Wednesday, June 30, 2010

Less Money Needed!

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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!

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