Buyers Beware!

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By Mike Conlon | June 30, 2011

Yesterday world markets rallied after Greece voted to accept austerity measures in order to receive further bailout money from the EU and IMF, to the displeasure of some of their citizens. The market viewed this vote as favorable and risk trades were established.

So does this mean that global economy is fixed and that everything is better? Absolutely not! Greece still has major structural debt issues that so far have gone un-addressed and will continue to be a persistent problem if not fixed. Fear of contagion to other Euro nations may also crop up for those who would potentially be looking for more money.

So the markets are in mild risk-taking mode, with Dollar weakness and stocks slightly higher, though commodities are slightly lower to start the day,

In addition to all of the drama surrounding Greece, Euro zone CPI came in as expected at 2.7%, which is fairly tame though recent hawkish comments from ECB honcho Trichet suggest the next move may be a rate hike. German retail sales came in much worse than expected as commodities prices were higher, and the unemployment rate in Germany remained steady at 7%.

Canadian GDP figures are due out later this morning and are expected to show a monthly decline of .1%, though yesterday’s hot inflation number pushed the Loonie higher.

US initial jobless claims and Chicago PMI round out the morning, and now that Greece is finished for the time being, focus will return to the US debt ceiling debate after President Obama fired the first shot yesterday in what may be a dragged out political process that could invoke risk-aversion if it gets nasty enough.

In the forex market:

Aussie (AUD): The Aussie is mostly higher as recent risk appetite has driven demand for its interest rate differential despite weakening ancillary economic data.

Kiwi (NZD): The Kiwi is mostly lower though gaining some traction as building permits came in lower than expected showing a gain of 2.2% vs. an expected 3.2%. In addition business confidence figures were higher than last month, though activity outlook figures were lower.

Loonie (CAD): Yesterday was a big move for the Loonie after CPI data came in showing much higher inflation than expected. This morning’s GDP report is expected to show a decline of .1% last month which could be worse if inflation impacted sales negatively.

Euro (EUR): Aside from Greece, Euro zone CPI came in as expected at 2.7%, though German retail sales figures fell 2.8% vs. an expected gain of .5% on higher commodities prices. In addition the German unemployment rate remained steady at 7%, though fewer people became unemployed though not as many as were expected. (Click chart to enlarge)

Pound (GBP): The Pound is lower across the board after a consumer confidence survey came in worse than expected and home prices fell, though less than expected. This may dampen inflation and the expectation that the BOE will have to raise rates. (Click chart to enlarge)

Swissie (CHF): The Swissie is mostly weaker as there is less demand for the safe-haven in light of the recent risk appetite in the market.

Dollar (USD): The Dollar is mostly weaker ahead of this morning’s initial jobless claims figures, and the rhetoric surrounding the debt ceiling debate is coming back into focus. Even though QE2 has officially ended, the Fed is not shrinking its balance sheet so we still have largely accommodative monetary policy which is a good environment for risk.

Yen (JPY): The Yen is showing surprising strength today despite the lack of risk in the market and the decent economic data Japan reported last night. Housing starts showed gains of 6.4% vs. an expected gain of 3.1% though this should be expected as Japan is still in rebuilding mode.

The environment in the global market is decidedly pro-risk as monetary policy here in the US and abroad is still very accommodative which is still supportive of stocks and commodities.

However, the global economy is improving slightly and at a snail’s pace which makes it difficult to plan for the future. Uncertainty in politics and not economics is what threatens the global economy on a daily basis. Corporate balance sheets here in the US remain strong; government balance sheets both in the US and abroad remain weak.

Philosophies on how to repair government balance sheets vary, and the use of the debt ceiling debate is one way to force action. This is unfortunately what as to happen in politics today when you face an “either/or proposition” in debate.

Meanwhile the unemployment rate here in the US is not improving fast enough to inspire confidence, which means that we could be mired in this economic malaise for some time. This means that the US Fed won’t to anything to derail the weak activity, so Dollar weakness could persist for some time.

Do yourself a favor and continue to look for opportunities abroad through the forex market!

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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ECB Again Signals Interest Rate Hike

Comments made today by European Central Bank President Jean-Claude Trichet once again point to a likely interest rate increase when the ECB meets next week to deliver its July statement. Inflation did hold steady in June but it remains well above the Bank’s inflation rate target.

“We are strongly determined to secure that inflation expectation remain firmly in-line (with our expectations),” ECB President Jean-Claude Trichet told the European Parliament’s economic and monetary affairs committee. “The current monetary policy is accommodative and … as I said we are in a state of strong vigilance,” he said.

The phrase “strong vigilance” has regularly been deployed to signal a rate hike in the past.

Source: Reuters

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Tide is Turning for the Aussie

“Australia is about to enter a boom that should last decades…The Australian dollar is unlikely to go back to where it was, and manufacturing will shrink in importance to the economy, perhaps even faster than it has been.” This, according to Martin Parkinson, Treasury Minister of Australia. While 30 years from now, Mr. Parkinson’s prognosis might probe to be accurate, I’m not so sure it applies to the period 3 months from now. Here’s why:

First of all, the putative economic boom that is taking place in Australia is being driven entirely by high commodity prices and surging production and exports. Since peaking at the end of April, commodity prices have fallen mightily. You can see from the chart above that there continues to exist a tight correlation between the AUD/USD and commodities prices. As commodities prices have fallen over the last two months, so has the Australian Dollar.

In addition, while demand will probably remain strong over the long-term, it may very well slacken over the short-term, due to declining economic growth across the industrialized world.  Consider also that Australia’s largest market for commodity exports â€" China â€" may have difficulty sustaining a GDP growth rate of 10%, and at the very least, new fixed-asset investment (which necessitates demand for raw materials) will temporarily peak in the immediate future.

Finally, the mining sector directly accounts for only 8% of Australia’s economy, which means that only to a limited extent to high commodities prices contribute to the bottom line of Australian GDP. This notion is reinforced by the 1.2% economic contraction in the second quarter â€" the biggest decline in 20 years â€" and the fact that GDP is basically flat over the last three quarters. Many non-mining economic indicators are sagging, and the number of corporate bankruptcies is 10% higher than in 2010. In the end, then, the ebb and flow of Australia’s fortune depends less on commodities, and more on other sectors.

Mr. Parkinson’s optimistic forecasts might also be undermined in the short-term by a looser-than-expected monetary policy. The Reserve Bank of Australia last hiked its benchmark interest rate in November 2010, and may not hike again for a few more months due to moderating economic growth and proportionally moderate inflation. Given that an attractive interest rate differential may be driving some of the speculative activity that has girded the Aussie’s rise, a decline in this differential could likewise propel it downward.

That’s because anecdotal reports suggest that the Australian Dollar remains a popular long currency for carry traders, funded by shorting the US Dollar, and to a lesser extent, Japanese Yen. Given that many of these carry trades are heavily leveraged, it wouldn’t take much to trigger a short squeeze and a rapid decline in the AUD/USD. For evidence of this phenomenon, one has to look no further back than May 2010, when the Aussie fell 10-15% in only three weeks.

Ultimately, as one commentator recently pointed out, the Aussie’s 70% rise since 2008 might better be seen as US Dollar weakness (which also catalyzed the rise in commodity prices). The apparent stabilizing of the dollar, then, might let some air out of the currency down under.

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The Final Countdown!

« One Last Hurdle? | Home

By Mike Conlon | June 28, 2011

The market is in a bit of a holding pattern today as the countdown to the Greek vote on austerity is due in the next 24-hours, and as I have mentioned before, this is most certainly not a done deal. Protests in the streets of Greece (riots) have demonstrated the displeasure with the austerity measures and all it would take is a few votes against the austerity to sink the Euro.

Contagion is a much larger concern than Greece itself, which only represents some 3% of the Euro zone economy. If the Greeks end of not accepting the measures and end up defaulting, then this could set off a downward spiral which the Central bankers may not be able to prevent. So there is still a good deal of risk in the marketplace, and this is reflected so far this morning with lower equity prices and mild risk aversion to start the morning. But overall, the markets appear confident that this deal will get done, and that Greece will live to fight another day.

In the UK, GDP figures came in showing a decline in GDP to 1.6% from an expected 1.8%, though the quarterly number came in as expected at .5%. Yesterday noted BOE dove Adam Posen dismissed the BIS call for higher interest rates as “nonsense”. I guess he doesn’t consider 4.5% CPI data as inflationary and cites lower wage growth as reason enough to be dovish.

Later this morning the Case/Shiller home price index is due out and is expected to show declining home prices of around 4%, though consumer confidence figures are expected to have risen from last month’s reading.In the forex market: Aussie (AUD): The Aussie is now higher as the markets have just flipped from risk aversion to risk taking without a major catalyst that can be identified. It should be noted that there is now sentiment in the market that next move for the RBA in Australia may be a rate reduction rather than a rate hike as China attempts to slow their growth. (Click chart to enlarge)

Kiwi (NZD): The Kiwi is mostly lower after yesterday’s trade balance figures came in lower than expected, but there is additional sentiment that the recovery in Christ Church after the earthquakes has been slowing.

Loonie (CAD): The Loonie is mixed as higher oil prices trading up to a 92 handle have counter-balanced the weak US economic outlook that is causing some US dollar selling this morning. Tomorrow CPI data will be released which could show inflationary pressure.

Euro (EUR): The Euro is mixed as all eyes are on the Greek vote for austerity as riots in the streets of Greece are taking place. Tomorrow will bring German CPI data but this is of little importance in the grand scheme of things.

Pound (GBP): The Pound is mixed after GDP figures came in lower than expected showing that stagflationary forces may be rearing their ugly head. BOE dove Posen’s comments may not be so far-fetched if the economy continues to worsen. (Click chart to enlarge)

Swissie (CHF): The Swissie is higher across the board as money flows from the Euro to the safe haven currency with the risk of the Greek vote in full force.

Dollar (USD): The Dollar is actually weakening at this point despite the risk in the market as investors want to get in one more day of risk-taking going into the Greek vote. Home price figures are expected to show declines later this morning, though consumer confidence is expected to be up from last month.

Yen (JPY): The Yen is mostly weaker but not by much as risk is still prevalent in the marketplace. Retail trade figures came in better than expected showing gains of 2.4%, but big box retail sales decrease by that same amount.

The Greek vote is expected tomorrow morning and represents the single largest risk event currently in the markets. The US debt ceiling debate is also something to be concerned about, but that discussion is for another day.

It is no secret that economies are contracting around the globe, however the days of extend and pretend are over and it is time to face the harsh realities. Look no further than what is taking place in Greece as a microcosm for the global economy.

What happens if the citizens of the UK decide that they have had enough of 4.5% inflation even though the BOE continues to avoid dealing with it for fear of sinking the economy? Or what happens if the confidence in the full faith and credit of the US is called into question if the debt ceiling debate can’t be resolved?

These are all precarious positions which need to be handled by governments and not avoided. Unfortunately, most wait until there is a crisis to provide political cover for making difficult choices which can have negative effects going forward.

So keep an eye on this Greek vote and mitigate your risk exposure.

To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!

To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!

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EU Bank Stress Tests Due Mid-July

The European Banking Authority (EBA) continues to court controversy with the way it is administering the recent round of bank “stress” tests. The testing process has been in progress since March and is designed to restore confidence in the European banking system awash in questionable sovereign debt.

As part of the evaluation, the banks have been provided with a formula that will “address inconsistencies and excessive optimism” when it comes to assessing risk of these sovereign exposures. Based on the risk assumption, the banks can then determine the extent of the “haircut” to which they could face and then determine how much they need in reserves to cover the potential losses.

What the EBA is not doing, however, is to force the banks to simulate the impact of an actual default or debt restructuring. If the EBA is hoping to restore confidence with this approach, it leave much to be desired. Especially given the track record of the previous round of stress testing.

Last year’s stress test results were called into question from the very beginning simply because so few banks were deemed at risk. Indeed, the Irish banks were given a clean bill of health just months before the Irish government was forced to provide emergency funding to keep them afloat.

Nevertheless, the EBA claims that owing to the improvements introduced this year, the results will provide a truer picture of the state of the financial system. Still, they are not addressing the greatest fear of all investors â€" an out-and-out default by a sovereign nation.

Testing Results Leaked

A story carried by several news agencies Tuesday morning quoted an anonymous Eurozone insider as saying that potentially one in six of the ninety-one banks tested will fail the testing process. This means up to fifteen banks are deemed at risk based on the criteria imposed by the EBA.

On the surface this appears to be a dreadful result but according to the EBA source, this is exactly what the banking authority wants as it feels this will prove that the EBA is serious in its assessment.

“In order to demonstrate that it is credible, the EBA would need to show that the number of bank failures is significant, without being substantial,” the source was quoted as saying. “A number in the teens is about right.”

The process still has the appearance of being manipulated given the nature of the comments, but in light of last year’s fiasco, there could be a degree of method in the madness. Besides, no one is buying the old “the banks are all right line” line any how, so by finding a significant number as being at risk â€" but not too many â€" this may actually show investors that authorities are indeed serious this time.

Final results are due in a couple of weeks at which point we’ll see once and for all how the EBA intends to deal with the bank solvency question.

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Emerging Market Currencies Brace for Correction

“It was the spring of hope, it was the winter of despair,” begins Charles Dickens’ The Tale of Two Cities. In 2011, the winter of despair was followed by the spring of uncertainty. Due to the earthquake/tsunami in Japan, the continued tribulations of Greece, rising commodity prices, and growing concern over the global economic recovery, volatility in the forex markets has risen, and investors are unclear as to how to proceed. For now at least, they are responding by dumping emerging market currencies.

As you can see from the chart above (which shows a cross-section of emerging market forex), most currencies peaked in the beginning of May and have since sold-off significantly. If not for the rally that started off the year, all emerging market currencies would probably be down for the year-to-date, and in fact many of them are anyway. Still, the returns for even the top performers are much less spectacular than in 2009 and 2010. Similarly, the MSCI Emerging Markets Stock Index is down 3.5% in the YTD, and the JP Morgan Emerging Market Bond Index (EMBI+) has risen 4.5% (which is reflects declining growth forecasts as much as perceptions of increasing creditworthiness).

There are a couple of factors that are driving this ebbing of sentiment. First of all, risk appetite is waning. Over the last couple months, every flareup in the eurozone debt crisis coincided with a sell-off in emerging markets. According to the Wall Street Journal, “Central and eastern European currencies that are seen as being most vulnerable to financial turmoil in the euro zone have underperformed.” Economies further afield, such as Turkey and Russia, have also experienced weakness in their respective currencies. Some analysts believe that because emerging economies are generally more fiscally sound than their fundamental counterparts, that they are inherently less risky. Unfortunately, while this proposition makes theoretical sense, you can be assured that a default by a member of the eurozone will trigger a mass exodus into safe havens â€" NOT into emerging markets.

While emerging market Asia and South America is somewhat insulated from eurozone fiscal problems. On the other hand, they remain vulnerable to an economic slowdown in China and to rising inflation. Emerging market central banks have avoided making significant interest rate hikes (hence, rising bond prices) â€" for fear of inviting further capital inflow and stoking currency appreciation â€" and the result has been rising price inflation. You can see from the chart above that the darkest areas (symbolizing higher inflation) are all located in emerging economic regions. While high inflation is not inherently problematic, it is not difficult to conceive of a downward spiral into hyperinflation. Again, a sudden bout of monetary instability would send investors rushing to the exits.

While most analysts (myself included) remain bullish on emerging markets over the long-term, many are laying off in the short-term. “RBC emerging market strategist Nick Chamie says his team has recommended ‘defensive posturing’ to clients since May 5 and isn’t recommending new bullish emerging currency bets right now….HSBC said Thursday that it isn’t recommending outright short positions on emerging market currencies to clients but suggested a more ‘cautious’ and selective approach in making currency bets.” This phenomenon will be exacerbated by the fact that market activity typically slows down in the summer chart above courtesy of Forex Magnates) as traders go on vacation. With less liquidity and an inability to constantly monitor one’s portfolio, traders will be loathe to take on risky positions.

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One Last Hurdle?

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By Mike Conlon | June 27, 2011

This week will hopefully put an end to this round of the Greek debt crisis on Wednesday, when it is expected that Greece will vote to accept the austerity measures agreed to in principle last week. However, there is still some risk that this is not a done deal until it actually passes, despite the confidence vote last week. If accepted, then they will receive the bailout money early next week.

One of the other forces putting pressure on the markets is the end of QE2 and the accompanying de-leveraging. Risk assets have been moving lower as Dollar strength due to both risk aversion and a natural reversion to mean take place. Debate here in the US over the raising of the debt ceiling is likely to drag out all summer, which could have an impact of interest rates if this becomes a political showdown.

This week will bring UK GDP figures tomorrow which may show a stagflationary environment if they come in lower than expected. Business sentiment has picked up though which means that expectations are improving.

In New Zealand, trade surplus figures came in lower than expected, which combined with a little unwinding of carry trades has pressured the Kiwi lower.

So the market is starting the morning flat to slightly higher, with oil prices lower to $90.50 and gold just above $1500. Personal consumption data is due out later this morning but is likely to show declines.

In the forex market:

Aussie (AUD): The Aussie is mostly lower as the de-leveraging of risk assets is causing some selling. There’s not a lot of news this week out of Australia so expect the Aussie to trade on risk themes.

Kiwi (NZD): The Kiwi is lower across the board after trade surplus figures came in lower than expected, coming in at 605M vs. an expected 1000M on lower exports and higher imports.

Loonie (CAD): The Loonie is lower as oil prices have retreated to $90.50 on the news of the release of the strategic oil reserve (SPR). Wednesday will be the release of CPI data in Canada which is expected to come in at 3.3%, which is a tad high so anything higher may increase rate-hike expectations. GDP figures are due out on Thursday. (Click chart to enlarge)

Euro (EUR): The big news this week for the Euro zone is the Greek vote on austerity but CPI data is due out on Wednesday, followed by the German unemployment report of Thursday. The Euro is mostly higher this morning to start the day.

Pound (GBP): The Pound is mixed this morning as a business barometer index came in better than expected, posting its highest reading in nearly a year. Expectations of rate hikes remain on the table, but tomorrow’s GDP report could show a stagflationary environment if worse than expected. (Click chart to enlarge)

Swissie (CHF): The Swissie is mostly lower as the safe haven play is muted despite the general de-leveraging in the market.

Dollar (USD): The Dollar is showing some strength today despite personal income and spending figures that came in slightly lower than expected. With the removal of the guiding hand of QE2, it will be interesting to see how the correlations in the market behave.

Yen (JPY): The Yen is weaker across the board as Dollar strength has caused a shift in money flows for carry trades.

The general theme in the marketplace is that interest rates need to move higher to combat global inflation according to the BIS (Bank of International Settlements). Should rates begin to rise, there could be a deflationary backlash as the cost of money increases.

Without the artificial hand of the Fed keeping US rates low, our debt problem may become worse if the market demands higher interest. The debt ceiling debate may induce further volatility as the market loses confidence that we can get our act together.

While the debt ceiling will likely be raised, expect high drama as the politics interfere with the economics. Also bear in mind that the Greek debt crisis may be done deal, but isn’t over until it’s over. Fears of contagion to the other PIIGS countries could be a problem if rates continue to rise or if someone else decides they want another bailout as well.

To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!

To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!

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US Consumer Spending Slows in May

US consumers tightened the purse strings in May in response to weaker employment and rising inflation. Purchases were essentially flat for the month after a 0.3 percent gain in April.

“The quarter is going to be very slow,” said Christopher Low, the chief economist at FTN Financial in New York who correctly forecast household spending. “The biggest explanation for that is gas prices, so obviously the fact that oil has fallen quite a bit in the last couple of weeks is a really good thing. Relief just in time.”

Source: Bloomberg

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Market Rollercoaster!

« Fed Falters! | Home

By Mike Conlon | June 24, 2011

Wow, what a wild ride yesterday was in the global market place! We had a bit of everything: gloom and doom, government manipulation, weakening economic data, crisis resolution, fear, anger, and hope. Where else can you get this type of excitement?Here’s a quick recap of what happened over the past few days: Dollar was strengthening after the FOMC said that QE2 would end, taking down global stocks and commodities. The EIA then said that the US would release 30 million barrels of oil from our strategic reserve, driving oil prices lower and sending correlated markets such as stocks lower. Later in the day it was announced that Greece had accepted a 5-year austerity plan and will be receiving money form the EU and IMF as part of a new bailout (though the actual vote is next week), so the markets rebounded only to finish slightly lower.

Frankly, I am outraged by the oil thing but not surprised. While yes I am in favor of lower oil (gasoline) prices, I am not in favor of achieving them by weakening our emergency reserves. What happens if a situation arises where we need that oil? It’s like raiding your emergency savings account to go on vacation. Politics at its worse.

Meanwhile in the Euro zone, it looks like the Greece austerity deal will go through next week, despite the protestations of nearly 75% of Greek citizens polled.

Here in the US, durable goods orders came in better than expected, posting a gain of 1.9% vs. an expectation of 1.5%, which is a welcome better-than-expected data point.

So the markets are starting the day in mild risk taking mode with stocks set to open higher, though oil prices are lower.

In the forex market:

Aussie (AUD): The Aussie is higher across the board after Asian stocks were higher overnight on risk taking after yesterday’s comeback in US stocks.

Kiwi (NZD): The Kiwi is strengthening as risk trades are being re-established after the Greek debt crisis announcement.

Loonie (CAD): The Loonie is mixed as risk appetite and lower oil prices fight to see which aspect will dominate trading today.

Euro (EUR): The Euro is off of its previous highs and has pulled back some as they are not out of the woods yet. While yesterday’s news of the agreement is extremely positive, the vote hasn’t actually taken place yet. German IFO expectations figures came in better than expected. (Click chart to enlarge)

Pound (GBP): The Pound is mostly lower as rate expectations for the UK have been lowered and there is considerable concern about the exposure that UK banks have to the Euro zone.

Swissie (CHF): The franc is stronger across the board today despite the mild risk taking in the markets to start the day. The safe haven aspects of the Swissie may still be desirable until after the Greek austerity plan is officially voted on and accepted. (Click chart to enlarge)

Dollar (USD): The Dollar is weakening on slight risk appetite after US durable goods orders came in better than expected. It will be interesting to see if the Dollar will continue to weaken without the aid of the Fed, or if it can co-exist in higher stock market environment if the correlations break down.

Yen (JPY): The Yen is showing some surprising strength despite the higher Asian stock market returns overnight. While there is still risk in the marketplace that appears to be coming from the EU and UK specifically, cautious buying persists.

Wild market action indeed! Whether you agree with what is going on in the marketplace or not is of no consequence. What is important is that you have a plan to protect yourself from unexpected events that can cause major volatility.

If summer volume decreases, then volatility could definitely pick up. This is exciting for forex traders because volatility equals potential. There are still many different global events that will carry trading well into the next few months, and there is still great risk and opportunity.

However, this doesn’t change this mess that is known as the US economy. It appears as though election cycle politics are in full-effect so it is doubtful that anything meaningful will get done. The debate over the US debt ceiling may come into play as ideology gets left behind in favor of pragmatism, but don’t expect wholesale changes overnight.

The business climate is still an abomination, with the new healthcare bill, regulations, potential for tax increases, and a reluctance to reduce the size of government and debt all factoring in to keep businesses from hiring. The fact that there is actually debate over the fact that the current path we are on is disastrous is both scary and sad.

So invest your money in countries on the right path, and stay away form those destined for doom. The best way I know of to do this is through the forex market!

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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Dallas Fed Bank President Sees Improvement in Second Half

In an interview published Friday morning, Federal Reserve Bank of Dallas President Richard Fisher said he believes the economy will grow at a faster rate in the second half of the year. Fisher acknowledged that economic activity will remain soft when compared to typical growth levels, but he expected to see the U.S. economy improve on the previous six months.

Unemployment

The major hurdle according to Fisher remains unemployment and Fisher sees no solution that will speed up the process. “It’s a slow recovery”, said Fisher when describing the job creation rate, “and it’s going to continue to be slow.” It may also occasionally shift into reverse.

Look at May’s poor showing for example. The Non-Farm Payroll for May indicated a miserly 54,000 jobs were created for the month. This weak showing fell considerably short of the 161,000 new jobs predicted prior to the report and underscores just how volatile the employment market remains. Expert predictions are usually pretty close to the actual result but this call was off the mark by nearly three hundred percent!

The outcome was so poor in fact, the unemployment rate actually moved higher in May as the number of new positions created fell woefully short of the jobs that were lost. As a result, the official unemployment edged higher to 9.1 percent from 9.0 percent the previous month.

Interest Rates and Stimulus Spending

On the question of raising interest rates Fisher held firm to the Fed’s message of keeping rates at the current record low for an “extended period”. Fisher also provided little insight into plans for or against further quantitative easing.

“No final decision has been made,” noted Fisher when asked if the Fed would engage on a third round of asset purchases. Earlier this week the FOMC confirmed that it would continue to reinvest earnings on maturating securities already held by the Fed but would not â€" for now at least â€" be adding to the inventory through a direct purchase program.

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NO QE3: What are the Implications for the Dollar?

The verdict is nearly in; there will be no QE3. The second round of quantitative easing (“QE2”) will expire at the end of this month, and while it will not be unwound for quite some time, the Fed has indicated that it will not be followed by yet another round. The question on the minds of forex traders, of course, is what does this mean for the Dollar?

In his most recent press conference, Ben Bernanke, himself, indicated that QE3 was unlikely. According to a survey conducted by Bloomberg News, the majority of FX analysts (65%) believe him. Simply, the circumstances don’t support further easing. To be sure, the unemployment rate remains high, and the economy is teetering on the verge of double-dip recession. However, the last two rounds did little to address either of these problems, and companies have hoarded cash rather than investing in new plant and workers.

Interest rates are still hovering around record lows, and there isn’t anything to be gained from trying to lower them further. Besides, given that inflation is now above 3% â€" due to an explosion in good and energy prices â€" QE3 would simply be too risky. Economist Ken Goldstein summarized the situation as follows: “We will come to the end of QE2 and largely we mark about how little happened when it ended and that’s also an argument about why there may not be persuasive argument to do a QE3.”

On the other hand, there are some analysts who think that QE3 is inevitable (29%). PIMCO’s Bill Gross, manager of the world’s biggest bond fund, recently indicated that, “Next Jackson Hole in August will likely hint at QE3/interest rate caps.” (Personally, I think that he’s probably just bitter that his forecast of a decline in Treasury Bond prices hasn’t materialized). One columnist wrote that the Fed’s arm will be twisted by the ongoing collapse of the housing market, while others have argued that the recent decline in the S&P 500 will spur the Fed into action. Most of us, however, believe that the Fed will adopt a wait-and-see approach before ultimately conceding that more easing is necessary.

For now at least, then, the prevailing assumption is that there will not be a QE3. As for how forex markets have digested this news, they have taken it in stride. The Dollar is now holding its value, and as I wrote in a previous post, it may even have bottomed out. Of course, it doesn’t hurt that the Euro is being punished by another flare-up in the sovereign debt crisis and investors are getting nervous about bubbles in emerging market currencies, all of which provide support for the dollar.

The fact that QE2 will soon end without having triggered financial apocalypse or hyperinflation â€" as some cassandras initially predicted â€" is something that is worth nothing. Of course, the proceeds of QE1 and QE2 will be recycled indefinitely into the markets, and forex investors can’t completely put quantitative easing behind them. Still, that there won’t be any more additional cash injected into commodities markets and emerging economy asset markets means that one of the main sources of downward pressure on the dollar has been eliminated.

Ironically, it is possible that the unveiling of QE3 could actually cause the dollar to rally. The reason is that there is still a tremendous amount of uncertainty in the markets, which provides the dollar with some safe haven demand. If the Fed were to concede that all is not well on the economic front and respond by more money printing, it could drive some safe haven flows into the US, even to the extent that it would overwhelm outflows driven by concerns over inflation.

Personally, I think the dollar will continue to hold its value, and perhaps even appreciate slightly in the near-term, as forex markets dither over the way forward.

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Swiss Franc is the Only Safe Haven Currency

According to conventional market wisdom, there are three safe haven currencies: the Swiss Franc, Japanese Yen, and US Dollar. It is to these currencies that investors flock whenever there is a crisis, or merely an outbreak of uncertainty, and for much of the period following the collapse of Lehman Brothers, the three were closely correlated. As you can see from the chart below, however, one of these currencies has begun to distinguish itself from the other two, leading some to argue that there is now only one true safe haven currency: the Swiss Franc.

What’s not to like about the Franc? It boasts a strong economy, low inflation, and low unemployment. Unlike the US and Japan, Switzerland is not plagued by a high national debt and perennial budget deficits. Its monetary policy has been extremely conservative: no quantitative easing, asset-purchases, or any other money printing programs with euphemistic names.

Ironically, the only thing that makes investors nervous about the franc is that it has already risen so much. Remember when it reached the milestone of parity against the dollar in 2010? Since then, it has appreciated by an additional 20%, and seems to breach a new record on an almost weekly basis. The same goes for the CHF/EUR and CHF/JPY. The President of Switzerland’s export association is expecting further gains: “Parity is a realistic scenario. Given the indebtedness of the eurozone and the strong attraction of the franc, the euro is likely to continue to lose value.”

Given that Swiss exports have surged in spite of (or even because of) the rising Franc, however, he has very little to worry about at the moment. As you can see fromt he graphic below (courtesy of the Financial Times), the balance of trade continues to expand, and has exploded in a handful of key sectors. To be sure, economists expect that this situation will eventually correct itself and are already moving to revise downward 2011 and 2012 GDP growth estimates. Then again, they made the same erroneous predictions in 2010.

The main variable in the Swiss Franc is the Swiss National Bank (SNB). Having booked a loss of CHF 20 Billion from failed intervention in 2010, the SNB is not in a position to make the same mistake again. In fact, SNB President Philipp Hildebrand has not even stooped to verbal intervention this time around, undoubtedly cognizant of the fact that he has very little credibility in forex markets.

At the same time, the SNB is not in any hurry to raise interest rates, lest it stoke further speculative interest in the Franc. Its June meeting came and went without any indication of when it might tighten. Interest rate futures currently reflect an expectation that the first rate hike won’t come until March 2012. Thus, the downside of holding the Franc is that it will continue to pay a negative real interest rate. The only upside, then, is the possibility of further appreciation. Fortunately, the SNB is unlikely to stop the Franc from rising, since it serves the same monetary end as higher interest rates. In other words, a more valuable Franc serves as a direct check on inflation because it lowers the cost of commodity imports and should (eventually) soften demand for Swiss exports.

It is possible that the Swiss Franc will suffer a correction at some point, if only because it rose by such a large margin in such a short period of time. On the other hand, given that its economy has proved its ability to withstand the Franc’s appreciation, it’s no wonder that investors continue to bet on its rise.

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Market Rollercoaster!

« Fed Falters! | Home

By Mike Conlon | June 24, 2011

Wow, what a wild ride yesterday was in the global market place! We had a bit of everything: gloom and doom, government manipulation, weakening economic data, crisis resolution, fear, anger, and hope. Where else can you get this type of excitement?Here’s a quick recap of what happened over the past few days: Dollar was strengthening after the FOMC said that QE2 would end, taking down global stocks and commodities. The EIA then said that the US would release 30 million barrels of oil from our strategic reserve, driving oil prices lower and sending correlated markets such as stocks lower. Later in the day it was announced that Greece had accepted a 5-year austerity plan and will be receiving money form the EU and IMF as part of a new bailout (though the actual vote is next week), so the markets rebounded only to finish slightly lower.

Frankly, I am outraged by the oil thing but not surprised. While yes I am in favor of lower oil (gasoline) prices, I am not in favor of achieving them by weakening our emergency reserves. What happens if a situation arises where we need that oil? It’s like raiding your emergency savings account to go on vacation. Politics at its worse.

Meanwhile in the Euro zone, it looks like the Greece austerity deal will go through next week, despite the protestations of nearly 75% of Greek citizens polled.

Here in the US, durable goods orders came in better than expected, posting a gain of 1.9% vs. an expectation of 1.5%, which is a welcome better-than-expected data point.

So the markets are starting the day in mild risk taking mode with stocks set to open higher, though oil prices are lower.

In the forex market:

Aussie (AUD): The Aussie is higher across the board after Asian stocks were higher overnight on risk taking after yesterday’s comeback in US stocks.

Kiwi (NZD): The Kiwi is strengthening as risk trades are being re-established after the Greek debt crisis announcement.

Loonie (CAD): The Loonie is mixed as risk appetite and lower oil prices fight to see which aspect will dominate trading today.

Euro (EUR): The Euro is off of its previous highs and has pulled back some as they are not out of the woods yet. While yesterday’s news of the agreement is extremely positive, the vote hasn’t actually taken place yet. German IFO expectations figures came in better than expected. (Click chart to enlarge)

Pound (GBP): The Pound is mostly lower as rate expectations for the UK have been lowered and there is considerable concern about the exposure that UK banks have to the Euro zone.

Swissie (CHF): The franc is stronger across the board today despite the mild risk taking in the markets to start the day. The safe haven aspects of the Swissie may still be desirable until after the Greek austerity plan is officially voted on and accepted. (Click chart to enlarge)

Dollar (USD): The Dollar is weakening on slight risk appetite after US durable goods orders came in better than expected. It will be interesting to see if the Dollar will continue to weaken without the aid of the Fed, or if it can co-exist in higher stock market environment if the correlations break down.

Yen (JPY): The Yen is showing some surprising strength despite the higher Asian stock market returns overnight. While there is still risk in the marketplace that appears to be coming from the EU and UK specifically, cautious buying persists.

Wild market action indeed! Whether you agree with what is going on in the marketplace or not is of no consequence. What is important is that you have a plan to protect yourself from unexpected events that can cause major volatility.

If summer volume decreases, then volatility could definitely pick up. This is exciting for forex traders because volatility equals potential. There are still many different global events that will carry trading well into the next few months, and there is still great risk and opportunity.

However, this doesn’t change this mess that is known as the US economy. It appears as though election cycle politics are in full-effect so it is doubtful that anything meaningful will get done. The debate over the US debt ceiling may come into play as ideology gets left behind in favor of pragmatism, but don’t expect wholesale changes overnight.

The business climate is still an abomination, with the new healthcare bill, regulations, potential for tax increases, and a reluctance to reduce the size of government and debt all factoring in to keep businesses from hiring. The fact that there is actually debate over the fact that the current path we are on is disastrous is both scary and sad.

So invest your money in countries on the right path, and stay away form those destined for doom. The best way I know of to do this is through the forex market!

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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Dallas Fed Bank President Sees Improvement in Second Half

In an interview published Friday morning, Federal Reserve Bank of Dallas President Richard Fisher said he believes the economy will grow at a faster rate in the second half of the year. Fisher acknowledged that economic activity will remain soft when compared to typical growth levels, but he expected to see the U.S. economy improve on the previous six months.

Unemployment

The major hurdle according to Fisher remains unemployment and Fisher sees no solution that will speed up the process. “It’s a slow recovery”, said Fisher when describing the job creation rate, “and it’s going to continue to be slow.” It may also occasionally shift into reverse.

Look at May’s poor showing for example. The Non-Farm Payroll for May indicated a miserly 54,000 jobs were created for the month. This weak showing fell considerably short of the 161,000 new jobs predicted prior to the report and underscores just how volatile the employment market remains. Expert predictions are usually pretty close to the actual result but this call was off the mark by nearly three hundred percent!

The outcome was so poor in fact, the unemployment rate actually moved higher in May as the number of new positions created fell woefully short of the jobs that were lost. As a result, the official unemployment edged higher to 9.1 percent from 9.0 percent the previous month.

Interest Rates and Stimulus Spending

On the question of raising interest rates Fisher held firm to the Fed’s message of keeping rates at the current record low for an “extended period”. Fisher also provided little insight into plans for or against further quantitative easing.

“No final decision has been made,” noted Fisher when asked if the Fed would engage on a third round of asset purchases. Earlier this week the FOMC confirmed that it would continue to reinvest earnings on maturating securities already held by the Fed but would not â€" for now at least â€" be adding to the inventory through a direct purchase program.

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How Confident Are You?

« No Easy Solution! | Home

By Mike Conlon | June 21, 2011

That’s the question that needs to be answered today as the current Greek government faces a confidence vote today, where the results are to be released at 5pm EST (midnight Greece time, probably intended to mitigate protests). This is coming after the cabinet was changed last week, with the intention to provide more unity.

An affirmation of the current government will be seen as positive as it would then appear likely that they would vote for the further austerity required to receive the additional funding from the EU and the IMF. The markets appear confident that this will happen, as risk appetite has increased with global stocks and commodities higher across the board to start the morning.

Despite the risk-taking in the market, the Aussie is lower after the release of the RBA rate policy meeting minutes which showed that they were comfortable with current rates as the Euro debt crisis has the ability to get worse.

In the UK, a BOE policy-maker came out ahead of the release of the BOE minutes tomorrow and said that further easing, and not tightening, may be the next move. Tomorrow’s release will confirm or deny, and it must be remembered that inflation in the UK is more than twice the BOE target rate.

Lastly, retail sales figures in Canada and existing home sales in the US round out the major news expected for the US session.

In the forex market:

Aussie (AUD): The Aussie is mostly lower despite the risk appetite in the market as the RBA minutes revealed that current policy was “prudent” given the state of the Euro debt crisis and despite rising inflation Down Under.

Kiwi (NZD): The Kiwi is responding more favorably to the risk sentiment in the market ahead of this evening’s release of the current account balance figures.

Loonie (CAD): The Loonie is trading higher as oil prices have rebounded ahead of this morning’s release of the retail sales figures and leading indicators. The former is expected to have risen .4%, the latter is expected to have risen .5%. (Click chart to enlarge)

Euro (EUR): The ZEW economic surveys came out earlier this morning and were lower than expected, as confidence is beginning to wane in the EU. However, we can essentially throw the fundamentals out the window as all eyes are on the Greek debt crisis. The markets appear highly confident that the current government will pass the confidence vote, however, it remains to be seen whether they will vote for the additional austerity measures.

Pound (GBP): The Pound is mostly lower after a BOE official suggested that further monetary easing could be the next move and not a tightening to help manage the declining growth prospects of the economy. While inflation is twice the BOE target, the bank may be content to let inflation die on its own, if possible. (Click chart to enlarge)

Swissie (CHF): The Swissie is mixed today as risk appetite has abated this morning, though money flows could pick up as the trading day moves forward.

Dollar (USD): The Dollar is lower across the board as risk themes cause less demand. Existing home sales due out later this morning are expected to be weak, and tomorrow’s FOMC meeting could reduce economic growth forecasts for the remainder of the year.

Yen (JPY): The Yen is mostly lower as carry trades are resumed and the All Industry Activity Index came in lower than expected.

It will be interesting to see how this day shakes out ahead of this Greece confidence vote. When looking at the overall market, I am inclined to sell rallies in risk sentiment as I think we are hardly out of the woods. One of the interesting aspects of this vote today is that the market sees a passing vote of confidence in the same light that Greece will accept whatever austerity measures are put to them.

Frankly in my opinion, Greece is holding the cards. If they don’t consent to the EU demands and default, this could set off a chain reaction throughout the Euro zone. So in that regard, who has more to lose? The Greeks who are already in trouble, or the banks of the Germany and France who could potentially be taken down if contagion causes the Euro to fail.

Seems like a major risk for the Euro, and not the other way around. This situation is far from over, so think twice before you put on that risk!

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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Fitch Warns of Greek, US Debt Default

Fitch Rating said today that a “re-profiling” of Greek debt where investors willingly allow Greece to delay payment on maturing securities would be seen as a default by the ratings agency. This action would further reduce Greece’s credit rating as a result.

Fitch also warned that unless Congress raises the federal government’s borrowing limit by August 2nd, the government will be forced to default on an August 15th coupon payment and Fitch would place the U.S. on watch. Fitch did note however, that it expected the debt ceiling would be raised in time to avoid defaulting.

Source: Reuters

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Japanese Yen In “No Man’s Land”

This, according to a hedge fund manager that has decided to cancel all of his fund’s bearish bets on the Japanese Yen. The reason: the yen is rising, and it’s unclear when â€" or even if â€" the government will intervene to push it back down. Even though the yen’s strength is fundamentally illogical, it seems that investors are growing increasingly wary of betting against it.

As I pointed out in my previous post on the Yen (“Japanese Yen Strength is Illogical, but Does it Matter?“), the yen has actually fallen over the last twelve months, on a correlation weighted basis (though to be fair, it has staged a pretty impressive comeback since the beginning of April). Unfortunately, investors mainly care about how it is performing against a handful of key currencies, namely the US Dollar. Simply, the yen continues to rise against the dollar, and it is unclear when it will stop.

Japanese government analysis has indeed confirmed that “speculators” are behind the strong yen, as the alleged wide-scale repatriation of yen by Japanese insurance companies has yet to materialize. Of course, there isn’t really much doubt: Japan’s economy is contracting, due to decrease in output spurred by the tsunami. In May, it recorded its second largest monthly trade deficit ever.

Meanwhile, interest rates and bond yields are pathetically low, and the Bank of Japan is being urged to expand its asset buying program, which would theoretically result in a devaluation of the yen. As  a result, retail Japanese forex traders (nicknamed “Mrs. Watanabes“) have resumed shorting the Yen as part of a carry trade strategy.

Alas, speculators either don’t share their pessimism or are running out of patience. While everyone continues to assume that the BOJ will intervene if the Yen rises to 80 against the dollar, no one can be sure whether the line in the sand might not be 78 or even 75. At this point, intervention seems to hinge more on politics than on economics, which means predicting it is beyond the scope of this post. In other words, “There is too much uncertainty and volatility in markets right now to make that yen trade appealing.” And sure enough, the most recent Commitments of Traders data shows that speculators have been re-building their yen long positions over the last month.

In the end, the speculators are probably right. The Bank of Japan has intervened twice over the last twelve months, and the impact has always been short-lived. Besides, given that many speculators still remain committed to shorting the yen, it remains extraordinarily vulnerable to the kind of short squeeze that sent it soaring 5% in a single session en route to the record high it touched in March.

I’m personally still bearish on the yen, but I also think it’s too risky to short it against the dollar, which seems to be declining for its own reasons. As you can see from the chart below, the yen has fallen against virtually every other major currency. Yen shorters, then, might be wise to avoid the dollar altogether and focus instead on any number of other currencies.

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Japanese Yen In “No Man’s Land”

This, according to a hedge fund manager that has decided to cancel all of his fund’s bearish bets on the Japanese Yen. The reason: the yen is rising, and it’s unclear when â€" or even if â€" the government will intervene to push it back down. Even though the yen’s strength is fundamentally illogical, it seems that investors are growing increasingly wary of betting against it.

As I pointed out in my previous post on the Yen (“Japanese Yen Strength is Illogical, but Does it Matter?“), the yen has actually fallen over the last twelve months, on a correlation weighted basis (though to be fair, it has staged a pretty impressive comeback since the beginning of April). Unfortunately, investors mainly care about how it is performing against a handful of key currencies, namely the US Dollar. Simply, the yen continues to rise against the dollar, and it is unclear when it will stop.

Japanese government analysis has indeed confirmed that “speculators” are behind the strong yen, as the alleged wide-scale repatriation of yen by Japanese insurance companies has yet to materialize. Of course, there isn’t really much doubt: Japan’s economy is contracting, due to decrease in output spurred by the tsunami. In May, it recorded its second largest monthly trade deficit ever.

Meanwhile, interest rates and bond yields are pathetically low, and the Bank of Japan is being urged to expand its asset buying program, which would theoretically result in a devaluation of the yen. As  a result, retail Japanese forex traders (nicknamed “Mrs. Watanabes“) have resumed shorting the Yen as part of a carry trade strategy.

Alas, speculators either don’t share their pessimism or are running out of patience. While everyone continues to assume that the BOJ will intervene if the Yen rises to 80 against the dollar, no one can be sure whether the line in the sand might not be 78 or even 75. At this point, intervention seems to hinge more on politics than on economics, which means predicting it is beyond the scope of this post. In other words, “There is too much uncertainty and volatility in markets right now to make that yen trade appealing.” And sure enough, the most recent Commitments of Traders data shows that speculators have been re-building their yen long positions over the last month.

In the end, the speculators are probably right. The Bank of Japan has intervened twice over the last twelve months, and the impact has always been short-lived. Besides, given that many speculators still remain committed to shorting the yen, it remains extraordinarily vulnerable to the kind of short squeeze that sent it soaring 5% in a single session en route to the record high it touched in March.

I’m personally still bearish on the yen, but I also think it’s too risky to short it against the dollar, which seems to be declining for its own reasons. As you can see from the chart below, the yen has fallen against virtually every other major currency. Yen shorters, then, might be wise to avoid the dollar altogether and focus instead on any number of other currencies.

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Bailout Expected But Greece Required to Cut Spending, Sell Assets

While latest discussions have not yet resulted in an agreement to provide Greece with a bailout to avoid default, it is expected that the Eurozone finance ministers will ultimately agree to terms. However, Greece will be forced to agree to further cut spending and to sell state property in exchange for the emergency funding.

Protests have increased in intensity in the days leading up to the meetings that forced the government to shuffle the cabinet. The government also faced a confidence vote Tuesday that could see the government toppled.

Source: Canadian Press

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No Easy Solution!

« Crisis Averted? | Home

By Mike Conlon | June 20, 2011

Just as quickly as the “breakthrough” was reported in the Euro zone last Friday, we wake up to the reality that indeed the complicated process of handling the Greek debt crisis is far from a done deal. This morning the global markets have opened lower as risk aversion is pervasive.

One of the key issues affecting this crisis is the confidence vote the current Greek government is facing tomorrow, and the ECB’s concerns that Greece won’t be able to enact the austerity measures that it needs to in order to receive the next bailout payment.This is leading to a situation where people are starting to realize the enormity of the problem and the near impossibility that this will end well. So the ECB is taking a “wait and see approach” to determine if they are just throwing good money after bad at Greece.

IN the UK, home asking prices came in higher than expected, showing signs that the inflation they have been seeing may be more than just higher food and energy prices that everyone around the globe has been seeing. Wednesday’s release of the BOE rate policy meeting minutes will show if they are becoming more concerned about their inflation and more importantly stagflation.

In Japan, exports came in worse than expected, though this should not be a surprise as it has become difficult to gauge the economic data as result of the natural disaster.

So stocks and commodities are lower to start the day, with Dollar strength leading the way.

In the forex market:

Aussie (AUD): The Aussie is lower across the board on risk aversion and the minutes from the RBA rate policy meeting will be released tomorrow. Should commodities prices continue to fall throughout the summer, then inflation may become less of a concern.

Kiwi (NZD): The Kiwi is slower as well after manufacturing activity came in slightly lower than expected. With Asian stocks lower overnight, demand for the Kiwi has lessened.

Loonie (CAD): The Loonie is mixed despite the risk aversion in the markets and oil trading back to a 91 handle. Overnight weakness in Asia and Europe have made the Loonie a more “desirable” commodity currency. Retail sales figures are due out tomorrow.

Euro (EUR): Meetings galore this week for EU Finance Ministers and the confidence vote in Greece tomorrow dominate the headlines. Rumors of a potential downgrade to Italy’s debt also means that contagion is a major issue and that they are running out of time to find a solution. (Click chart to enlarge)

Pound (GBP): The Pound is somewhat higher despite the risk themes as the Rightmove Home Index came in showing that asking prices for homes have risen. This means that inflation may be broader than had been previously thought, and the release of the BOE rate policy meeting minutes on Wednesday may confirm those fears.

Swissie (CHF): The Swissie is stronger across the board as its safe haven qualities are in demand by the markets. Trade balance figures are due out on Thursday which may show the effects of the strength of the franc on the Swiss economy.

Dollar (USD): The Dollar is mostly higher on risk aversion to start the morning. Wednesday’s FOMC meeting will let us know where the Fed stands on the economy. Existing home sales are due out tomorrow and are expected to show declines.

Yen (JPY): The Yen is somewhat mixed despite the risk aversion to start the day as Japanese exports came in lower than expected. The market was expected a decline of 8.4, but the figure came in showing a decline of 10.3.  (Click chart to enlarge)

Right now the markets are dominated by the Greek debt crisis and will continue to be until there is further clarity in the situation. While no one wants to see a Greek default, everyday that goes by brings us closer to that reality.

The Greek people know that this is not a bailout for them, but rather for the banks that lent their government money. So it is no surprise that they have taken to the streets to protest. Tomorrow’s confidence vote will be an important decision, for if the ECB and the IMF are not convinced that Greece will accept the austerity measures, then default may be imminent.

I’m surprised to see the Euro rally back to 1.43 this morning and to actually have moved higher, as the markets may be discounting the gravity of the situation.

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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Crisis Averted?

« Will Greece Default? | Home

By Mike Conlon | June 17, 2011

Breaking news this morning is the announcement that there has been a major “breakthrough” in the Greek debt crisis. Germany has apparently agreed to another rescue package and it is rumored that the IMF forced their hand in the matter.

This is seemingly good news for the Euro today, as it is continuing yesterday’s gains. However, I am not comfortable saying that we are out the woods just yet, and I still believe this poses a major risk in the marketplace. Yet so far this morning, markets are in risk-taking mode, though we will see if this lasts heading into the weekend.

There is very little news out today in the way of economic data, so the markets are focus solely on this crisis. The US leading indicators are due out later this morning and are expected to show a gain of .3%. This sometimes can be a predictor of future growth so they market may pay special attention to it with little else to focus on, other than the UM consumer confidence survey.

It is possible that news may trickle out throughout the day, so be aware of anything that could cause erratic market behavior. Not to mention that today is “quadruple witching” where the expiration of multiple products occurs.

US stock futures are trading higher, yet oil and gold are lower which could be part of a correlation shift that may play out over the summer.

In the forex market:

Aussie (AUD): The Aussie is mostly higher on risk appetite this morning as the market likes what it is hearing from the Euro zone regarding the Greek debt crisis.

Kiwi (NZD): The Kiwi is moving similarly to the Aussie after having been sold off earlier in the week due to the risk themes in the market.

Loonie (CAD): The Loonie is also somewhat higher, though wholesale sales are expected to come in lower than last month. Lower oil prices are muting Loonie gains this morning as oil is trading back to a 93 handle. (Click chart to enlarge)

Euro (EUR): The Euro is trading higher despite worsening trade balance figures because of the apparent news out of the Euro zone. However, I must tell you that this is not a solution to the problem, but merely another band-aid to buy some more time. EU leaders have to come up with a credible plan otherwise this situation is going to continue to hang over the global economy. (Click chart to enlarge)

Pound (GBP): The Pound is mixed today as this week’s data has showed that the UK economy is slowing.

Dollar (USD):  The Dollar is mostly lower on risk taking ahead of this morning’s leading indicators and consumer confidence reports.

Swissie (CHF): The franc is weaker across the board as safe havens are down today as investors seek yield.

Yen (JPY): The Yen is showing some strength today despite the risk appetite in the market after the Asian stocks were lower overnight.

I don’t want to be a buzz kill here but this Greek and more importantly Euro debt crisis is far from over. While today’s announcement of a “breakthrough” by France’s Sarkozy has the markets feeling a sense of relief, the devil is in the details as they say.

This has all of the trappings of just another short-term fix to a long-term, structural problem. If Euro leaders think that they can now go on holiday because they threw some money at the problem, they will have done the global economy a disservice.

I still believe there is major risk in the market and a proper, long-term solution is the only medicine that can cure what ails them. However what that entails is anyone’s guess at this point, as people far smarter than me struggle to find an answer.

So I’m going to flatten my positions at the end of the day, as the risk manager in me tells me that this may not be a done deal just yet!

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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Topics: What To Look At In The Market |

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Forex Week in Review June 12-17

Markets are ending the week on firmer footing. The meeting between Merkel and Sarkozy and the news of a new Greek cabinet is supporting the EUR. The German Chancellor has agreed to compromise and work with the ECB on a debt plan for Greece. Supposedly, they will use a ‘Vienna-style’ voluntary debt rollover as the framework. The Greek PM Papandreou has formed a new cabinet, setting the stage for a confidence vote in parliament next week. Market uncertainty remains. No one knows the depth and scope for ‘the’ rollover agreement. The European finance ministers resume their talks on the second bailout package for Greece this Sunday.

“When you are insolvent you do not solve things with new and larger loans”-Yanis Varoufakis

Below are some of the highlights of the week:

EUROPE

• Italian IP was strong in April with a +1.0%, m/m rise, well above the +0.2% expected and pushed the annual growth rate of industrial production to +3.7%, y/y from +3.4%.
• UK headline inflation was stable at +4.5%, y/y in May. Core inflation subsided to +3.3%, reversing the exceptional spike to +3.7% last month. Transport services, the main cause, fell -5%.
• S&P’s added to Greece’s woes, cutting its long term sovereign rating three notches to CCC, citing, a ‘significantly higher likelihood of one or more defaults’.
• UK RICS house prices fell to -28 in May from -21. Analysts note that weak data and softer inflation continue to argue against a hawkish turn in the BoE policy stance.
• Swedish inflation stayed stable at +3.3%, y/y in May, while core inflation moderated a touch to +1.7%, y/y from +1.8%. Market believes its in line with Riksbank’s expectations and that they will continue to raise interest rates.
• Tuesday, EU finance ministers ended their first meeting with little evidence of progress in agreeing on a framework for private sector involvement in the Greek rescue. Meet again this Sunday.
• Euro-zone IP grew +0.2%, m/m vs. expectations for a -0.2% decline. March was revised upward to flat from the -0.2% m/m fall. Strength was driven by Italy, Finland and Luxembourg, offsetting the -0.6% m/m fall in Germany and the -0.3% fall in France.
• UK labor report disappointed with a spike in jobless claims to almost +20k, above the +6k consensus. Weekly earnings were weak at +1.8%, y/y, down from +2.3%. No reason for the BoE to turn less dovish.
• SNB kept rates on hold, maintaining a relatively dovish tone in the policy statement. Growth forecast unchanged at +2%, y/y. Inflation forecast for 2013 was revised lower to +1.7%, y/y, from +2.0%. The franc strength is the reason behind lower inflation forecasts from 2012.
• UK retail sales ex-autos fell -1.6%, m/m, in May with the year-on-year growth rate now reduced to 0%. The weak wages and money growth reported earlier are likely to pull down inflation.
• Euro-zone final CPI for May was unrevised from the flash estimate of +2.7%,y/y. Core inflation also moderated slightly to +1.5%, y/y, from +1.6%. Lower energy inflation was the main reason behind the softer headline.

Americas

• US Retail sales (-0.2%) fell last month for the first time in eleven-months as receipts at auto dealerships dropped sharply, but the decline was less than expected (-0.6%), and provided investors some optimism of a pickup in economic activity in the second half of the year.
• US CPI surprised to the upside with a +0.2% rise in the headline and a more worrying +0.3% rise in the core (ex-food and energy). This is the strongest monthly rise in nearly three-years, making it more difficult for helicopter Ben to implement QE3. Analysts’ have noted that the y/y core-CPI has accelerated to +1.5% from +1.3%.
• An ugly Empire State manufacturing print (-7.79) can be added to the long list of softer US data. This is the first negative headline in eight-months and a complete surprise to the market who had expected the index to edge higher to 13.5.
• US TIC data showed that net foreign purchases of long term securities rose from +$24b to +$30.6b last month. China has added $7.6b to its net-treasury holdings.
• CAD manufacturers saw sales slip -1.3% in April, reversing much of the previous month’s gains as the Japan earthquake cut off supplies to the auto industry.
• The Philly Fed factory index came in at a miserable -7.7 this month, mirroring the ugly Empire print and calls into question the durability of the US recovery. It was the weakest headline reading in two-years.
• US weekly claims were a tad better, declining -16k to +414k, again above that psychological +400k barrier. The headline print was aided by an easy seasonal factor.
• US May house starts rose + 3.5% to +560k. Giving a better performance was US May permits, rising +8.7% to +612k.
• US current account deficit rose in the 1st Q (-$119b vs. -$112b), dragged higher by rising imports. Most of the increase in imports came from gains in industrial supplies such as petroleum,
• CAD Wholesale sales edged down -0.1% to $46.8b in April, following a +0.3% gain in March.
• Confidence among US consumers dropped more than forecasted in June (71.8 vs. 74.2) as households contended with higher prices that are eating into incomes amid slowing job growth.

ASIA

• NZD suffered more earthquakes in Christchurch, causing some damage to roads and structures in residential areas of the city.
• China reported that new loans totaled CNY551b in May, much lower than the consensus forecast for CNY650b and down from the CNY739.6b in April. Loans are 12% lower ytd than last year and 39% lower than in 2009. This would suggest that Chinese policy tightening is beginning to take hold.
• Growth in Chinese industrial output (+13.3%) and fixed asset investment (+25.8%) remains robust and above market expectations, while retail sales (+16.9%) was modestly below expectations.
• Chinese CPI inflation was at a three-year high of +5.5%, y/y in May. The rise in services inflation continues to offset the slowing of momentum in food inflation
• PBoC hiked the commercial banks’ reserve requirement ratio (RRR) +50bp, that is a cumulative +550bp since the cycle began. Rate is now at +21.5%.
• BoJ announced the creation of a small new lending facility, adding 500b yen to its existing 3-trillion yen facility that provides loans to banks at +0.1% for on-lending.
• RBA Governor Stevens reiterated a bias to raise the policy rate in the medium term and acknowledged that the slightly restrictive monetary policy and fiscal policy are currently constraining the economy. He reiterated that inflation is still more likely to rise than fall despite the gains in the AUD and that further rates rises are need to curb price increases.

 

 

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Forex Volatility Continues Rising

This week witnessed another flareup in the eurozone sovereign debt crisis. As a result, volatility in the EUR/USD pair surged, by some measures to a record high. Even though the Euro rallied yesterday and today, this suggests that investors remain nervous, and that going forward, the euro could embark on a steep decline.

There are a couple of forex volatility indexes. The JP Morgan G7 Volatility Index is based on the implied volatility in 3-month currency options and is one of the broadest measures of forex volatility. As you can see from the chart above, the index is closing in on year-to-date high (excluding the spike in March caused by the Japanese tsunami), and is generally entrenched in an upward trend. Barring day-to-day spikes, however, it will take months to confirm the direction of this trend.

For specific volatility measurements, there is no better source of data than Mataf.net (whose founder, Arnaud Jeulin, I interviewed only last month). Here, you can find data on more than 30 currency pairs, charted across multiple time periods. You can see for the EUR/USD pair in particular that volatility is now at the highest point in 2011 and is closing in on a two-year high.

Meanwhile, the so-called risk-reversal rate for Euro currency options touched 3.1, which is greater than the peak of the credit crisis. This indicator represents a proxy for investor concerns that the Euro will collapse suddenly, and its high level suggests that this is indeed a growing concern. In addition, implied volatility in options contracts has jumped dramatically over the last week, which confirms that investors expect the euro to move dramatically over the next month.

What does all of this mean? In a nutshell, it shows that panic is rising in the forex markets. Last month, I used this notion as a basis for arguing that the dollar safe-haven trade will make a come-back. This would still seem to be the case, and should also benefit the Swiss Franc, which is nearing an all-time high against the euro. Naturally, it also implies that forex investors remain extremely concerned about a continued decline in the euro, and are rushing to hedge their exposure and/or close out long positions altogether.

Mataf.net suggests that this could make the EUR/USD an interesting pair to trade, since large swings in either direction will necessarily create opportunities for traders. While I have no opinion on such indiscriminate trading [I prefer to make directional bets based on fundamentals], I must nonetheless acknowledge the logic of such a strategy.

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Forex Week in Review June 12-17

Markets are ending the week on firmer footing. The meeting between Merkel and Sarkozy and the news of a new Greek cabinet is supporting the EUR. The German Chancellor has agreed to compromise and work with the ECB on a debt plan for Greece. Supposedly, they will use a ‘Vienna-style’ voluntary debt rollover as the framework. The Greek PM Papandreou has formed a new cabinet, setting the stage for a confidence vote in parliament next week. Market uncertainty remains. No one knows the depth and scope for ‘the’ rollover agreement. The European finance ministers resume their talks on the second bailout package for Greece this Sunday.

“When you are insolvent you do not solve things with new and larger loans”-Yanis Varoufakis

Below are some of the highlights of the week:

EUROPE

• Italian IP was strong in April with a +1.0%, m/m rise, well above the +0.2% expected and pushed the annual growth rate of industrial production to +3.7%, y/y from +3.4%.
• UK headline inflation was stable at +4.5%, y/y in May. Core inflation subsided to +3.3%, reversing the exceptional spike to +3.7% last month. Transport services, the main cause, fell -5%.
• S&P’s added to Greece’s woes, cutting its long term sovereign rating three notches to CCC, citing, a ‘significantly higher likelihood of one or more defaults’.
• UK RICS house prices fell to -28 in May from -21. Analysts note that weak data and softer inflation continue to argue against a hawkish turn in the BoE policy stance.
• Swedish inflation stayed stable at +3.3%, y/y in May, while core inflation moderated a touch to +1.7%, y/y from +1.8%. Market believes its in line with Riksbank’s expectations and that they will continue to raise interest rates.
• Tuesday, EU finance ministers ended their first meeting with little evidence of progress in agreeing on a framework for private sector involvement in the Greek rescue. Meet again this Sunday.
• Euro-zone IP grew +0.2%, m/m vs. expectations for a -0.2% decline. March was revised upward to flat from the -0.2% m/m fall. Strength was driven by Italy, Finland and Luxembourg, offsetting the -0.6% m/m fall in Germany and the -0.3% fall in France.
• UK labor report disappointed with a spike in jobless claims to almost +20k, above the +6k consensus. Weekly earnings were weak at +1.8%, y/y, down from +2.3%. No reason for the BoE to turn less dovish.
• SNB kept rates on hold, maintaining a relatively dovish tone in the policy statement. Growth forecast unchanged at +2%, y/y. Inflation forecast for 2013 was revised lower to +1.7%, y/y, from +2.0%. The franc strength is the reason behind lower inflation forecasts from 2012.
• UK retail sales ex-autos fell -1.6%, m/m, in May with the year-on-year growth rate now reduced to 0%. The weak wages and money growth reported earlier are likely to pull down inflation.
• Euro-zone final CPI for May was unrevised from the flash estimate of +2.7%,y/y. Core inflation also moderated slightly to +1.5%, y/y, from +1.6%. Lower energy inflation was the main reason behind the softer headline.

Americas

• US Retail sales (-0.2%) fell last month for the first time in eleven-months as receipts at auto dealerships dropped sharply, but the decline was less than expected (-0.6%), and provided investors some optimism of a pickup in economic activity in the second half of the year.
• US CPI surprised to the upside with a +0.2% rise in the headline and a more worrying +0.3% rise in the core (ex-food and energy). This is the strongest monthly rise in nearly three-years, making it more difficult for helicopter Ben to implement QE3. Analysts’ have noted that the y/y core-CPI has accelerated to +1.5% from +1.3%.
• An ugly Empire State manufacturing print (-7.79) can be added to the long list of softer US data. This is the first negative headline in eight-months and a complete surprise to the market who had expected the index to edge higher to 13.5.
• US TIC data showed that net foreign purchases of long term securities rose from +$24b to +$30.6b last month. China has added $7.6b to its net-treasury holdings.
• CAD manufacturers saw sales slip -1.3% in April, reversing much of the previous month’s gains as the Japan earthquake cut off supplies to the auto industry.
• The Philly Fed factory index came in at a miserable -7.7 this month, mirroring the ugly Empire print and calls into question the durability of the US recovery. It was the weakest headline reading in two-years.
• US weekly claims were a tad better, declining -16k to +414k, again above that psychological +400k barrier. The headline print was aided by an easy seasonal factor.
• US May house starts rose + 3.5% to +560k. Giving a better performance was US May permits, rising +8.7% to +612k.
• US current account deficit rose in the 1st Q (-$119b vs. -$112b), dragged higher by rising imports. Most of the increase in imports came from gains in industrial supplies such as petroleum,
• CAD Wholesale sales edged down -0.1% to $46.8b in April, following a +0.3% gain in March.
• Confidence among US consumers dropped more than forecasted in June (71.8 vs. 74.2) as households contended with higher prices that are eating into incomes amid slowing job growth.

ASIA

• NZD suffered more earthquakes in Christchurch, causing some damage to roads and structures in residential areas of the city.
• China reported that new loans totaled CNY551b in May, much lower than the consensus forecast for CNY650b and down from the CNY739.6b in April. Loans are 12% lower ytd than last year and 39% lower than in 2009. This would suggest that Chinese policy tightening is beginning to take hold.
• Growth in Chinese industrial output (+13.3%) and fixed asset investment (+25.8%) remains robust and above market expectations, while retail sales (+16.9%) was modestly below expectations.
• Chinese CPI inflation was at a three-year high of +5.5%, y/y in May. The rise in services inflation continues to offset the slowing of momentum in food inflation
• PBoC hiked the commercial banks’ reserve requirement ratio (RRR) +50bp, that is a cumulative +550bp since the cycle began. Rate is now at +21.5%.
• BoJ announced the creation of a small new lending facility, adding 500b yen to its existing 3-trillion yen facility that provides loans to banks at +0.1% for on-lending.
• RBA Governor Stevens reiterated a bias to raise the policy rate in the medium term and acknowledged that the slightly restrictive monetary policy and fiscal policy are currently constraining the economy. He reiterated that inflation is still more likely to rise than fall despite the gains in the AUD and that further rates rises are need to curb price increases.

 

 

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