Euro Danger!

« Chinese Fire Drill! | Home

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.

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!

Tags: account, AUD, Aussie, blog, cad, course, currenc, currency, currency trading, dollar, dow, economy, EUR, Euro, forex, forextrading, free, fx, fxedu, gbp, Il, jpy, market, Mike Conlon, nzd, practice, ssi, time, trade, USD, Yen

Topics: What To Look At In The Market |

Comments

Powered By WizardRSS.com | Full Text RSS Feed | Amazon Plugin | Hud Settlement Statement

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.

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.

Powered By WizardRSS.com | Full Text RSS Feed | Amazon Plugin | Hud Settlement Statement

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.

Powered By WizardRSS.com | Full Text RSS Feed | Amazon Plugin | Hud Settlement Statement

Introduction to Technical Analysis: Morning Fake-out

© 2004 - 2011 Forex Blog.org. 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.

Powered By WizardRSS.com | Full Text RSS Feed | Amazon Plugin | Hud Settlement Statement

Commodities Collapse!

« Decisions, Decisions! | Home

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!

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!

?

none

Topics: What To Look At In The Market |

Comments

Powered By WizardRSS.com | Full Text RSS Feed | Amazon Plugin | Hud Settlement Statement

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:

EUROPE

• 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.

Americas

• 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%.

ASIA

• 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.

Powered By WizardRSS.com | Full Text RSS Feed | Amazon Plugin | Hud Settlement Statement

Rough Patch Ahead?

« Fear Of Retaliation? | Home

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!

Tags: account, AUD, Aussie, blog, cad, course, currenc, currencies, currency, currency trading, dollar, dow, economy, EUR, Euro, forex, forextrading, free, fx, fxedu, gbp, Il, jpy, market, Mike Conlon, nzd, practice, ssi, time, USD, Yen

Topics: What To Look At In The Market |

Comments

Powered By WizardRSS.com | Full Text RSS Feed | Amazon Plugin | Hud Settlement Statement

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

Powered By WizardRSS.com | Full Text RSS Feed | Amazon Plugin | Hud Settlement Statement

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.

Powered By WizardRSS.com | Full Text RSS Feed | Amazon Plugin | Hud Settlement Statement

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.

Powered By WizardRSS.com | Full Text RSS Feed | Amazon Plugin | Hud Settlement Statement

Bin Laden Bounce!

« The Real Fairytale! | Home

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!

Tags: account, AUD, Aussie, blog, cad, course, currenc, currency, currency trading, dollar, economy, EUR, Euro, forex, forextrading, free, fx, fxedu, gbp, Il, interest, jpy, market, Mike Conlon, news, nzd, practice, ssi, time, USD, Yen

Topics: What To Look At In The Market |

Comments

Powered By WizardRSS.com | Full Text RSS Feed | Amazon Plugin | Hud Settlement Statement

US Home Prices Decline

For the eighth straight month, the price for single-family homes fell in February. The S&P/Case Shiller composite index â€" which measure home prices for twenty cities across America â€" declined by 0.2 percent.

“There is very little, if any, good news about housing. Prices continue to weaken, trends in sales and construction are disappointing,” David Blitzer, chairman of the Index Committee at S&P Indices, said in a statement.

“Recent data on existing-home sales, housing starts, foreclosure activity and employment confirm that we are still in a slow recovery.”

Source: Bloomberg

Powered By WizardRSS.com | Full Text RSS Feed | Amazon Plugin | Hud Settlement Statement

The Real Fairytale!

« Dollar Pains Mean Gains! | Home

By Mike Conlon | April 29, 2011

This morning is all about fairytales as the Royal Wedding in the UK has drawn the attention of watchers worldwide and has also closed London for business today as it is a bank holiday. However, the real fairytale may be the news and data we have been seeing here in the US and the policy responses to them.

Yesterday’s declining GDP figures here in the US show that Bernanke’s QE2 policy has been a near-failure and is going to drag the US and then the global economy down again. The Fed’s insistence and denial that they have caused commodity inflation is intellectually dishonest, and now the effects are starting to come home to roost.

As input costs increase, businesses have to squeeze costs to maintain profitability and one of the most efficient ways to do this is to fire workers. Businesses then pass along these costs to the consumer, who can’t afford these new higher costs as the majority of their disposable income goes to pay for increases in the price of food and energy.

The US consumer makes up some 70% of US GDP, so if consumer spending on discretionary items decreases, then demand for good will also decrease, putting further strain on businesses. Thus the deflationary cycle begins again. The weak US dollar is a direct reflection of this sentiment, and how much lower it can go without causing a major global economic crisis is anyone’s guess.

In the Euro zone, most economic data was negative this morning including German retail sales figures, but CPI came in higher than expected and the Dollar is weak so the Euro is trading higher.

Canadian GDP is due out later this morning which is expected to show neither expansion or contraction.

In the forex market:

Aussie (AUD): The Aussie is mostly higher as weak Dollars are driving demand for carry trades and yield-seeking.

Kiwi (NZD): The Kiwi has also rebounded today as trade balance figures due to higher exports came in better than expected.

Loonie (CAD): Canadian GDP figures have just come in and are worse than expected, showing a quarterly decline of .2% vs. an expectation of no-change, pushing the YoY figure down to 2.9% vs. the expectation of 3.1%. Canada’s close economic ties to the US are the possible culprit, as well as higher inflation. (Click chart to enlarge)

Euro (EUR): The Euro is mixed as a weak Dollar is driving it higher as are higher then expected CPI figures, showing a gain of 2.8% which was slightly higher than the expected 2.7%. German retail sales figures though came in negative, and confidence figures have been falling.

Pound (GBP): Today is a bank holiday in the UK in honor of the Royal Wedding. The Pound is slightly lower against all but the Dollar.

Dollar (USD): Another day, another weak dollar. Personal income and spending data came in slightly higher than expected, and later this morning consumer confidence figures are due.

Yen (JPY): The Yen is strengthening as the US dollar is losing some of its safe-haven status and money flows out of USD and into Yen. Despite the problems in the Japanese economy, it is starting to look like a more attractive place to invest than the US. (Click chart to enlarge)

The fairytale we have been living in for the past year is soon coming to an end. Like any good story, it has to end somewhere and whether or not there will be a happy ending is up for debate.

What we do know so far is that QE2 has not been the economic savior we have been looking for, and Bernanke is no white knight looking to come to the rescue. Instead we have been given an unlikely choice of hero thrust into a situation way over his head, with a lack of proper tools and skills to get the job done.

Like all fairytales, we want them to work out in the end. However, the global economy is not fantasyland and the more real we become about the situation, the more dire it looks.

So let’s save the fairytales for Royal Weddings, shall we?

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!

Tags: account, AUD, Aussie, blog, cad, course, currenc, currency, currency trading, dollar, dow, economy, EUR, Euro, forex, forextrading, free, fx, fxedu, gbp, Il, jpy, market, Mike Conlon, nzd, practice, ssi, time, trade, USD, Yen

Topics: What To Look At In The Market |

Comments

Powered By WizardRSS.com | Full Text RSS Feed | Amazon Plugin | Hud Settlement Statement

Forex Week in Review: April 24-29

It was a trading week with the broad dollar sell-off finding few obstacles in the calendar. The absence of hawkish innovations from the FOMC has been taken by the market as an all-clear to add to bearish USD momentum and carry trades. It seems that its only immediate savior is a renewed Euro-zone crisis. The technicals are again showing that most currency’s are in overbought territory now that many of the short term targets have been printed. Maybe it will be left up to Central Banks to protest, just like the RBNZ did by stating that their currency strength was ‘unfavorable’. Below are some of the highlights of the week:

EUROPE

• Trichet stating that a stronger USD was in the interest of the United States fell on deaf ears this week.
• Greek, Irish and Portuguese spreads continue to widen to Germany. Spain is showing signs of decoupling from the trend. Systemic fears associated with the peripheral funding outlook remain on the backburner.
• UK CBI total factory orders index fell sharply in Apr. to -11 from 5 in Mar. Activity outlook index was mixed with steady business optimism but weaker export confidence. Data is failing to show any evidence of a strong pick-up in the first half.
• UK GDP grew +0.5%, q/q in 1st Q after contracting -0.5% in 4th Q. Construction remained particularly weak, the rebound was driven by strong services performance, up +0.9%.
• EUR Industrial new-orders index rose +0.9% in Feb., following a sharp upward revision to the Jan. print. Net of revision, new orders rose +21.3%, y/y, suggests continued strong growth momentum.
• Swedish consumer and manufacturing confidence indices moderated in Apr. The economic tendency survey fell to 109.8 from 112.3 in Mar. as a result.
• True Finns party were quoted emphasizing the need for compromise in negotiating to participate in the next government, reducing concerns about Finland blocking negotiations for a Portugal EFSF program
• Flash Euro-zone Apr. CPI came in at a +2.8%, y/y. Mar. M3 data showed an acceleration in the y/y rate of increase to +2.3%, which puts the growth rate at its fastest pace in two years. This increases the risk that the ECB will signal a June rate hike at its May meeting.
• Swiss KOF indicator rose to +2.29 from an upwardly revised +2.25.

Americas

• US Sales of New Homes in Mar. increased from an all time low in Feb. (+300k or +11.1% from a revised +270k). However, on an annual monthly basis they are down -21.9% from Mar. 2010. Median prices continue to struggle and are down -2.9%, y/y.
• US Consumer’s current assessment of economic prosperity, fueled by job prospects, edged up +1.6 points this month to 65.4 from Mar.’s unrevised print of 63.4.
• Feb.’s S&P/Case-Shiller House Price Index printed a -3.3%, y/y, decline, deteriorating from a -3.1%, y/y, decline in Jan.
• As expected, Fed kept rates steady. The FOMC statement indicated that the Fed will end its QE2 program as scheduled in June. Policy makes will closely watch inflation, thought the Fed believes the effects from rising oil prices are temporary. They do not seem to be worried about the weakening in the dollar. They argue that by fulfilling its dual mandate, the Fed can cause a stronger recovery which will lead to a stronger dollar.
• US durable goods report was solid on its details. New orders surprised to the upside in Mar. (+2.5%) while Feb.’s report was revised up substantially (+0.7% vs. -0.9%), leading to a positive gain in the first quarter (+2.1%).
• In Canada, a recent poll sees the Liberal party being pushed into third place ahead of next week’s general election by the left wing NDP. An NDP-led minority government is a likely negative for the loonie, as their political mandate and agenda tends to be ‘a little less business friendly, a little less fiscal austere than under a Conservative majority’.
• US economy hit the breaks in the 1st Q, as higher prices, especially gas and food, curtailed consumer spending, limiting seasonally adjusted GDP to print +1.8%.
• US pending home re-sales climbed +5.1% after a revised +0.7% increase the previous month.
• US initial jobless claims increased by +25k to +429k, w/w. The four-week moving average, capable of smoothing out volatility, rose by +9.2k to +408.5k.
• Canada’s economy shrinks in February by -0.2%. Early expectations stood on +0%.
• US consumer sentiment in April rose by +0.2pts, above expectations, coming in at 69.8
• The Fed.’s favorite inflation measure, core-PCE reported as expected +0.1%

ASIA

• Singapore’s CPI-inflation was flat at +5.0%, y/y, in Mar. However, the elevated CPI inflation rate should keep the year-on-year pace of SGD NEER appreciation at around +5.0%-5.5%.
• An FT article flagged critical labor shortages in Australia. They also reported that the Chinese sovereign wealth fund, CIC, will soon receive $100-200bn in new funds from a Chinese government trying to further diversify away from US Treasuries.
• Singapore’s industrial output, seasonally adjusted, rose +22.0%, m/m in Mar.
• Australia’s CPI inflation rose +1.6%, q/q in the 1st Q, pushing the year-on-year rate to +3.3% from +2.7%.Flood related food price spikes and higher oil prices drove the headline. Underlying inflation was also high, rising +0.9%, q/q to +2.3%, y/y in the 1st Q from +2.2%.
• Asian Cbank’s were believed to be intervening moderately to prevent currency strength this week, adding to expectations for more diversification flows out of USD and into other reserve currencies.
• RBNZ made it explicit in its new policy statement that the recent appreciation of the NZD was “unwelcome.”
• Japan’s industrial production data for Mar. revealed much more significant disruption from the earthquake than previously thought. Production plunged -15.3%, m/m, much worse than the -10.6% consensus. On year-on-year basis, it has dropped -12.9%.
• The BOJ left their rate policy unchanged, like the dollar, rate differentials will likely continue to move against the JPY.
• Australia, housing credit rose +0.4%, m/m in Mar. following a +0.5% increase in Feb., taking the y/y rate to +6.6%.
• PBoC again fixed USDCNY to a new low, 6.499, reflecting broad-based dollar weakness rather than CNY strength.

Powered By WizardRSS.com | Full Text RSS Feed | Amazon Plugin | Hud Settlement Statement

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.

Powered By WizardRSS.com | Full Text RSS Feed | Amazon Plugin | Hud Settlement Statement

The Real Fairytale!

« Dollar Pains Mean Gains! | Home

By Mike Conlon | April 29, 2011

This morning is all about fairytales as the Royal Wedding in the UK has drawn the attention of watchers worldwide and has also closed London for business today as it is a bank holiday. However, the real fairytale may be the news and data we have been seeing here in the US and the policy responses to them.

Yesterday’s declining GDP figures here in the US show that Bernanke’s QE2 policy has been a near-failure and is going to drag the US and then the global economy down again. The Fed’s insistence and denial that they have caused commodity inflation is intellectually dishonest, and now the effects are starting to come home to roost.

As input costs increase, businesses have to squeeze costs to maintain profitability and one of the most efficient ways to do this is to fire workers. Businesses then pass along these costs to the consumer, who can’t afford these new higher costs as the majority of their disposable income goes to pay for increases in the price of food and energy.

The US consumer makes up some 70% of US GDP, so if consumer spending on discretionary items decreases, then demand for good will also decrease, putting further strain on businesses. Thus the deflationary cycle begins again. The weak US dollar is a direct reflection of this sentiment, and how much lower it can go without causing a major global economic crisis is anyone’s guess.

In the Euro zone, most economic data was negative this morning including German retail sales figures, but CPI came in higher than expected and the Dollar is weak so the Euro is trading higher.

Canadian GDP is due out later this morning which is expected to show neither expansion or contraction.

In the forex market:

Aussie (AUD): The Aussie is mostly higher as weak Dollars are driving demand for carry trades and yield-seeking.

Kiwi (NZD): The Kiwi has also rebounded today as trade balance figures due to higher exports came in better than expected.

Loonie (CAD): Canadian GDP figures have just come in and are worse than expected, showing a quarterly decline of .2% vs. an expectation of no-change, pushing the YoY figure down to 2.9% vs. the expectation of 3.1%. Canada’s close economic ties to the US are the possible culprit, as well as higher inflation. (Click chart to enlarge)

Euro (EUR): The Euro is mixed as a weak Dollar is driving it higher as are higher then expected CPI figures, showing a gain of 2.8% which was slightly higher than the expected 2.7%. German retail sales figures though came in negative, and confidence figures have been falling.

Pound (GBP): Today is a bank holiday in the UK in honor of the Royal Wedding. The Pound is slightly lower against all but the Dollar.

Dollar (USD): Another day, another weak dollar. Personal income and spending data came in slightly higher than expected, and later this morning consumer confidence figures are due.

Yen (JPY): The Yen is strengthening as the US dollar is losing some of its safe-haven status and money flows out of USD and into Yen. Despite the problems in the Japanese economy, it is starting to look like a more attractive place to invest than the US. (Click chart to enlarge)

The fairytale we have been living in for the past year is soon coming to an end. Like any good story, it has to end somewhere and whether or not there will be a happy ending is up for debate.

What we do know so far is that QE2 has not been the economic savior we have been looking for, and Bernanke is no white knight looking to come to the rescue. Instead we have been given an unlikely choice of hero thrust into a situation way over his head, with a lack of proper tools and skills to get the job done.

Like all fairytales, we want them to work out in the end. However, the global economy is not fantasyland and the more real we become about the situation, the more dire it looks.

So let’s save the fairytales for Royal Weddings, shall we?

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!

Tags: account, AUD, Aussie, blog, cad, course, currenc, currency, currency trading, dollar, dow, economy, EUR, Euro, forex, forextrading, free, fx, fxedu, gbp, Il, jpy, market, Mike Conlon, nzd, practice, ssi, time, trade, USD, Yen

Topics: What To Look At In The Market |

Comments

Powered By WizardRSS.com | Full Text RSS Feed | Amazon Plugin | Hud Settlement Statement

Canadian Dollar Weaker on Slowing Economy

The Canadian dollar â€" known as the “loonie” â€" lost ground to the US dollar this morning on news that the Canadian economy expanded by an annualized rate of 2.9 percent in February. This is the lowest increase in a year and contributed to the loonie’s 0.1 percent to 95.13 cents against the US dollar from 95.06 cents yesterday.

“GDP was a little weaker than expected and what that’s really done is push expectations of a rate hike from BOC from July to September,” said Blake Jespersen, director of foreign exchange in Toronto at Bank of Montreal.

Source: Bloomberg

Powered By WizardRSS.com | Full Text RSS Feed | Amazon Plugin | Hud Settlement Statement

Dollar will Rally when QE2 Ends

In shifting their focus to interest rates, forex traders have perhaps overlooked one very important monetary policy event: the conclusion of the Fed’s quantitative easing program. By the end of June, the Fed will have added $600 Billion (mostly in US Treasury Securities) to its reserves, and must decide how next to proceed. Naturally, everyone seems to have a different opinion, regarding both the Fed’s next move and the accompanying impact on financial markets.

The second installment of quantitative easing (QE2) was initially greeted with skepticism by everyone except for equities investors (who correctly anticipated the continuation of the stock market rally). In November, I reported that QE2 was unfairly labeled a lose-lose by the forex markets: “If QE2 is successful, then hawks will start moaning about inflation and use it as an excuse to sell the Dollar. If QE2 fails, well, then the US economy could become mired in an interminable recession, and bears will sell the Dollar in favor of emerging market currencies.”

The jury is still out on whether QE2 was a success. On the one hand, US GDP growth continues to gather force, and should come in around 3% for the year. A handful of leading indicators are also ticking up, while unemployment may have peaked. On the other hand, actual and forecast inflation are rising (though it’s not clear how much of that is due to QE2 and how much is due to other factors). Stock and commodities prices have risen, while bond prices have fallen. Other countries have been quick to lambaste QE2 (including most recently, Vladimir Putin) for its perceived role in inflating asset bubbles around the world and fomenting the currency wars.

Personally, I think that the Fed deserves some credit- or at least doesn’t deserve so much blame. If you believe that asset price inflation is being driven by the Fed, it doesn’t really make sense to blame it for consumer and producer price inflation. If you believe that price inflation is the Fed’s fault, however, then you must similarly acknowledge its impact on economic growth. In other words, if you accept the notion that QE2 funds have trickled down into the economy (rather than being used entirely for financial speculation), it’s only fair to give the Fed credit for the positive implications of this and not just the negative ones.

But I digress. The more important questions are: what will the Fed do next, and how will the markets respond. The consensus seems to be that QE2 will not be followed by QE3, but that the Fed will not yet take steps to unwind QE2. Ben Bernanke echoed this sentiment during today’s inaugural press conference: “The next step is to stop reinvesting the maturing securities, a move that ‘does constitute a policy tightening.’ ” This is ultimately a much bigger step, and one that Chairman Bernanke will not yet commit.

As for how the markets will react, opinions really start to diverge. Bill Gross, who manages the world’s biggest bond fund, has been an outspoken critic of QE2 and believes that the Treasury market will collapse when the Fed ends its involvement. His firm, PIMCO, has released a widely-read report that accuses the Fed of distracting investors with “donuts” and compares its monetary policy to a giant Ponzi scheme. However, the report is filled with red herring charts and doesn’t ultimately make any attempt to account for the fact that Treasury rates have fallen dramatically (the opposite of what would otherwise be expected) since the Fed first unveiled QE2.

The report also concedes that, “The cost associated with the end of QEII therefore appears to be mostly factored into forward rates.” This is exactly what Bernanke told reporters today: “It’s [the end of QE2] ‘unlikely’ to have significant effects on financial markets or the economy…because you and the markets already know about it.” In other words, financial armmagedon is less likely when the markets have advanced knowledge and the ability to adjust. If anything, some investors who were initially crowded-out of the bond markets might be tempted to return, cushioning the Fed’s exit.

If bond prices do fall and interest rates rise, that might not be so bad for the US dollar. It might lure back overseas investors, grateful both for higher yields and the end of QE2. Despite the howls, foreign central banks never shunned the dollar.  In addition, the end of QE2 only makes a short-term interest rate that much closer. In short, it’s no surprise that the dollar is projected to “appreciate to $1.35 per euro by the end of the year, according to the median estimate of 47 analysts in a Bloomberg News survey. It will gain to 88 per yen, a separate poll shows.”

Powered By WizardRSS.com | Full Text RSS Feed | Amazon Plugin | Hud Settlement Statement

Dollar Done?

« One Hundred Reasons To Worry! | Home

By Mike Conlon | February 25, 2011

With recent turmoil in world markets, one of the “surefire” things we would normally assume under such risk aversion did not take place. In the past, when world economic markets have been faced with adversity and risk, the US dollar was one of the most sought after investments.Because the US dollar is the world’s de facto reserve currency, people want to own Dollars when risk increases, as many times those Dollars will be moved into US Treasury bonds.

This has not occurred this week, as the Dollar has been primarily lower despite higher oil prices and stock market losses. In fact, as I mentioned yesterday, the primary beneficiaries of the flight to safety trade this week were the Swiss franc, the Japanese yen, and gold.

Meanwhile, oil has pulled back from trading a 100 handle as Saudi Arabia is going to raise the supply of oil they send to market to make up the losses from Libya, but again, I think $100 oil is here to stay for a while. The story with oil is not really about supply shocks, but rather with the weak US dollar.

In the UK, GDP figures came in slightly lower than expected, showing a 4th quarter decline of .6% vs. the expectation of a decline of .5%, pushing the YoY figure down to 1.5% vs. an expectation of 1.7%. The Pound is weaker across the board as a result.

Here in the US, revised GDP figures showed an increase of 2.8% vs. the expectation of 3.2%, and personal consumption figures came in slightly higher than expected at .5%. While this still shows good growth, the lower figure has to change assumptions about budget deficits, which means that deficit is actually higher than is being reported. Oops.

So lower oil prices today have encouraged some early risk-taking, as stock markets and commodity currencies are higher.

In the forex market:

Aussie (AUD): The Aussie is higher following the MSCI Pac Index higher as yield differentials and general Dollar weakness have increased demand.

Kiwi (NZD): The Kiwi is also higher in the wake of the earthquake despite the market pricing in a rate reduction at the next rate policy meeting. This would normally be a negative, but the positive interest carry and weak US dollar make it still more attractive.

Loonie (CAD): The Loonie is mixed this morning, as lower oil prices and lower US GDP figures highlight the difference among the commodity currencies.

Euro (EUR): The Euro is lower as it has actually been trading more closely linked to oil prices than the Loonie. In addition, German CPI data showed an increase in prices which combined with hawkish rhetoric from the ECB could mean rate hikes will happen soon. (Click chart to enlarge)

Pound (GBP): The Pound is lower across the board as GDP figures came in lower than expectations. In addition, business investment was also lower, as was a consumer confidence survey. How the BOE will react is anyone’s guess at this point. (Click chart to enlarge)

Dollar (USD): GDP revisions came in lower than expected, and later this morning consumer confidence figures are due. In addition, there is a lot of Fed speak on the docket, with policy-makers trying to justify current policy as weak dollars are driving inflation.

Yen (JPY): The yen is mixed as the demand for safe haven assets has decreased, though it is trading higher vs. USD, EUR, GBP, and CAD. Stocks in Asia were higher overnight, as oil prices began to reverse.

It is amazing to see the confluence of events that is taking place around the globe in the form of protests. Libya, Egypt, Tunisia, Wisconsin….

Whoa, Wisconsin? I’m not trying to put on my tin-foil hat just yet and claim conspiracy, but these events can be linked to a common sourceâ€"weak US fundamentals and the need for loose monetary policy to accommodate it.

While I have been harping on inflation all week and will probably continue to do so until the Fed does something to change policy, it will be interesting to see the reactions both here and abroad. While the Fed may be able to manage core inflation, they may not be able to manage the inflation expectations that in turn could become a self-fulfilling prophesy.

This is exactly the type of build-up that could lead to over-reactions that the textbook that the Fed uses doesn’t account for. So while getting a respite from higher oil prices is nice today, it does not mean that risk has left the market.

In fact, going into the weekend I am very concerned about risk, as who knows what might occur. I would not be surprised to see some flight to safety by the end of the day, though nothing surprises me any longer!

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!

?

Tags: account, AUD, Aussie, blog, cad, course, currenc, currencies, currency, currency trading, dollar, dow, EUR, Euro, forex, forextrading, free, fx, fxedu, gbp, jpy, market, Mike Conlon, nzd, practice, ssi, time, trade, USD, Yen

Topics: What To Look At In The Market |

Comments

Powered By WizardRSS - WizardRSS.com For Sale

Rising Inflation to Force Bank of China to Hike Rates Further

On February 8th, the People’s Bank of China raised the one-year lending rate twenty-five basis points to 6.06 percent. This marked the third rate increase in four months and most observers believe more interest rates hikes will be necessary for China to keep a lid on inflation.

The latest figures from China’s Statistics Bureau indicate that consumer prices jumped 4.9 percent in January compared to the same month one year ago. The actual result was less than the expected 5.3 percent but January’s outcome keeps intact a long string of monthly price increases underscoring the risk of inflation in the Chinese economy.

In addition to raising rates further in the coming months, China’s monetary authority will likely continue the trend of forcing lending institutions to increase the percentage of funds to be held in reserve. This effectively removes liquidity from the money supply leaving financial institutions with a smaller pool from which to lend to businesses and consumers. Rampant property speculation for instance has helped fuel a property bubble and in light of the Japanese and more recent American experience with property bubbles, authorities in China have good reason for concern.

As well as surging property values, a dramatic jump in food prices is forcing the government to take more decisive action. Authorities have even resorted to selling food reserves to augment supplies in an attempt to stem the pace of price increases. Officials are also taking sterner actions to target hoarding and other actions artificially boosting the cost to purchase these basic essentials.

Naturally, as prices continue to climb, pressure is building for salaries to also rise to help consumers bridge the growing inflation gap. The potential spillover effect could have serious implications for China’s all-important export sector.
China was able to position itself as one of the planet’s leading exporters by taking advantage of its abundant and â€" compared to most other countries â€" inexpensive workforce to produce goods at a lower cost than the traditional manufacturing centers. However, this advantage could be diminished if salaries are pushed higher to offset rising domestic prices.

Does China’s Inflation pose a threat to Global Recovery?

One thing lost in this discussion perhaps is how China’s inflation struggles could impact the global recovery. With the Eurozone lurching from one crisis to the next and the US economy recovering at a much slower pace than following previous recessions, China is being heralded as the driving force to lead the greater global recovery.

But what if China’s internal problems worsen and it falls short of these expectations?

China’s central bank recently warned of the potential for this very scenario. As major economies in the West (read, the markets for China’s exports) abandon spending programs originally implemented to combat the recession, demand for imports from China could decline. Should China also be forced at the same time to tighten monetary policy to hold the inflationary tide, the combined impact could seriously impede China’s adopted role of the “engine” of the recovery.

Powered By WizardRSS - WizardRSS.com For Sale