Sunday, June 12, 2011

Summer Soft Patch?

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By Mike Conlon | June 10, 2011

Or something worse? The talking heads would like you to believe that the weak economic data we are seeing is only transitory and in fact the good times are just around the corner. I’m having a hard time rectifying this sentiment, as it seems like the “good times” are what has been transitory led by the temporary “free money” condition of QE2. Since that time, nothing has changed on the fiscal side of the ledger so I’m not surprised that the delay tactics by the Fed are not working.

The problem with all of these emergency and stop-gap measures is that everyone knows they are fleeting, so this does not change consumer sentiment or behavior. Temporary solutions provide temporary relief, and the complete lack of confidence in politicians to solve our problems is alarming.

But it’s not just here in the US where these issue occur, though we are the worst of the bunch. The ECB had to take the other tack, pressing the individual countries to solve the debt crisis and stating that the ECB would not be expanding its aid to Greece.

In the UK, the data has also gotten worse, with industrial and manufacturing production figures coming in way worse than expected, which may actually vindicate the BOE’s easy money policy. But therein lies the problemâ€"people have caught on to the fact the economies are not healthy because monetary policy is so cheap so they act defensively which causes economic stagnation.

Would the reverse actually occur if Central banks stated raising rates? If you want to fool the people into believe things are well, shouldn’t they be doing the opposite of what they have been doing?

Things aren’t horrible everywhere, though, as China increased its imports by 28.4% showing signs that they may be pushing an agenda led by domestic demand. This will ultimately be a positive for New Zealand and Australia, and possible Japan when they get back on track.

In Canada, the unemployment rate shrank to 7.4% as more jobs were added to the economy, though the participation rate came in slightly lower. So all of this adds up to risk aversion in the markets, with declines in both stocks and commodities.

In the forex market:

Aussie (AUD): The Aussie is lower across the board on risk aversion as well as the fact that recent weaker economic data has shifted the focus more toward the Kiwi and Loonie.

Kiwi (NZD): The Kiwi is actually mostly higher despite the risk aversion as the increase in Chinese imports helps New Zealand’s economy. A fresh all-time high was made earlier vs. USD.

Loonie (CAD): The Loonie is mixed today as lower oil prices and a sputtering US economy put pressure on the currency, yet better than expected employment figures show that the economy is moving forward. Canada added 22.3K jobs vs. an expected 20K jobs gain, and the unemployment rate shrank to 7.4% from an expected and previous 7.6%. (Click chart to enlarge)


Euro (EUR): The ECB has re-assumed the role of parent and not enabler with regard to the member countries and the debt crisis. The message is loud and clear that the inaction over the past year to find a resolution will no longer be tolerated. German CPI data came in as expected and growth projections for the economy were also expanded.

Pound (GBP): The Pound is lower across the board after industrial production figures showed a decline of 1.7% vs. an expected no-change, and manufacturing production figures showed a decline of 1.5% vs. an expected decline of .1%. This is indicative of the weakening economic conditions in the UK. (Click chart to enlarge)


Swissie (CHF): The Swissie is mixed as it’s safe haven properties are causing demand, but less so than the Dollar and Yen as the economic problems in the Euro zone could have a carry-over effect.

Dollar (USD): The Dollar is showing some strength on risk aversion heading into the weekend on the usual “take risk off ahead of the weekend” play. No news out of the US is good news.

Yen (JPY): The Yen is stronger across the board on risk aversion as carry trades are abandoned, at least for the weekend carry. Rumblings of some type of monetary intervention keep making the rounds, and perhaps the market is willing to probe these suspicions by buying Yen.

So is it just a soft patch, or something worse? I have not seen any evidence that would lead me to believe it is the former, as long-term outlooks are still being held back by misguided government policy. So far nothing has changed.

QE2 was intended to buy the government time to make strides toward getting its fiscal house in order, but seemingly they have done nothing. Now that summer season is upon us, these guys in Washington can’t wait to get out of Dodge and retire to whatever golf course they can to avoid the scrutiny of the general public who elected them and are struggling to make ends meet.

Pretty soon election season will be upon us so that means its time to hit the campaign trail which will further delay any type of action. Meanwhile, the economy stagnates and the malaise and lack of confidence grow.

Not quite the recipe for growth, now is it? The beauty of the forex market is that you don’t have to stand idly by and take it! You can invest your hard earned money in the currencies of countries that are committed to solutions and not just kicking the can down the road.

Isn’t time you came to see what the forex market is all about?

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