Wednesday, June 16, 2010

Who’s Next?

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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!

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