Managers Directive as the bill is known, will require hedge fund managers outside the EU, to register with each country in which they intend to operate, before being permitted to market directly to investors. If passed the new law will also limit performance bonuses for fund managers.

The UK attempted to rally support to kill the draft bill, but was unable to secure sufficient support to vote the proposal down. Former UK Prime Minister Gordon Brown spoke against such a law last March saying that it could threaten London’s position as a global leader in financial services. While noting Britain’s reservations for the bill, few finance ministers offered sympathy.

“We’re a community and that means that there can be decisions against an individual member state,” Germany’s finance minister, Wolfgang Schaeuble said in a press conference following the vote.

Before the draft legislation can be passed into law, an agreement must be reached between the EU Parliament, and each national EU government. This process would likely take at least a year.

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When Will Attention Shift to the Dollar?

The fiscal crisis ravaging the Euro and the Pound has sent the Dollar skyward. On the one hand, the prospect of continued uncertainty and dissolution of the Euro would seem to be an excellent harbinger for continued appreciation in the Dollar. On the other hand, it should only be a matter of time before investors recognize that the Dollar’s fiscal fundamentals are also quite weak.

Unlike during the last few years, analysts are no longer talking about (forex reserve) diversification. It was once widely predicted that the Euro would rival the Dollar for a place in the portfolios of foreign Central Banks. As expected, preferences are now shifting back in favor of the Dollar and to a lesser extent, the Yen. The Pound and Swiss Franc may have a small role, as will the “New” Euro. Over the short-term, however, Central Banks (and investors) will continue to eschew the Euro, if only due to sheer uncertainty.

Given that everything is relative in forex, investors and Central Banks only have so many options when it comes to choosing which currencies in which to denominate their portfolios. Thus, it’s understandable that a sudden crisis in the EU would buoy the Dollar. At the same time, it’s not exactly a good bet that the US isn’t destined to suffer a similar fate.

Due to extremely low short-term interest rates, most investors have been willing to accept low returns when lending to the US (by buying Treasury Securities, and indirectly by simply holding Dollars). At some point, both short-term interest rates and the rate of inflation will rise, and investors will have to re-examine their risk/reward schemes. My suspicion is that investors will demand higher yields in exchange for lending to the US.

Just like with Greece, a US fiscal crisis would probably emerge suddenly. While the US government pays lip service to the notion of balancing its budget and reducing its sovereign debt, even the most optimistic projections show a budget deficit for the next 10 years. Beyond that, the retirement of the baby boom generation and their “entitlement” payment will make it nearly impossible for the US to operate a budget surplus.

In short, the only hope is for the US economy to grow faster than the national debt. If the US economy grows at 4% per year, for example, it will have to run a budget deficit less than 4% of GDP in order to reduce its relative level of debt. On the surface, this seems like a reasonable possibility, but given trends over the last three decades (covering periods of both recession and economic boom), it doesn’t seem likely.

This is not new information. Doomsday theorists have been predicting the bankruptcy of the US for two centuries. Don’t mistake me for doing the same. Rather, I only wish to point out how ironic it is that the Dollar’s fiscal conditions are comparable (and in some ways worse) than some of the problem countries that investors are currently focusing on.

Then again, forex is relative. Some analysts have suggested that the new reserve currency will be gold, oil, and other commodities. Unfortunately, there isn’t nearly enough (liquid) supply of these materials to occupy more than a small portion of reserves. Under the current system, then, investors are pretty much stuck with the Dollar. At this point, betting to the contrary is tantamount to betting on the complete collapse of the modern financial system. A reasonable bet, perhaps, but you can forgive investors for being hesitant to embrace it.

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