Wednesday, July 14, 2010

Portugal Downgrade!

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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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