Monday, May 30, 2011

UN Says US Dollar Could “Collapse”

A report issued today by the UN says the US dollar could collapse if it continues to lose ground to other currencies. The result says the report, an update of the UN “World Economic Situation and Prospects 2011” issued last December, would be catastrophic for the global financial system.

“We’re not saying the collapse is imminent,” said Rob Vos, a senior UN economist involved with the report, “but the factors are further building up that we could quickly come to that stage if other things are not improving quickly on other fronts â€" like the risk of the U.S. not being able to service its obligations.”

Source: Financial Post

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Risk Still Dominates Forex. The Dollar as “Safe Haven” is Back!

Well over two years have passed since the collapse of Lehman Brothers and the accompanying climax of the credit crisis. Most economies have emerged from recession, stocks have recovered, credit markets are strong, and commodities prices are well on their way to new record highs. And yet, even the most cursory scanning of headlines reveals that all is not well in forex markets. Hardly a week goes by without a report of “risk averse” investors flocking to “safe haven” currencies.

As you can see from the chart below, forex volatility has risen steadily since the Japanese earthquake/tsunami in March. Ignoring the spike of the day (clearly visible in the chart), volatility is nearing a 2011 high.What’s driving this trend? Bank of America Merrill Lynch calls it the “known unknown.” In a word: uncertainty. Fiscal pressures are mounting across the G7. The Eurozone’s woes are certainly the most pressing, but that doesn’t mean the debt situation in the US, UK, and Japan are any less serious. There is also general economic uncertainty, over whether economic recovery can be sustained, or whether it will flag in the absence of government or monetary stimulus. Speaking of which, investors are struggling to get a grip on how the end of quantitative easing will impact exchange rates, and when and to what extent central banks will have to raise interest rates. Commodity prices and too much cash in the system are driving price inflation, and it’s unclear how long the Fed, ECB, etc. will continue to play chicken with monetary policy.

Every time doubt is cast into the system â€" whether from a natural disaster, monetary press release, surprise economic indicator, ratings downgrade â€" investors have been quick to flock back into so-called safe haven currencies, showing that appearances aside, they are still relatively on edge. Even the flipside of this phenomenon â€" risk appetite â€" is really just another manifestation of risk aversion. In other words, if traders weren’t still so nervous about the prospect of another crisis, they would have no reasons to constantly tweak their risk exposure and reevaluate their appetite for risk.

Over the last few weeks, the US dollar has been reborn as a preeminent safe haven currency, having previously surrendered that role to the Swiss Franc and Japanese Yen. Both of these currencies have already touched record highs against the dollar in 2011. For all of the concern over quantitative easing and runaway inflation and low interest rates and surging national debt and economic stagnation and high unemployment (and the list certainly goes on…), the dollar is still the go-to currency in times of serious risk aversion. Its capital markets are still the deepest and broadest, and the indestructible Treasury security is still the world’s most secure and liquid investment asset. When the Fed ceases its purchases of Treasuries (in June), US long-term rates should rise, further entrenching the dollar’s safe haven status. In fact, the size of US capital markets is a double-edge sword; since the US is able to absorb many times as much risk-averse capital as Japan (and especially Switzerland, sudden jumps in the dollar due to risk aversion will always be understated compared to the franc and yen.

On the other side of this equation stands virtually every other currency: commodity currencies, emerging market currencies, and the British pound and euro. When safe haven currencies go up (because of risk aversion), other currencies will typically fall, though some currencies will certainly be impacted more than others. The highest-yielding currencies, for example, are typically bought on that basis, and not necessarily for fundamental reasons. (The Australian Dollar and Brazilian Real are somewhere in between, featuring good fundamentals and high short-term interest rates). As volatility is the sworn enemy of the carry trade, these currencies are usually the first to fall when the markets are gripped by a bout of risk aversion.

Of course, it’s nearly impossible to anticipate ebbs and flows in risk appetite. Still, just being aware how these fluctuations will manifest themselves in forex markets means that you will be a step ahead when they take place.

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The Saga Continues!

« All Better? | Home

By Mike Conlon | May 25, 2011

Overnight, the Euro was lower and tested support vs. USD at 1.40 after a rumor was floated that Greece was going to have a “snap election” which would essentially allow the public to weigh in on the austerity measures. This rumor has since been denied, but it is obvious to see how this could have a negative effect on the Euro as it is highly unlikely Greek voters are supportive of these measures. As a friend of mine likes to say, ” 100% of the people enjoy a free lunch!”

With little other news emanating from the Euro zone, our attention has turned to the UK and the release of its GDP figures which came in as expected. While personal consumption was lower, exports were higher making up for the lack of domestic demand.

In Japan, trade deficit figures rose the fastest in nearly 2-years though this was expected as the supply-chain disruptions that occurred as a result of the natural disasters there have hurt exports. However, the BOJ is apparently ready to boost lending to help in the rebuilding effort, mostly likely in coordination with further government spending.

US durable goods orders are due out later this morning and are expected to show a decline of some 2% and the home price index is also expected to show declining prices. With economic expectations this low, the worst might already be factored in.

Stocks are slightly lower to start the morning as is oil, though gold is trading higher.

In the forex market:

Aussie (AUD): The Aussie is lower across the board as mild risk aversion and a lower than last month leading indicators index have reduced demand.

Kiwi (NZD): The Kiwi is mostly higher despite the risk aversion as it is still catching a bid from yesterday’s inflation expectation report.

Loonie (CAD): The Loonie continues to move lower as oil retreats and the market expectation is that slowing growth will keep the Bank of Canada from raising rates any time soon. (Click chart to enlarge)


Euro (EUR): The Euro was lower but has since bounced higher after the rumor of the snap election was squashed by Greece. Allowing the fate of Greek austerity to be determined by the populace would be disastrous.

Pound (GBP): The Pound is mostly higher after GDP figures came in as expected showing .5% quarterly growth and 1.8% YoY. Private consumption figures came in lower at -.6% vs. an expected gain of .1%, but this was largely offset by exports which were up 3.7% vs. an expected 2.1%.

Dollar (USD): The Dollar is showing strength this morning after durables goods orders came in worse than expected, showing a decline of 3.6% vs. the expected decline of 2.5%. This may invoke further risk aversion as the trading day moves forward, but the house price index due out later this morning could surprise.

Yen (JPY): The Yen is mostly weaker as trade balance figures showed a deficit, though not as bad as had been expected. It is widely assumed that the Bank of Japan will take further action to help the economy re-build, though they may wait to coordinate with the government on further spending. (Click chart to enlarge)


So far this week, not much has changed. The risk in the marketplace is still looming, there is nothing positive coming out of the Euro zone regarding the debt crisis, and the economic data continues to point to a slowing global economy.

It is always times like this that put me on heightened alert as I hate to wait. The uncertainty of the situations and the fact that the various currency pairs are trading at critical levels means that sentiment may be about to shift as we breach these support and resistance levels.

For now, it looks as though the markets will trade around these levels until the next significant piece of news can establish a market direction. What that news will be is anyone’s guess, and it may not be something as obvious as what we know about today. While the Euro debt crisis is likely to drag on for some time, it will be interesting to see if the summer trading season brings opportunity or disinterest.

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Sunday, May 22, 2011

Lower Your Expectations!

« Japanese Recession! | Home

By Mike Conlon | May 20, 2011

This is what Central Banks are effectively saying to the marketplace. Recent actions and comments are starting to show what some of us already knowâ€" that Central banks alone cannot manage the global economy and the artificial conditions they create only impede and prevent the real economy finding its way.

Overnight, the Bank of Japan did not ease monetary conditions as some had expected in order to attempt to jump start the Japanese economy after yesterday’s report that Japan had slipped into recession.

Earlier this morning, the German Bundesbank said that growth in Germany would likely slow which would mean that the ECB would likely hold interest rates steady and not raise them again for some time.

In Canada, CPI data came in lower than expected, prompting the Loonie to sell-off and the expectation for rate hikes to lessen. In addition, retail sales figures have come in lower than expected which also shows a potential weakening in the Canadian economy.

So what is the world going to do? After all, tomorrow is “the rapture”â€"for those of you unaware there is a doomsday prediction floating around the internet claiming the world is going to end and I apologize in advance for giving it more press than it deserves.

That said, as QE2 comes to an end, where is the growth going to come from? Most countries have so much debt on their books that governments are looking to reduce spending, not increase it. And rightfully so. Yet the idea that here in the US taxes should go up on businesses that provide jobs makes no sense in the face of declining economic growth.

Hot money will still seek yield and will buy commodities, even if demand slows which could foster stagflation. It will be interesting to see if the US Fed will just continue to throw money at the problem, rather than demanding that the structural problems be fixed. This fight in Washington over raising the debt ceiling is just a start.

So this morning is starting out with a bit of risk-aversion, with stocks lower but commodities trading slightly higher. Risk in the market is still high, from the Euro debt crisis to unrest in the Middle East (Obama is not helping this at all with his recent speech on Israel), so maybe this doomsday prediction isn’t too far off the mark. (Just kidding)

In the forex market:

Aussie (AUD): The Aussie is mixed this morning as Australia’s small exporter predict that the Aussie will go the 1.16 vs. USD this year, even though there is mild risk in the market this morning.

Kiwi (NZD): The Kiwi is higher across the board on rate differentials after a combination of better than expected news this week for the NZ economy and lowered rate expectation for Canada have shifted money flows to the Kiwi.

Loonie (CAD): The Loonie is lower across the board after CPI data came in lower than expected, reducing the sentiment for a future BOC rate hike. CPI came in showing 3.3% vs. an expectation of 3.4%, and retail sales figures came in way worse than expected, showing no change vs. an expected gain of .9%. (Click chart to enlarge)


Euro (EUR): The Euro is lower across the board after the Bundesbank came out and said that German economic growth would slow. In addition, the debt crisis still remains unresolved as the IMF is side-tracked attempting to find a new Chief. (Click chart to enlarge)


Pound (GBP): The Pound is higher, mostly the result of Euro weakness and the fact that there is no negative news today out of the UK to reduce demand.

Dollar (USD): The Dollar is also mixed as it looks like risk appetite wants to increase, yet fundamental data and risk is still present in the marketplace. There is no news from the US today so expect the Dollar to trade on risk themes.

Yen (JPY): The Yen is mostly lower even after the BOJ declined to ease monetary policy at last night’s rate decision. This may be a sign of things to come, as yesterday’s report that Japan is in recession was ignored by the BOJ who may be starting to realize that further monetary easing may be futile at this point.

Well things are definitely changing, though I can’t say it is for the better. The recent actions of Central banks have not improved global growth, but merely encouraged bubble in areas that are unintended.

Commodity price inflation is not good for growth, and consumer expectations are so low right now that it will be a long time before there is any faith in government’s ability to fix the problems that ail us.

I see stagflation coming as the likely outcome of all of this meddling, with no apparent end in sight. Until we can get the politics out of the economics, we will be doomed to mediocrity. For as much as I bash Central banks, I also realize that their hands are tied if they can’t get cooperation on the fiscal side of things, as monetary policy alone cannot fix out problems.

How this all ends is anyone’s guessâ€"I’m just hoping to make it through the weekend!

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Forex Week in Review May 15-20

Developments with respect to Greece remain a source of stress for the markets. How will Greece find the €27bn it needs to fill its 2012 ‘funding gap’? Restructure, reprofiling? The market is trying to shape word definitions rather that reshape a quicker market solution for Greece. Before you know it we will have created a Lehman style contagion affair. Today’s Euro pullback appears to have been prompted by pre-weekend nervousness on peripheral finance issues and reports of heavy liquidation in Greek bonds that have coincided with the Spanish/Bund spread blowing out. It’s your typical ‘buy the rumor sell the fact’. It’s easy to create a lot of noise when liquidity is non existent on a Friday. Below are some of the highlights of the week:


  • IMF names John Lipsky as interim Managing Director
  • EUR headline inflation was unrevised at +2.8%, y/y, last month, but core-inflation surprised to the upside to +1.6%, y/y. Together with strong GDP numbers last week this clearly argues for further ECB tightening.
  • Rightmove data showed UK property asking prices rising +1.3% this month, to the highest level since June 2008.
  • Eurogroup chair Juncker conceded that Greek debt is currently at unsustainable levels and said that Europe would consider ‘reprofiling’ of Greek maturities, though only in the context of more spending cuts and asset sales from the Greek government.
  • UK inflation, both headline and core, surprised to the upside last month. Headline inflation accelerated to +4.5%, y/y and core CPI jumped to +3.7% from +3.2%, y/y, in March, a new record high. Much of the spike was caused by airfare prices, up +36%, y/y.
  • The letter from BoE Governor King to the UK Chancellor of the Exchequer again downplayed the above-target inflation. King continued to expect, in line with the inflation report, CPI to return back to target with the Bank rate moving in line with market interest rates.
  • German ZEW economic sentiment was on the weak side, printing at 3.1 in May, down from 7.6 in April and continues the downward trend since February. The ZEW current situation assessment increased to 91.5 from 87.1.
  • The BoE May minutes showed no change in the voting pattern despite some expectations of one less member supporting a hike. As at the last meeting, Weale and Dale voted for a +25bps hike and Sentance voted for a +50bps hike.
  • UK jobless claims printed higher than expected at +12.4k vs. the flat consensus forecasted. The claimant count unemployment increased slightly to +4.6%, but the ILO unemployment was down to +7.7% from +7.8%.
  • Strauss-Kahn resigns from IMF, France’s Lagarde possible successor.
  • FT Deutschland reported that the ECB might cease to accept Greek sovereign debt if maturities were extended. Board-member Stark was quoted making similar comments at a public forum in Athens.
  • UK retail sales surprised with a strong +1.2%, m/m read ex-gas, above the +0.8% forecast. It was the strongest increase in over a year,
  • Spain-Germany 10-year spread exceeds April wides.


  • Russia’s central bank (CBR) reported in its annual report that its previously disclosed increase in allocation to the CAD in 2010 came at the expense of the GBP, rather than lowering allocation to EUR or USD.
  • Empire State manufacturing index extended its gains for a sixth-consecutive month (11.9 vs. 20.7), but at its slowest pace this year.
  • Despite a weaker than expected TIC’s data (+24b vs. +57.7b), overseas demand remains relatively strong. China was seen as a net seller of US treasuries in March.
  • Governor Carney stated that recent Canadian economic data continues to support the BoC’s near term outlook, noting that employment and inflation numbers were modestly stronger, while auto-sales and retail spending were a touch weaker. The Bank next meets on May 31st to determine their interest rate policy.
  • US home construction fell unexpectedly in April, an indication that the troubled housing sector will remain a drag on ‘the’ recovery. Construction of homes plummeted -10.6% from March to a seasonally adjusted annual rate of +523k.
  • US building permits came in weaker, falling to +551k from a downward revision of +574k in March.
  • US manufacturing production fell for the first time in ten-months (+0.0%) last month, as Japans natural disaster disrupted the auto-industry. Industries used +76.9% of their capacity vs. a +77% reading in March. Manufacturing capacity utilization dropped -0.4% to +74.4%, ex-autos, then factory production gained +0.2% in April.
  • In the FOMC minutes there was little different to what Bernanke commented in his post press appearance. The FOMC meeting showed that monetary policy tightening is still far down the line. Concerns about inflation were present, but with the dominating view still being rising energy costs are ‘transitory’.
  • Canadian wholesale trade was weighed down by lower import prices (+0.1% vs. +1.2%) which provided for a disappointing report.
  • US jobless claims fell for a second consecutive week (-29k to +409k), a tentative sign that the downward trend may have recommenced. The decline is being attributed to the ‘shake out of weather related problems, and supply shortages in Japan
  • US home resale’s unexpectedly declined last month on widespread weakness (+5.05m vs. +5.20m), despite a downward revision to the previous month and the second contraction in three-months. What is also disturbing is that the month’s supply moved back above 9 (highest print in six months).
  • For a second consecutive month the Philly Fed manufacturing index plummeted, falling from +18.5 to +3.9 in May.
  • Canadian retail sales disappointed -0.1% and Canadian inflation numbers came in softer with CPI +0.3% vs. +1.1%


  • Japan core-machinery orders rose +2.9% in March, well above consensus expectations for an earthquake-induced 10% decline. This marks the third consecutive month of increased three-month momentum, but seems unlikely to fully reflect the impact from the mid-March earthquake.
  • Australia reported that the number of home loans contracted -1.5%, m/m, in March, vs. expectation of a +2.0% rebound, to below +45k (weakest number in ten years). However, investment lending rose +2.1%, almost offsetting the -2.3%, m/m, contraction in February.
  • RBA May minutes said that an appreciating AUD was helping to contain inflation pressures. However, the minutes also noted that higher interest rates may be required at some point if inflation was to remain consistent with medium-term goals.
  • Australia reported weaker than expected wage cost growth in Q1 of +0.8%, q/q, vs. +1.1% expected.
  • New Zealand input and output PPI rose to +2.2% and +1.7%, q/q, respectively. Consumer confidence rose to 103.2 from 101.4 in March, arresting the slide in confidence year-to-date.
  • Japan Q1 GDP fell by -0.9%, q/q, weaker than the -0.5% consensus. The decline was even larger when taking into account that Q4 GDP growth was revised down to -0.8% from -0.3%, q/q, previously. This would suggest an increasing divergence in BoJ and other G10 monetary policy.
  • New Zealand reported a larger budget surplus projection than the previous forecast easing concerns of sovereign rating downgrades.
  • BoJ left their monetary policy and its asset purchase plan unchanged. Stable BoJ policy leaves the yen vulnerable as US front-end rates rise.

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Japanese Yen Strength is Illogical, but Does it Matter?

On a correlation-weighted basis, the Japanese Yen has been one of the world’s weakest performing currencies in 2011. Alas, while this information is interesting for theoretical purposes, it is of little concern to traders, who focus instead on individual pairs. Against the dollar (USDJPY), the Japanese yen is still quite strong, having recovered most of the losses inflicted upon it by the coordinated G7 intervention in March. Does the yen deserve such a lofty valuation? No. Will it continue to remain strong as the dollar? Well, that is a different question altogether.

As a fundamental analyst, I am inclined to look at the data before making a determination on whether a particular currency will rise or fall. In this case, the fundamentals underlying the yen are beyond abysmal. The recent release of Q1 GDP showed a 3.7% contraction in GDP. Thanks to an interminable streak of weak growth combined with deflation, Japan’s nominal GDP is incredibly the same as it was in 1996! Based on industrial production, consumption, and other economic indicators â€" all of which were negatively impacted by the earthquake/tsunami â€" this trend will undoubtedly continue.

The only force that is keeping Japan’s economy afloat is government spending. While this was a necessary response to anemic growth and natural disaster, it is clearly a double-edged sword. The government’s own (inherently optimistic) forecasts show a budget deficit of 5% in 2015, which doesn’t even include the costs of rebuilding the earthquake region. This will necessitate tax hikes, which will further erode growth, requiring ever more government spending. It seems self-evident that Japan’s national debt will remain the highest in the G7 for the foreseeable future.

From a macro standpoint, there is very little to be gained from investing in Japan. The stock market continues to tank, and bond yields are the lowest in the world. To be fair, years of deflation have made the yen an excellent store of value, but this is hardly of interest to speculator, whose time horizons are usually measured in weeks and months, rather than years and decades.

If not for the yen’s safe haven status, it would and does make an excellent funding currency for the carry trade. Short-term rates are around 0%, and the Bank of Japan (BOJ) has made it clear that this will remain the case at least into 2013. As you can see from the chart above (which mimics a strategy designed to take advantage of interest rate differentials), the carry trade is alive and well. Granted, it has suffered a bit since 2010, due to increased fiscal and financial uncertainty. However, given that the rate gap between high-yielding emerging market currencies and low-yield G7 currencies continues to widen, this strategy should remain viable.

And yet, the Yen continues to rise against the US dollar. It has receded in the last couple weeks, but remains close to the magic level of 80, and it’s not hard to find bullish analysts that expect it to keep rising. They argue that Japanese investors are eschewing risky asset, and that the yen remains an attractive safe haven currency. Not to mention that volatility (aka uncertainty) serves as an effective deterrent to those thinking about shorting it and/or using it as a funding currency for carry trades.

Personally, I’m not so sure that this is the case. If you look at the way the yen has performed against the Swiss Franc, for example, the picture is completely reversed. The Franc has risen 20% against the Yen over the last twelve months, which shows that heads-up, the Yen is hardly the world’s go-to safe haven currency. In addition, you can see from the chart below that on a composite basis, the yen peaked during the height of the financial crisis in 2009, and has since fallen by more than 10%. This shows that its performance in 2011 should be seen as much as dollar weakness as yen strength. Since I’ve spent countless previous posts explaining why I think dollar bearishness is overblown, I won’t revisit that topic here.

In the end, the majority of traders don’t care about this nuance â€" that the Yen has conformed to fundamental logic and depreciated in the wake of the natural disasters against a basket of currencies â€" and want to know only whether the yen will rise or fall against the dollar. Even though, I think that shorting the Yen remains an attractive (and as I argued yesterday, comparatively riskless) proposition. Given that the dollar also remains weak, however, traders would be wise to short it against other currencies.

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Thursday, May 19, 2011

The Euro (Still) has a Greek Problem

Since the beginning of May, the euro has fallen by a whopping 7% against the dollar on the basis of renewed fiscal uncertainty in the peripheral eurozone. The optimists would have you believe that the markets will soon forget about the so-called sovereign debt crisis and just as quickly return their focus to monetary policy and other euro drivers. Personally, I think investors to follow such a course, as forex markets must eventually reckon with the seriousness of the eurozone’s fiscal troubles.

First, I want to at least acknowledge the primary sources of euro support. Namely, the European Central Bank (ECB) recently became the first “G4″ central bank to raise its benchmark interest rate; at 1.25%, it is now the highest among major currencies, save only the Australian dollar. Moreover, there is reason to believe that the ECB will hike further over the coming six â€" twelve months. First of all, eurozone price inflation continues to rise, and the ECB is notoriously hawkish when it comes to ensuring price stability. Second, Q1 GDP growth for the eurozone was a solid .8%, thanks to especially strong performances from France and Germany. While the ECB will likely follow the lead of the Bank of England and wait until Q2 data is released before making a decision, the strong Q1 performance is nonetheless an indication that the eurozone can withstand further rate hikes. Finally, Mario Draghi, who has been confirmed to replace Jean-Claude Trichet in June as head of the ECB, will need to effect an immediate rate hike if he is to establish credibility with the markets.

As I wrote in my last euro update (“Time to Short the Euro“), however, such a modest ECB interest rate â€" regardless of how it compares to other G4 rates â€" should hardly be enough to compensate yield-seekers for the risks associated with holding the euro for an extended period of time. Of course, the primary risk I am talking about is the possibility first of a full-fledged sovereign debt crisis, and secondarily of a eurozone banking crisis.

At this point, it is painfully obvious to everyone except for EU officials that the status quo cannot continue. Bailout funds cannot be expanded and rolled over indefinitely, especially since 3 countries (Greece, Ireland, and Portugal) are now involved. Greece, which is certainly the most pressing case, faces skyrocketing interest rates and declining interest from creditors, even as its budget deficit and national debt rise and its economy shrinks. Under these conditions, there is no way that it can re-enter private bond markets in 2012 (as was originally expected), if at all.

Thus, the only question is, what will happen instead? If Greece were to leave the eurozone, it could inflate away its debt, devalue its currency, and decrease interest rates. Regardless of its merit, this possibility has been vehemently dismissed because of concerns that it would lead to the implosion of the euro, and it seems very unlikely. What if Greece were to restructure its debt, by demanding concessions from bondholders? Based on the bond covenants, it apparently has wide latitude to do so, and might not even face legal repercussions. This possibility is also opposed by the ECB and EU officials because it would force banks to take massive [see chart below] write-downs on their debt holdings.

Greece could similarly elect to “re-profile”- basically lengthening the bond maturities (no “haircut” on interest and principal), ostensibly to give it more time to retool economically and fiscally. While this is a popular option, it probably would only succeed in forestalling the inevitable. Finally, the EU (with help from the IMF) could continue to loan money to Greece, in exchange for more additional austerity measures and collateralized by sales of state assets. Alas, this would be met with stiff political resistance from Greece. Not to mention that the recent indictment of Dominique Strauss-Khan â€" head of the IMF- on rape charges has jeopardized what has been the highest-profile advocate for continued support of Greece.

It seems inevitable that Greece will default on all or part of its debt. That’s not to say that this would cause its economy to collapse, nor that it would precipitate the end of the euro. In fact, recent history is full of cases of countries that successfully declared bankruptcy and emerged several years later unscathed. In this way, Greece could probably eliminate half of its debt, and significantly ease the burden that it poses.

Of course, this would not only set a dangerous precedent for Ireland, Portugal (and perhaps even Spain and Italy), but it would also reverberate throughout Europe’s banking sector, and would probably necessitate multiple bailouts. But what’s the alternative? Dragging out the crisis with secret meanings and feckless proposals will only add to the uncertainty. If Greece and the rest of the eurozone can come to grips with its collective fiscal problem, it will certainly cause chaos in the short-term and a further decline in the euro. By removing uncertainty, however, it will buttress the euro over the long-term and allow it to remain in existence.

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Japanese Recession!

« Global Stagflation! | Home

By Mike Conlon | May 19, 2011

Last night, Japan reported GDP figures that came in worse than expected, showing a quarterly decline of .9% vs. an expectation of a .5% decline, pushing the YoY figure to a negative 3.7% vs. the expectation of a negative 1.9%. By definition, this puts Japan in recession as the effects of the natural disaster there added insult to injury.

However, the rebuilding that will take place as a result of the disaster may help add to GDP in the coming quarters and Japan has become accustomed to tepid economic growth over the last 20 years so the market reaction has been muted so far.

Speaking of GDP, I mentioned yesterday that the BOE minutes showed that the Central bank didn’t want to raise rates with declining GDP figures, but if those declines are the result of the lack of government spending (one of 4 GDP components) then that should be seen as a good thing and should have little affect on monetary policy.

The reason I say this is because UK retail sales figures came in better than expected, showing signs of life in the UK consumer.

Yesterday’s release of the FOMC meeting minutes showed that the Fed is in no hurry to exit QE2 so the market took that as a sign that all systems are go and stocks and commodities pushed higher to end the day. Oil is back to over $100 and gold is hovering around $1500.

Now the supply/demand debate is starting to enter the commodity space, as adverse weather and flooding are reducing supplies of commodities thereby driving prices higher, but this belies the impact of US monetary policy.

Later this morning we will get existing home sales as well as initial jobless claims which are expected to be back in the low 400s. At this point, economic prospects are beginning to look weaker and the effect of QE2 has created higher food and energy costs and raised stock prices but little else. Thanks, Bubble Ben! I’d ask where Obama is in all of this but I think its probably better that he is not involved.

In the forex market:

Aussie (AUD): The Aussie is mostly higher as increased risk appetite is driving markets early, and consumer inflation expectations came in lower than last month’s reading. An important point to remember is that it is the expectation of inflation, and not so much the figure itself, that is the driver of consumer behavior.

Kiwi (NZD): The Kiwi is also higher as budget projections show that the NZ economy will return to surplus in 4 years after the costs of the earthquake are factored in, as government spending cuts attempt to reign in debt levels.

Loonie (CAD): The Loonie is trading higher as oil prices are back to over $100 and the release of the BOC review will show what the Central bank thinks of the state of the economy. Tomorrow’s CPI data release and retail sales figures may provide further clarity on the inflation situation. (Click chart to enlarge)


Euro (EUR): The Euro is taking a break from the action today as DSK has officially resigned as Head of the IMF. Now the search for a new chief begins, and in the meantime ECB honcho Trichet will be speaking on the state of the Euro zone economy. Expect the Euro to trade on anti-Dollar sentiment.

Pound (GBP): The Pound is mostly higher as retail sales figures came in better than expected. Sales ex auto fuel came in showing an increase of 2.7% vs. an expectation of 2.2%. If the UK consumer is still breathing in the face of the rampant inflation they are experiencing and not just spending on necessities, then declining GDP due to government austerity should be viewed as a good thing and not used as an excuse to keep rates low for a long time.

Dollar (USD): Well it looks like the Fed is not willing to let the US economy attempt to stand on its own two feet just yet. In no hurry to exit QE2, today’s existing home sales figures will shed light on whether or not the true problem in the USâ€"the housing marketâ€"is starting to recover. Initial jobless claims are going to be back in the 400s, and I’m still uncertain how the Fed is supposed to help employment anyway.

Yen (JPY): The Yen is weaker across the board after GDP figures came in worse than expected showing that Japan is indeed in recession. While this not a surprise and therefore the market reaction subdued, I’m not quite certain what it is going to take for Japan to be able to turn this situation around, outside of further monetary easing. The Japanese rate policy decision is due out tomorrow. (Click chart to enlarge)


If a global economic slowdown is due to governments reduced spending, then I am all for it! However, keeping rates low and encouraging higher prices in this type of economic climate doesn’t help the average person.

While the supply/demand debate does have some merit when it comes to commodity prices, I am still convinced that it is Fed policy that is pushing prices higher. I believe that demand is fairly constant whether oil is at $50, $75, or $100.

China is paying with what it considers “monopoly money”, as the massive Dollar reserves they have accumulated mean they will buy at any price. It is the average consumer, however that cannot compete in that environment so higher prices effect them more.

In addition, when true supply issues arise, the fact that prices are already high leaves little room for error. It’s like going to an auction and bidding on something that you really want, but realizing that a billionaire wants it as well. You may as well give up on the spot, as there is no way you are going to win.

Unfortunately, this is the economic story unfolding today.

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Investors Wary of Greek Debt Restructuring

The euro gained slightly in back-and-forth trading in early morning trading London. With weak growth news expected to dampen enthusiasm for the dollar, investors are turning to the euro but there is no question that recent talk of a restructuring of Greek debt has investors wary of large euro positions.

Comments from European Central Bank President Jean-Claude Trichet that the ECB would not accept Greek bonds as collateral if Greek debt payments are delayed as part of a restructuring plan.

“There is still a lot of noise from euro zone officials about how to go about finding a solution to the Greek debt problem,” said Sebastien Galy, currency strategist at Societe Generale.

Source: Reuters

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Tuesday, May 10, 2011

Euro Danger!

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By Mike Conlon | May 10, 2011

Where there’s smoke, there is fire and it is no different for the Greece and the Euro zone. The stories that are being floated insinuate everything from Greece leaving the Euro zone, restructuring debt, or receiving further bailouts. At this point it is difficult to determine what is actually going to happen, but one thing is clear: Greece is in need of help.

Yesterday S&P poured gasoline on the fire and downgraded Greece’s credit rating again, and the current rates Greece would have to pay to re-finance are not feasible in the market. So there is heightened structural risk for the single currency.

In the UK, retail sales figures came in better than expected, but the market is looking ahead to tomorrow’s GDP estimate, which is likely to set the bar low so that the BOE can act surprised when it comes in “better than expected”.

China’s trade balance figures came in better than expected with better exports and worse imports. If they cared to have a stronger Yuan as I mentioned yesterday, perhaps they would be willing to buy more of other people’s stuff. Chinese CPI data is due out tomorrow and there is an expectation that they will raise rates again to try to slow growth.

Oil prices are lower to start the day, as the CME raised margin requirements for oil, but stocks and other commodities are trading higher.

In the forex market:

Aussie (AUD): The Aussie is mixed despite better than expected trade balance figures as the potential for a Chinese slowdown could affect Australia greatly.

Kiwi (NZD): The Kiwi is mostly lower after the IMF came out and said that the Kiwi was over-valued by roughly 20%. Thanks guys! (Click chart to enlarge)


Loonie (CAD): The Loonie is mostly higher today despite lower oil prices as the soundness of the Canadian economy is has been highlighted today after last week’s elections which the market perceives as adding to fiscal responsibility.

Euro (EUR): With all that is going on with Greece, it’s easy to lose sight of the fundamental data that still exists. Tomorrow will bring CPI data and Friday will be the GDP report. The Swiss franc is lower today as CPI data came in less than expected.

Pound (GBP): The Pound is mostly lower as the market is expecting tomorrow’s GDP estimates to be reduced, despite today’s better than expected retail sales figures which showed a gain of 5.2% vs. an expectation of 2.5%. How much longer the UK can deny better than expected data is anyone’s guess. (Click chart to enlarge)


Dollar (USD): The Dollar is showing some strength today despite higher stocks and commodities (except oil) prices as there is still some risk from the Euro zone pushing the safe-haven play.

Yen (JPY): The Yen is lower across the board as the Nikkei was higher on better than expected stock earnings which out-weighed Euro debt concerns.

While there is certainly a great deal of risk in the marketplace emanating from Greece and the Euro zone, the market doesn’t seem to be overly concerned about it. While everyone expects some sort of resolution to be forthcoming, the way in which it is handled could have a major impact.

As I mentioned above, there are many different competing financial interests that could be affected by different outcomes, and the ECB should have come up with a credible plan for Greece (and the others) long ago, as no one expected these problems to just disappear.

But without them we would have little to talk about so the outcome will be important going forward. But I don’t expect Greece to leave the Euro zone, nor do I expect to see a major restructuring of debt. What is most likely is that Germany will reluctantly agree to further aid, and the IMF will get Greece more favorable terms.

However until this occurs, it is wise to be cautious.

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EURO to Survive a Greek Haircut?

As expected, the Greek tragedy dominates the markets. It’s a long performance with no intermissions. The rumors of another Greek bailout package (EUR+60b), to come into force next month, is providing a ray of hope for risk investors.

Credit markets are in corrective mode this morning, with broad tightening across the curve. The indices have nearly reversed all the Greek inspired widening since yesterday. The EUR is also getting a lift from Bin Smaghi’s comments that a debt restructuring (code name for default) would cause more problems than it solves. It’s so true, European banks would have to finally clean their balance sheets to withstand a genuine Greek ‘haircut’ and the market believe they are in no position to withstand this scrutiny. The problem is that Greece needs growth in its tax revenue to finance all this and that’s not easily forth coming.

This months 6-month Greek T-bill auction has also attracted a healthy demand this morning. The sovereign was able to offload +1.625b at a yield below the psychological +5% (+4.88%) with a bid-to-cover ratio of 3.58.

The US$ is stronger in the O/N trading session. Currently, it is higher against 11 of the 16 most actively traded currencies in an ‘subdued’ session.

Forex heatmap

The USD is lower against the EUR +0.07% and higher against GBP -0.13%, CHF -0.49% and JPY -0.44%. The commodity currencies are weaker this morning, CAD -0.04% and AUD -0.06%.

After three consecutive months of gains, Canadian housing stats declined at a faster pace than expected last month (-3.2%). Most of the weakness was focused in multi-starts (-5.1%) as singles rebounded. This would suggest that the drag on growth for April will likely be more modest than the headline suggests, couple with S&P’s cutting their rating for Greece has temporarily dampened some of the investor demand for riskier assets. The loonie has been able to pare some of yesterdays losses on the back of a tepid rise in commodities after the over extended price movement last week.

Last week, the CAD retreated from a three-year high as commodities plunged on concerns for Greece’s continued Euro membership, pushing investors to seek temporary sanctuary in the world’s go to safe heaven currency, the dollar, and this despite another stellar jobs report north of the forty-ninth parallel (+58k and +7.6%). With corporate CAD buying interest not appearing until above 0.97, the loonie remains at the mercy of energy prices. If one eliminates all the noise, investors wish to be better buyers of the currency on dollar rallies (0.9623).

The global commodity boom is supporting the Australian trade surplus. Data this morning shows that the trade balance rose to a +1.7b surplus in March from a downwardly revised-87m deficit in February. Increased exports of iron ore (+30%, m/m) and coal (+27%) is driving the +9.2%, m/m rise in total exports, outpacing the +1.2%, m/m rise in imports. The recent commodity boom is leading to an increase in both the price of and demand for hard commodities and the Aussie dollar outright. Stronger Chinese trade data O/N (+$11.4b), a sign that tighter monetary policy is ‘not crimping the Asian nation’s growth’ is also a plus for Australia economy.

The currency has been able to rebound from last weeks lows after the RBA sounded ‘surprisingly’ hawkish in its Statement of Monetary Policy. The hawkish Statement came in well above market expectations of forecasts remaining unchanged. Governor Stevens is signaling that ‘current mildly restrictive monetary policy is not enough to contain inflation pressures in the pipeline’. Furthermore, the RBA is indicating that market pricing of one hike over the next year is not enough. Underlying inflation is now expected to be above its 2-3% target band by the end 2013.

Aussie yields are still the highest in the G10 and do look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on pullbacks for the time being (1.0788).

Crude is lower in the O/N session ($101.52 -$1.03c). Oil prices rebounded yesterday from the plummeting nature of last weeks actions, on signs that global economic recovery remains intact. Market participants believe that the recent purging in most asset classes is somewhat overdone and that we are experiencing a technical rebound after last weeks-15% haircut, the biggest drop in three-years. The market will be weary of this weeks inventory report, expecting another build in inventories.

Not helping the black-stuff was last week’s EIA report, which was much more bearish than expected. The data showed crude stocks rising +3.4m barrels greater than the +2m barrel build expected by the street, signaling less demand from refiners. On the flip side, gas stockpiles fell-1m barrels, while inventories of distillates (heating oil and diesel), fell -1.4m. Analysts had expected that gas stocks would rise +100k barrels. They were looking for distillate stocks to climb +400k. Gas consumption dropped -2.2% to +8.94m barrels a day last week.

Higher oil prices have been denting demand growth and it’s this drop-off, combined with the overall retreat in commodities, and a rising dollar that forced this drastic easing of oil prices this month. The market had been overbought and last week’s purging is largely a momentum thing. Expect the energy market to find more support below these current levels.

Gold has rebounded as investors take advantage of last week’s free fall in prices to enter the market. The uncertain macro-economic and political environment has encouraged investors to want to own their piece of gold. The yellow metal, as a non-yielding asset, has a higher opportunity cost when interest rates rise. Big picture, the commodity has become the currency of choice because of the heightened currency volatility and on the back of a questionable dollar value.

The metals bull-run is far from over with speculators continuing to look to buy the metal on these deeper pullbacks, however, with inflation expectations dipping this month has the weaker ‘long’s’ remaining on the back foot and second guessing their outright positions ($1,515 +$12.10c).

The Nikkei closed at 9,818 up+24. The DAX index in Europe was at 7,480 up+70; the FTSE (UK) currently is 5,993 up+51. The early call for the open of key US indices is higher. The US 10-year eased 1bp yesterday (3.16%) and is little changed in the O/N session.

Treasuries prices are caught in a tug-of-war as they trade within striking distance of their lowest yields this year. European growth and debt concerns has investors reducing some of their risk appetite, while the issuance of $72b’s worth of product this week and the belief that US retail sales will surprise is trying to push yields higher.

The US treasury plans to sell $72b of long-term debt this week, starting with today’s auction of $32b-3, tomorrow’s $24b-10’s and Thursday’s $16b long-bonds. At the moment they certainly appear rich on the curve, expect dealers to try to cheapen that curve.

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What the Forex Markets Tell Us about Gold & Silver

All investors, regardless of stripe, must now be aware both of the bull market for gold/silver and the bear market in the US dollar. Despite all of the rhetoric, however, it seems that little is actually understood about how these two phenomena are actually connected. Ultimately, this connection (or lack thereof) has serious implications for both markets.

Many gold investors insist they are buying gold as a proxy for shorting the dollar. Commentary on gold prices is full of apocalyptic warnings about the current financial system and criticism of fiat currencies, which are backed by nothing except for good faith. They argue that buying gold is the best (or even the only) hedge against the eventual collapse of the dollar.

Unfortunately, I don’t think this argument holds up to close scrutiny. First of all, gold and silver [I am including silver in this analysis not because of any deep relationship to gold, but only because of the association ascribed by other commentators and an observable market correlation] prices have risen much faster over the last year (and decade, for that matter) than even the strongest currencies. Furthermore, gold is rising faster than the dollar is falling. In terms of the Swiss Franc â€" which is to forex markets as gold is to commodities markets â€" gold has risen more than 17% since the start of 2010.

Second, the putative correlation between gold and forex markets asserts itself sparingly (as you can see from the chart below, which plots gold against an index that shows dollar bearishness), and in difficult-to-understand ways. For example, gold stalled during the financial crisis, while the price of silver suffered a veritable collapse. Does it make sense that when financial anxiety was highest, interest in gold and silver ebbed? Along similar lines, the recent rally in the dollar followed the recent correction in gold and silver â€" NOT the other way around. If anything, this shows that gold investors are taking their cues from the broader commodity markets, and not from forex markets.

Third, the macroeconomic case for gold is flimsy. While I don’t think it’s fair to attack gold on political grounds, I still think it’s reasonable to try to ascertain what forces are supposedly being hedged against. If it is inflation that gold buyers are worried about, why aren’t other all investors equally concerned? Based on futures markets â€" whose credibility is just as solid as gold markets â€" inflation expectations are around 2-4% across the G7. If instead it is sovereign debt default that gold investors are concerned about, again, I have to ask why other markets don’t share their concerns. Credit default swap rates are higher for Japanese and European debt than for US Treasury securities, but the yen and euro remain positively buoyant against the dollar. Again, how do gold investors explain this contradiction?

To me, it seems obvious that gold and silver are rising for reasons that have very little to do with fundamentals. Monetary expansion has driven a wave of money into financial markets, and a significant portion of this has no doubt found its way into gold, silver, and other metals. In fact, it seems that last week’s correction was driven partly by higher margin requirements for speculators. Finally, their cause is being helped by low interest rates, since the opportunity cost of holding gold (which doesn’t pay interest) in lieu of dollars (which does) is currently close to zero. When interest rates rise, it will certainly be interesting to see if there is any impact on gold.

In the end, I don’t have a strong understanding of gold and silver markets. For all I know, their rise is genuinely rooted in supply/demand, as it should be. My only wish is that investors will stop pretending that it has anything to do with the dollar.

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Monday, May 9, 2011

Introduction to Technical Analysis: Morning Fake-out

© 2004 - 2011 Forex Currency charts © their sources. While we aim to analyze and try to forceast the forex markets, none of what we publish should be taken as personalized investment advice. Forex exchange rates depend on many factors like monetary policy, currency inflation, and geo-political risks that may not be forseen. Forex trading & investing involves a significant risk of loss.

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Commodities Collapse!

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By Mike Conlon | May 6, 2011

As we all know by now, the inputs that make up the global economy are all inter-twined and that’s what makes the forex market so interesting. Yesterday, commodities prices collapsed across the board, bringing down prices in oil, precious metals, and even agricultural products. Oil is now under $100, gold under $1500, and silver back to under $35.

This begs the question as to what is actually driving prices higher, and what caused this sudden decline. While I think declining commodity prices are a good thing as this can relieve headline inflation, the role of speculators, the US Fed and other Central banks, and supply and demand dynamics must all be examined.

But there was an interesting confluence events occurred yesterday which is likely the reasoning for such a sell-off. While in the US we had a dismal initial jobless claims numbers, the ECB rate policy statement did not confirm that further rate hikes would be coming and deferred to the flexibility the ECB has. The market took this as dovish and began selling Euros, which helped the Dollar rally the most in nearly 2 years.

So adding it all up, we have weakening global economic data, potential pauses in rate hikes abroad which cause Dollar strength, the end of QE2, and the Non-Farm Payrolls report later this morning which all could support a strong Dollar position. However, at this point we can’t rule out further Fed easing if the data continues to get worse here in the US.

So what we’ve been waiting for all week, the US Non-Farm Payrolls Report is expected a gain of 185K jobs.

In the forex market:

Aussie (AUD): The Aussie is mostly higher despite lower commodity prices to start the day as the yield differentials are just too hard to ignore.

Kiwi (NZD): The Kiwi is also higher for the same reasons as the Aussie.

Loonie (CAD): The Loonie is mostly higher as a better than expected employment report shows that there is economic improvement in Canada. Canada added 58.3K jobs vs. an expectation of 20K, and the unemployment rate ticked lower to 7.6% from 7.7%. (Click chart to enlarge)


Euro (EUR): The Euro is mostly lower after the market perception over the ECB statement yesterday is that there may be a pause in rate hikes. The Euro is improving this morning after the NFP figure was released. (Click chart to enlarge)


Pound (GBP): The Pound is mixed as “mum is the word” out of the BOE yesterday. By not issuing a policy statement yesterday, the Pound should continue to strengthen vs. Euro.

Dollar (USD): Wow again. NFP came in showing a gain of 244K jobs, which was much better than the expected 185K and quite a shock to the market. The one negative is that the unemployment rate moved higher to 9% from 8.8%, though it is uncertain what is driving that number.

Yen (JPY): The Yen is weaker across the board as it appears to be “risk-on” again in Japan after yesterday’s holiday.

It looks like some of the correlations that the markets rely on may be breaking down a bit as it appears as though the market is not sure what to make of the data.

On the one hand, good economic data here in the US means that Bernanke and the Fed could let QE2 expire without having to take further monetary action, which should strengthen the Dollar as it has been kept unusually low thanks to that policy.

But on the other hand, good economic data also means that the US economy is recovering, which could put the risk trade back on again, which would mean selling Dollars and buying commodities and higher yielding currencies.

Right now oil is still trading lower, the Euro has just gone positive vs. USD as it is weakening across the board. Stock markets are flying higher, so at this point it looks like the risk appetite is out-weighing the thought that the end of QE2 could bring Dollar strength.

I expect to see some volatility over the ensuing trading days as the market works this all out!

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Saturday, May 7, 2011

Forex Week in Review: May 1-6

It was a week many would like to forget. A week of surreal price movements across all asset classes. The perfect storm of price movement, with investors exiting the one directional, inflation premium commodity trade with gusto, after the CME cost hiking, the rumors of a Soros fund exiting ‘the’ trade and a less hawkish Trichet omitting the code words ‘most vigilant’ from his communique. Now the market has to endure European finance officials in Luxembourg for an unscheduled meeting as rumors of Greece possibly wanting to leave the Euro zone has market sentiment remaining on the defense at week’s end. Below are some of the highlights of the week:


  • Euro area manufacturing PMI data for April was revised higher from 57.7 to 58.0, above expectations set for a flat 57.7 reading. The data is consistent with strong growth and provides a comforting outlook on the sector, especially in the light of the stagnant recent Ifo reading.
  • Swiss SVME PMI indicator fell unexpectedly to 58.4 from 59.3 last month, while markets were looking for a 59.8 reading.
  • Swedish PMI surprised to the upside in April, rising from 58.6 to 59.8 m/m with consensus set at 58.5.
  • Unlike Norway who had a sharp downward PMI revision, as the headline fell to 55.6 from 57.4.
  • UK manufacturing PMI badly disappointed with a drop to 54.6, the lowest level since last September. The market expected a 57.0 print and, to make matters worse, the March reading was revised down from 57.1 to 56.7. With a weak domestic orders component, does not bode well for growth momentum going into second quarter.
  • In Sweden, the Riksbank’s minutes confirmed the very hawkish stand of the executive board.
  • Portuguese/German 10-year spreads have tightened on news of agreement on an aid package between the Portuguese caretaker government and EU institutions. The deal still has to be approved by the Portuguese opposition and the EU governments.
  • The Euro-zone services PMI was revised down slightly to 56.7 from the preliminary 56.9, coupled with the upward revision to manufacturing PMI, leaves the indicator on firm footing.
  • UK construction PMI came in at 53.3, well below the 55.9 expected. Money supply data remained soft, the preferred measure of money supply for the MPC, the three-month annualized rate of M4 ex-intermediate OFCs eased to +1.0% from +1.7% in February.
  • UK services dropped to 54.3 in April from 57.1 in March, well below the 56 consensus forecast. With all UK PMI surveys (manufacturing, construction and services) sharply lower this week points to sluggish growth entering the second quarter. This should keep the BoE dovish.
  • German factory orders surprised the market with a sharp drop of -4% m/m in March with February print revised lower to +1.9% from +2.4% previously and pushed the annual growth rate to only +9.7% y/y, down from 19.6% in February.
  • German industrial production beat expectations rising +0.7%, m/m vs. +0.5%.
  • UK PPI printed higher than expected, with the output PPI rising +5.3%, y/y last month vs. +5.1% forecasted. Perhaps higher commodity prices might be starting to filter through.
  • Both the BoE and the ECB held rates steady at +0.5% and +1.25% respectively. Trichet’s well documented less hawkish tone had the market pricing out near term inflation premium.
  • In Norway, manufacturing production printed stronger than expected at +0.9%, m/m, vs. expected +0.6%. The annual rate accelerated to +3.0%, y/y from +2.0% in February.


  • In Canada, Prime Minister Harpers Conservatives won a ‘majority’. To date, the Tories have pursued policies that have been fairly friendly to the CAD.
  • US Treasury Secretary Geithner reiterated that global economies would benefit if China allowed its ‘substantially undervalued’ currency to strengthen. Expect more rhetoric to seek the appreciation of the Yuan ahead of the US-China Strategic Economic Dialogue next week.
  • US manufacturing slowed last month (60.4), but not as much as expected (59.5). However, rising costs remain a problem (85.5). The ISM report contrasts the Fed’s regional surveys which show that manufacturing expanded in April. Manufactures continue to experience significant cost pressures from commodities.
  • US factory orders climbed for a fifth consecutive month in March (+3%). A broad based increase in orders as well as rising prices for food and oil were factors behind the bigger than expected gain.
  • US ADP’s estimate of +179k for private non-farm payroll growth fell short of market expectations (+200k). On the plus side, March data was revised higher by +6k to show a gain of +207k jobs.
  • The much weaker than expected US ISM non-manufacturing data has given the investor another reason to be concerned about the US economy and further justifying the Fed’s ‘extended’ monetary policy. The ISM plunged 4.5 points to 52.8 in April, well below expectations (57.4).
  • US weekly initial claims jumped to +474k, up from the previous weeks +431k. As long as the headline number stays above +400k, this would imply a slower recovery than the Fed would like.
  • US Non-farm productivity rose at a +1.6% rate in the first quarter, beating the streets estimate of +1.1%. The preliminary estimate of hourly compensation (+2.7%) was half-a-percentage point higher, boosting the estimated growth rate of unit-labor costs to +1.0% versus a decline of 1.0% in the fourth quarter.
  • Canadian Ivey PMI came out at 57.8, unadjusted 57.7, plummeting from 73.3 last month, has added some pressure to the ‘risk off’ tone mid-week.
  • March’s Canadian building permits came in much stronger than expected, with a massive +17.2% increase after a strong +9.8% gain in February.
  • NFP expanded by +244k last month, the biggest gain in a year, after a revised +221kincrease the prior month. The jobless rate climbed to +9% (first increase since November).
  • Canadian employers added a net +58.3k jobs in April after a decrease of -1.5k in the previous month. The jobless rate unexpectedly dropped to +7.6%.


  • China’s April PMI fell -0.5 points to 52.9 with new orders falling -1.4 points to 53.8. Some proof that China’s economy is decelerating amid rising financial stress for non state owned companies, wide spread labor shortages, and emerging power interruptions. Does the weaker data curtail policy tightening?
  • As expected, the RBA left their rate policy on hold (+4.75%). Their following communiqué was hawkish compared to the April release, but certainly caught the rate’s market on the back foot, who had pushed yields higher going into the meeting in the wake of higher than expected first quarter inflation. Governor Stevens’s communiqué ran a balanced mix of downplaying first quarter inflation due to the floods, noting strength in the labor market and a pickup in corporate credit growth but weakness in household credit. However, he went on to say that ‘the marked decline in underlying inflation from the peak in 2008 has now run its course.
  • The Reserve Bank of India hiked policy rates +50bps to +7.25% and +6.25%, respectively on the repo and reverse-repo, more than the consensus forecast for +25bps.
  • New Zealand building permits rose only +2.2% m/m in March after the sharp fall of -9.8% m/m in February.
  • Japan Finance Minister Noda went out of his way this week to distinguish the current yen movement from the pre-intervention period. He noted that the moves stem from weakness in the dollar, not from yen strength.
  • New Zealand reported a higher than expected +1.4% q/q rise in employment in the first quarter.
  • Australian retail sales were weak in March, down -0.5% m/m vs. an expected +0.5% gain.
  • The RBA’s Monetary Policy Statement also emphasized the possibility for further policy divergence. The statement came in more hawkish than market expectations of forecasts remaining unchanged. Policy makers indicated that market pricing of one hike over the year ahead (to May 2012) is not enough. Inflation is expected to be above its +2-3% target band by end 2013.

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Wednesday, May 4, 2011

Rough Patch Ahead?

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By Mike Conlon | May 4, 2011

The data is starting to get a bit weaker and the market looks as though it is preparing for an economic “rough patch” that may be just around the corner. While we all know that QE2 will officially be coming to an end shortly, how long that lasts is anyone’s guess.

The first indicator of unemployment here in the US came out this morning, with the ADP jobs report showing gains that were les than expected. This comes ahead of tomorrow’s initial jobless which are expected in the low 400K range (which is higher than we had hoped when we reached the 300k range) and then Friday’s all-important Non Farm Payrolls report.

Overnight, the Central Bank of China issued hawkish statements that combating inflation was their number one concern, so the fear of a Chinese slowdown sent the MSCI Pac Rim stock index lower, taking commodities and commodity currencies lower as well.

Yet the Euro and the Pound are holding up well, as tomorrow’s rate policy decisions are expected to produce no change, yet the ECB policy statement could be hawkish. Retail sales figures in the Euro zone came in lower than expected, and home prices declined in the UK.

This all adds up to a global slowdown, which means that the market is convinced that Bernanke will attempt to come back to the rescue and put the training wheels back on the economy through further easing at the first sign of trouble.

In the forex market:

Aussie (AUD): The Aussie started the morning lower but has flipped to higher as the weak Dollar play is back in action.

Kiwi (NZD): The Kiwi is lower across the board as it is very much influenced by what goes on in the Chinese economy. Unemployment figures due out later tonight could put a positive spin on the NZ economy.

Loonie (CAD): The Loonie is mostly lower as oil prices have pulled back to a $110 handle and the dual problem of being so in bed with the US economy has further contributed to weakness. Nevertheless the weakening Dollar has just pushed the Loonie back toward .95 vs. USD. (Click chart to enlarge)


Euro (EUR): Greek debt restructuring. Declining retail sales figures (-1.7% vs. an expected no change). Portuguese and Irish debt costs ballooning. These might seem like major problems to any other currency that is not considered the “anti-Dollar”. The ECB rate decision will keep rates unchanged, but the statement could surprise. (Click chart to enlarge)


Pound (GBP): The Pound is also higher despite home prices that fell more than expected and the notion that the BOE will not change rate policy at tomorrow’s decision. Unlike the ECB, the BOE will not issue a policy statement.

Dollar (USD): The Dollar’s short-lived bounce from risk aversion has reversed and now we are looking at weakness as there is no confidence that a declining US economy will be allowed to function without the intervention of Bernanke and the Fed. The ADP employment change showed a gain of 179K jobs vs. an expectation of 195K.

Yen (JPY): The Yen is weaker as Japanese markets are closed today.

Well it looks like this is going to be a case of bad news is good news for stocks and commodities heading into the end of QE2. The worse the data gets, the higher the expectation that Bernanke will continue some sort of monetary easing.

Whispers of “QE2.5″ are making the rounds, and the artificial conditions that created thanks to this easy money policy are delaying the problem and not fixing it. While these delay tactics might be appropriate if we trying in earnest to get our fiscal act together, the politics of Washington are preventing certainty in the marketplace.

Questions about taxes, regulation, and government spending have not assuaged businesses, and the prevailing notion is that things are getting worse and not better.

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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Euro Gains as ECB Readies Interest Rate Statement

The euro continued to make gains on the dollar this morning rising 0.5 percent to $1.4901 at 8:30 an in New York. Investors are hopping aboard the euro as speculation grows that tomorrow’s statement from the European Central Bank will strongly hint at further interest rate increases for the Eurozone.

“The ECB has nailed its anti-inflation colors firmly to the mast, and the Fed hasn’t even got around to starting yet,” said Steven Barrow, a currency strategist at Standard Bank Plc in London. “This euro rally won’t extend too far if the ECB isn’t as hawkish as the market expects.”

Source: Bloomberg

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Interview with InnerFX: “JPY and CHF will Continue to Strengthen”

Today, I bring you an interview with Liviu Flesar, an independent trader and blogger. His portal is InnerFX, which is billed as a “useful resource for traders from all over the world and a trading blog where novice traders can learn how to trade better.” Below, Mr. Flesar discusses his background and shares his thoughts on the major currencies, setting up trades, and how to reform the rating agency system.

Forex Blog: I’d like to begin by asking you about your background as a trader and as a commentator. How did you get started in forex? At what point did you make the transition from trading currencies to offering analysis to the public? What was your motivation for that decision?

Hello Adam, thank you for inviting me to the interview. Back in the year 2003, some friends were talking about investing in the stock market. I had listened to their conversations, which was quite interesting, even though I had only a little idea about what they meant. Once I got back home, I started to search on the Internet â€" looking for Stock Investing websites to learn more about it. I stumbled across various sites and soon opened my first account on a gambling site. Gambling â€" that’s right. For example, it was possible to try predicting the last decimal of a financial instrument after 10 market ticks. That was crazy and foolish. I blew my account after two weeks, so I decided to take a break and do some more research.

After browsing though forums and trading sites, I discovered the exciting and challenging world of FX Spot Trading. I also signed up with a trading advisory service, expecting to replicate its performance. The advisory service went out of business after almost one year, and I felt like I was alone in a dark place. Retail FX wasn’t too popular 7 years ago and there were only a few FX sites, so it was quite hard to find another reliable advisory service. While searching and trying to learn more, I came to understand that it’s best if I use my own brain to trade, as it is almost impossible to be successful on the long run by following other people.

I started to share my analysis with the public after one year, in 2004. I wasn’t especially motivated to do it. Perhaps I just wanted to start my own project, in a less popular niche. I wanted to give something back- to share some of what I’ve learned. Sharing market commentary on a daily basis was also keeping me focused, and the site became a great tool to improve my own discipline and to keep track of my own expectations: a hobby, a playground, a serious project â€" a little bit of everything.  
Site monetization was of course another reason â€" who would refuse some extra money?!

Forex Blog: Can you explain your approach to trading? Do you prefer fundamental analysis, technical analysis, or a mix of both?

I prefer the technical approach. When it comes to my own trading, I am a market follower. I don’t make predictions, I don’t ask questions, and I don’t seek answers. The FX Market is way too sensitive to all kind of events, both expected and unexpected. I believe that everything is reflected in market prices, so I prefer to concentrate on prices rather than analyzing the impact of every single economic data release. I don’t have enough time or skill to do that. I do care, however, about really significant things, such as quantitative easing, interest rates decisions and differentials, unemployment, bailouts, debt restructuring etc.

Forex Blog: You’ve written quite a bit about the EUR/USD. What do you make of the fact that the Euro is now rising rapidly, in spite of the unresolved sovereign debt crisis? Do you think the Euro will continue appreciating, or is it due for a correction?

EURUSD is one of the best pairs that reflects the dollar’s weakness nowadays. So this rally is not mainly about the EUR strength but rather about dollar’s weakness. Both currencies have their own major problems but recent and upcoming rate hikes by the ECB are making the euro more attractive relative to the US dollar.

Forex Blog: The Japanese Yen continues to behave erratically. After rising to a record high following the triple disaster, it proceeded to fall rapidly on the G7 intervention, only to resume its rise. What do you make of all of this. Under these conditions, is it even worth trying to formulate a fundamental trading strategy, or do you think traders should stick to technical analysis and short-term positions?

Recent history has shown that CB interventions in currency markets are ineffective and they are only causing massive short-term spikes. Although I prefer to stick to short-term predictions, I think that in the long run, both JPY and CHF will maintain their safe-haven status and will continue to strengthen against the US dollar.

Forex Blog: You recently observed that, “Nobody pays attention anymore to what the rating agencies have to say…” Why do you think this is the case? If the ratings agencies are indeed useless, how do you think individual traders gauge the seriousness of countries’ fiscal problems and the likelihood of default?

Most traders should be aware of the role the rating agencies played in the sub-prime crisis, and they were the main enablers of the financial meltdown. Well, it’s clear that fewer people care about what the rating agencies have to say. I certainly hope that traders and investors are more careful now, after the rating agencies missed both the sub-prime crisis and the eurozone debt crisis. Secondly, I don’t think we need the rating agencies to compete with each other to be the first to downgrade everything nowadays, playing the “Captain Obvious” role and telling us how troublesome sovereign debt really is. Most people can do their own research, especially large funds.  

Unfortunately, for all the flaws the “Big 3″ rating agencies have demonstrated, I think it’s a bit hard â€" but definitely not impossible â€" to find a better system. If governments would rate their own securities it would be totally pointless â€" obviously. So we shouldn’t even consider this option.

Changing the business model, making the bond buyer to pay the ratings agency instead of bond issuer probably won’t do any good either. Another option may be the Credit Default Swaps spreads, which represent more reliable data sources and viable alternatives to credit ratings.

Forex Blog: You occasionally offer “setups” to your readers. How are these designed to be used? Do you use these same setups as a basis for your own trades?

As you noted, I share charts, commentary and trade setups on regular basis.  
They are some of my own trades and intentions. As far as I know, most of my readers use their own analysis and strategies to make trading decisions and that’s what I highly recommend to beginners. All traders should do their own research before making any trading decisions. I learned that myself when I was still new to trading. I know that sometimes it is useful to read what other people expect and what strategies they use, especially when you are taking your first steps towards trading. Learning from others’ mistakes is better and more fun than learning from your own.

Forex Blog: InnerFX contains a great economic calendar that is very user-friendly. Given the abundance of economic data that is released every day, how can traders profit from this information? Which economic indicators are on your watch-list this week?

The Economic Calendar is provided by Forex Pros and is quite similar to other calendars you can find. I check it each morning in order to be aware of important economic releases and reports: I just don’t want to jump into trades a few minutes before Interest Rate Decisions or other key events. The most important events on my watch-list this week are the ECB Rate Decision and accompanying Press Conference and, of course, the NFP on Friday.

Forex Blog: Finally, what’s your advice for traders that want to beat the market and turn a profit in these uncertain times?

When it comes to trading, times will always be uncertainty: bubbles, crises, wars, rumors, lies, interventions, market manipulation etc. â€" we won’t get rid of them. My advice for traders is to have realistic goals and trade what they see, not what they think and preferably not what other people say.  
Also, don’t over-complicate trading and research. One who really understands how the market works can make great trades even if he doesn’t use any charts or indicators at all.

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Monday, May 2, 2011

Korean Won Poised for Further Gains

It was in November 2010 that I last blogged about the South Korean Won. As a result of the standoff with North Korea and a recent flareup in the Eurozone sovereign debt crisis, the Won had plummeted. Still, I viewed these as temporary problems and concluded that, “Ultimately, both the EU fiscal crisis and the tensions with North Korea will subside, which should cause the Won to resume its rise.” Since then, the Won has indeed risen by more than 8% against the US dollar. Rather than call for a correction, however, I’m ignoring my best instincts and arguing in favor of a further rise.

In a nutshell, the Korean Won has almost everything going for it at the moment. In the words of one columnist, “South Korea is today the 15th largest global economic power [and] is also the leading global nation in shipbuilding, production of LCD screens and in the distribution of broadband per capita. It is the third leading nation in the production of semi-conductors, the fifth in automobile manufacturing and in scientific research.” GDP is growing at a healthy clip of 4.2%. After recording real GDP growth in excess of 6% in 2010, South Korea’s economy is projected to grow by a further 4.5% in 2011, which means that it has more than made up for the recession that it suffered alongside the rest of the word in 2008-2009.  Exports reached a record level in 2010, propelling Korea’s current account balance well into surplus. “It seems that a target of $1 trillion of trade this year will be achieved, in spite of unfavorable conditions from the massive quake in Japan and the Middle East unrest,” declared Korea’s commerce minister. On balance then, money coming into Korea well exceeds money flowing out.

Moreover, unlike Japan and China â€" both of whose currencies are hovering around record levels â€" the Korean Won remains about 20% below its 2008 pre-credit crisis high. That means that the Won has plenty of scope for further appreciation before its exporters will be squeezed to the same extent as its Asian competitors. If the Bank of Korea (BOK) has its way, it will be a long time before this even happens. The BOK continues to intervene on behalf of the Won on a daily basis, and as a result, its foreign exchange reserves have risen to $300 billion, a record high.

Granted, Korean inflation is also rising, and most recently touched 4.7%, which is at or above the level in neighboring economies. The Bank of Korea has taken steps to counter this, but it is understandably wary about inadvertently stoking speculative interest in the Won. Thus, it has raised its benchmark interest rate only four times since last summer, and the rate is still at a historically low level. According to the Wall Street Journal, “That’s still well below the 4% to 4.5% level where economists estimate the neutral policy rate to be.”

When you consider both that the carry trade is back in vogue and that most other emerging market currencies have recovered most of their credit crisis losses and then some, it’s downright surprising that the Won hasn’t risen more. Perhaps, lamented one commentator, South Korea still lacks cachet among investors and is known more as the political counterbalance to North Korea than as the economic juggernaut that it has become. Even though its economy is larger than that of Australia, the Won doesn’t have nearly as much appeal as the Aussie.

Since it’s the weekend, I’ll keep this post short and sweet! Suffice it to say that the Won still has plenty of scope for further appreciation, and unless the BOK completely avoids hiking rates, I don’t see real downside pressures. At this rate, it will probably be one of the big success stories of 2011.

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Bin Laden Bounce!

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By Mike Conlon | May 2, 2011

Overnight it was revealed that Osama Bin Laden has finally been brought to justice and was killed by US forces. The sense of relief that came over the markets may be short-lived however as there are still many sources of risk in the global economy, each posing a different threat.

Oil sold off immediately on the news and stocks are higher to start the day and while this certainly is an important development, it may not be enough to reverse recent trends. Those trends of course are a weak US dollar and higher commodity prices, especially oil.

This week there are a few rate policy decisions that we need to keep an eye on: Australia on Tuesday and Europe and the UK on Thursday.

In addition, the US Non-Farm Payrolls report is due out on Friday and this leading indicator may show whether or not the economy is on the mend. It is expected that we will add 190K jobs and that the unemployment rate will remain steady at 8.8%.

With the end of QE2 coming next month, it will be interesting to see if the old market adage, “sell in May and go away” has any merit.

In the forex market:

Aussie (AUD): The Aussie is mostly lower despite the risk appetite in the market as home prices came in lower than expected. This comes a day ahead of the RBA rate policy meeting where it is expected that they will leave rates unchanged at 4.75%. The Aussie eclipsed 1.10 vs. USD earlier this morning. (Click chart to enlarge)


Kiwi (NZD): The Kiwi is mixed as well as the US dollar is picking up a little strength this morning as commodity prices are lower to start the day. Employment figures are due out in New Zealand on Wednesday.

Loonie (CAD): The Loonie is mostly lower as oil prices have pulled back from recent highs on the Bin Laden news. However, it must be noted that oil is still trading above $112. Canadian employment figures are due out on Friday.

Euro (EUR): Euro zone PMI figures came in this morning better than expected and Thursday’s rate policy decision will be important as even though there is no change expected, the accompanying statement could provide more clarity into whether or not the ECB will tighten further in the ensuing months. (Click chart to enlarge)


Pound (GBP): The Pound is mixed this morning as home prices stayed steady in the UK, halting previous declines. The BOE rate policy decision on Thursday is also expected to yield no change but unlike the ECB, there will be no policy statement so this decision may have less impact than that of the ECB.

Dollar (USD): It is always good to get news that can give people hope however once the reality of current economic conditions comes back into focus, there could be continued worry. The Non-Farm payrolls report due out on Friday will be an important metric to watch, but stocks and commodities prices may ultimately tell the story.

Yen (JPY): The Yen is weaker across the board as some sense of risk-taking has reduced demand for the safe haven. The Nikkei average made it back to just over 10K for the first time since the natural disaster took place.

While it is definitely a bittersweet moment to know that Osama Bin Laden is no more, it would be a major mistake to think that terrorism has ended. There is still considerable risk in the world today, and the conflict in Libya and various other regions remind us of it daily.

While a slowing economy here in the US is a major problem, commodity price inflation due to loose monetary policy may be a bigger detriment. The US dollar has been the worst-performing currency over the last three months so this is no coincidence.

Whether or not the end of QE2 will bring about further declines is anyone’s guess at this point but one thing is certain: there may be some bumps and bruises to the economy once the training wheels are removed and it will be interesting to see if the economy can function on its own!

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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