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

Untangling the Puzzle of Risk Appetite

When analyzing forex, nothing is more satisfying than establishing a strong correlation between a particular currency pair and another quantifiable investment vehicle. You see â€" we fundamental analysts love to kid ourselves that we can actually explain what’s going in the forex markets, but it’s only when you can visually observe (and statistically confirm) a correlation can you actually pretend that this self-assuredness is justified.

On that note, I found myself looking at in interesting chart today: the EUR/USD vs. CHF/USD vs. S&P 500 Index. My purpose in drawing this particular chart was to ascertain how risk appetite (represented by the S&P) is being reflected in forex markets. As you can see, two observations can immediately be made. CHF/USD very closely tracks the S&P (or vice versa), while the EUR/USD similarly mirrored the S&P for most of the last 12 months, before suddenly diverging in November 2010.

By extension, this raises two questions. First, why should a rising S&P be accompanied by the Swiss Franc? After all, the former is a proxy for risk appetite, while the latter is a symbol of risk aversion. That means that tither the S&P is a weak indicator of risk appetite, or the Swiss France is not being driven by risk aversion. In a way, I think both notions are true. Specifically, US equity prices are are primarily a sign of US economic recovery and strong corporate profits. It’s probably equally accurate to say that the S&P promotes risk appetite, as saying it reflects risk appetite.

Moreover, as US stocks and investor risk appetite have increased, interest in the US Dollar has (somewhat ironically) decreased. One would think that this would spur a depreciation in the Swiss Franc, but I guess this was superseded by the falling Dollar. [For that reason, I actually added the MSCI Emerging Markets Stock Index after I started writing this post, because I realized it was a better proxy for global investor risk appetite. Sure enough, the recent continuation in the Franc's rise has coincided with a correction in emerging market stocks].

While this explains why the Euro should also appreciate for five consecutive months, it doesn’t offer any insight into why the EUR/USD correlation with the S&P should suddenly breakdown. [Question #2]. Recall from my earlier posts that there was a sudden flareup in the Eurozone sovereign debt crisis in November 2010. Around that time, there were a handful of debt downgrades, Ireland received an EU bailout, and there was heightened concern that the crisis would soon spread from Greece to the rest of the PIGS.

This caused a bout of intense Euro instability, against both the US Dollar and Swiss Franc. While the S&P continued rising, interest in emerging market stocks began to flag. It’s extremely tempting to posit a connection between these two trends, especially since it would seem to be implied by the chart. However, I think the correction in emerging markets is due more to Central Bank intervention and a recognition that a bubble was forming, than to the EU sovereign debt crisis. That the Euro has rallied in 2011 even as emerging market stocks have begun to decline, supports this interpretation.

Trying to draw meaningful conclusions from these correlations is frustrating at best, and dangerous at worst. Namely,  that’s because it’s impossible to completely distinguish cause from effect. The two stock market indexes are probably the least dependent of the four items. For instance, the Euro is derived in part from the Dollar, which is derived in part from the S&P. You could say that the Franc takes its cues from the S&P (as a proxy for risk appetite) and the Euro. Second of all, the strongest correlation on the chart (CHF/USD and S&P) is also the most unexpected.

In the end, I think only one solid conclusion can be drawn: uncertainty surrounding the Euro will continue to boost the Franc. While I probably could have told you that without the use of this chart, at the very least, it reinforces the interconnectedness of all financial markets and that even if poorly understood, all trends are ultimately related.

Powered By WizardRSS - WizardRSS.com For Sale

Sterling Falls as Rate Hike Appears Less Likely

Sterling fell 0.7 percent to $1.5984 in early afternoon trading in London today following the Bank of England’s decision to hold interest rates at the current level. Opinion is swiftly moving to the view that there will not be an interest rate hike in the near-term and especially once the impact of the government’s planned spending cuts takes effect.

“The argument for a much stronger pound is not a good one based on current rates policy,” said Steve Barrow, the London- based head of research for Group-of-10 currencies at Standard Bank Plc. “At the moment the economy is still sufficiently vulnerable for inflation to come down. On that basis, one would tend to favor a scenario where rates only go up towards the back end of the year.”

Source: Bloomberg

Powered By WizardRSS

Forex Markets Look to Interest Rates for Guidance

There are a number of forces currently competing for control of forex markets: the ebb and flow of risk appetite, Central Bank currency intervention, comparative economic growth differentials, and numerous technical factors. Soon, traders will have to add one more item to their list of must-watch variables: interest rates.

Interest rates around the world remain at record lows. In many cases, they are locked at 0%, unable to drift any lower. With a couple of minor exceptions, none of the major Central Banks have yet raised their benchmark interest rates. The same applies to most emerging countries. Despite rising inflation and enviable GDP growth, they remain reluctant to hike rates for fear that they will invite further speculative capital inflows and consequent currency appreciation.

Emerging markets countries can only toy with inflation for so long. Over the medium-term, all of them will undoubtedly be forced to raise interest rates. The time horizon for G7 Central Banks is a little longer, due to high unemployment, tepid economic growth, and price stability. At a certain point, however, inflation will compel all of them to act. When they raise rates â€" and by much â€" may well dictate the major trends in forex markets over the next couple years.

Australia (4.75%), New Zealand (3%), and Canada (1%) are the only industrialized Central Banks to have lifted their benchmark interest rates. However, the former two must deal with high inflation, while the latter’s benchmark rate is hardly high enough for carry traders to take interest. In addition, the Reserve Bank of Australia has basically stopped tightening, and traders are betting on only one or two 25 basis point hikes in 2011. Besides, higher interest rates have probably already been priced into their respective currencies (which is why they rallied tremendously in 2010), and will have to rise much more before yield-seekers take notice.

China (~6%) and Brazil (11.25%) are leading the way in emerging markets in raising rates. However, their benchmark lending rates belie lower deposit rates and are probably negative when you account for soaring inflation in both countries. The Reserve Bank of India and Bank of Russia have also hiked rates several times over the last year, though again, not yet enough to offset rising prices.

Instead, the real battle will probably be fought primarily amongst the Pound, Euro, Dollar, and Franc. (The Japanese Yen is essentially moot in this debate, and its Central Bank has not even humored the markets about the possibility of higher interest rates down the road). The Bank of England (BoE) will probably be the first to move. “The present ultra-low rates are unsustainable. They would be unsustainable in a period of low inflation but they are especially unsustainable with inflation, however you measure it, approaching 5 per cent,” summarized one columnist. In fact, it is projected to hike rates 3 times over the next year. If/when it unwinds its quantitative easing program, long-term rates will probably follow suit.

The European Central Bank will probably act next. Its mandate is to limit inflation â€" rather than facilitate economic growth, which means that it probably won’t hesitate to hike rates if inflation remains above its 2% threshold. In addition, the front runner to replace Jean-Claude Trichet as head of the ECB is Axel Webber, who is notoriously hawkish when it comes to monetary policy. Meanwhile, the Swiss National Bank is currently too concerned about the rising Franc to even think about raising rates.

That leaves the Federal Reserve Bank. Traders were previously betting on 2010 rate hikes, but since these have failed to materialized, they have pushed back their expectations to 2012. In fact, there is reason to believe that it will be even longer than that. According to a Bloomberg News analysis, “After the past two U.S. recessions, the Fed didn’t start raising policy rates until joblessness had fallen about three- quarters of the way back to the full-employment level…To satisfy that requirement, the jobless rate would need to be 6.5 percent, compared with today’s 9 percent.” Another commentator argued that the Fed will similarly hold off raising rates in order to further stabilize (aka subsidize) banks and to help the federal government lower the real value of its debt, even if it means tolerating slightly higher inflation.

When you consider that US deposit rates are already negative (when you account for inflation) and that this will probably worsen further, it looks like the US Dollar will probably come out on the losing end of any interest rate battles in the currency markets.

Powered By WizardRSS

Out Of Touch!

« The Wait For Rates! | Home

By Mike Conlon | February 11, 2011

At least those are the claims of the opponents of Egyptian President Mubarak, who yesterday pulled a head-fake and defiantly is staying on as President. It had been reported that he was going to resign prior to his speech, but that clearly wasn’t the case. Now there is increased instability in the region as the protests have gotten bigger and the uncertainty of outcome has caused a flight to safety ahead of the weekend.

While this is obviously the major global story today, we also got some price data from different regions around the globe which are supportive of rising inflation.

In New Zealand, they are seeing biflation where the price of food has gone up and home prices have gone down. This is going to be a major theme going forward as asset bubbles (housing particularly) are bound to pop at some point. Because of the cheap flow of money around the globe, demand for housing pushed prices to levels could be deemed excessive.

In the Euro zone, German PPI data came in mostly as expected but UK PPI data came in much higher than expected. Luckily for the BOE, they made their rate decision yesterday so they bought themselves some more time to let inflation creep into the economy.

So this morning is marked by risk aversion in the currency market with Dollar and commodity strength, and equities weakness.

In the forex market:

Aussie (AUD): The Aussie is lower and has fallen under parity with USD as risk aversion has increased in the market. It should also be noted that RBA chief Stevens came out and said that leaving rates unchanged was “sensible” and that the RBA was “ahead of the curve”.

Kiwi (NZD): The Kiwi is also lower on risk themes with the added weight of biflation weighing on the economy. Home prices decreased 2.6% and food prices increased 1.8%, highlighting the dilemma that the global economy is facing. (Click chart to enlarge)

Loonie (CAD): With no news on tap, the Loonie is also susceptible to risk aversion though faring better than other currencies as higher oil prices due to Egypt have mitigated the selling.

Euro (EUR): The Euro is mostly lower on anti-Dollar sentiment as safe haven seeking is taking place. PPI data in Germany came in as expected which shows that they have a good handle on pricesâ€"for now.

Pound (GBP): The Pound is lower across the board after yesterday’s rate policy meeting left rates unchanged which helped the Pound move higher, only to fall back to lower depths after PPI data confirmed what the market already knows: that inflation is prevalent in the UK and that the BOE may be on an economic collision course with the government over the economic climate. (Click chart to enlarge)

Dollar (USD): The Dollar is putting in 3-week highs as risk aversion has induced a flight to safety and demand for the greenback. Yesterday’s initial jobless claims finally posted a 3-handle, meaning that only 383K people officially lost jobs last week vs. the expectation of the usual 410K. I find it amazing that the same media that blamed bad weather for the lousy Non-Farm Payrolls report completely discounted it in the analysis of the jobless claims. I expect this number to be revised higher. Later this morning, consumer confidence figures are due out.

Yen (JPY): The Yen is finally showing some strength but not nearly what would be expected under risk aversion scenarios. This highlights the fundamental weakness of the Japanese economy and could mean major weakness in the ensuing months.

The situation is Egypt is a microcosm for what is going on around the globe. Food and energy prices are rising, but economies are lagging. High unemployment and falling housing prices are dragging on various economies and this situation is highlighted by the turmoil.

The irony of Egypt is as the unrest and uncertainty continue, the higher both food and energy prices are likely to go! Instability in Egypt could set off a domino effect around the Middle East which topples governments and causes oil prices to rise. Add this too the already incredibly cheap money that is flowing around the globe and this is an inflation powder-keg ready to explode!

So I expect to see some more selling today as traders won’t want to carry the risk over the weekend, and I’d advise you to do the same.

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

Who's Working?

« Tensions Flaring! | Home
By Mike Conlon | February 4, 2011
That is the question that will be answered later this morning as today is “jobs Friday� and we eagerly await the release of the Non-Farm Payrolls report and the unemployment number. This is one of the most important data releases as it shows whether or not meaningful jobs are being created. The expectation is for a gain of 140K jobs.
The unemployment rate is also due out and this can sometimes be a deceiving number as the participation rate will sometimes affect the overall numbers. A higher participation rate usually means that workers are less discouraged and looking to get back in the workforce. Our neighbors to the north, Canada will also be reporting their unemployment rate. As goes the US, so goes Canada. At least that has been the market action of late, as part of the fate of Canada’s economy lies with US economic recovery, for better or worse.
There is no other economic data due out for the rest of the day, so expect the markets to trade off of that NFP number.
The Aussie is higher as the RBA lifted both its economic and inflation forecasts despite the recent natural disasters and previous comments form the RBA head.
And lastly, the Euro zone head honchos are meeting today in Brussels for a debt summit where the hope is that they will produce some meaningful response and solution to how to deal with the crisis. Don’t count on it.
In the forex market:
Aussie (AUD): The Aussie is higher across the board as the RBA raised its GDP outlook for 2011 to 4.25% growth from a previous forecast of 3.75% and they raised their inflation outlook with CPI set to increase 3% from a previous forecast of 2.75%. If they are correct in the new assessment, then we will see further rate hikes in Australia some time this year unless another global crisis emerges. (Click chart to enlarge)

Kiwi (NZD): The Kiwi is mostly lower getting a bit of follow-thru from the negative employment report that came out on Wednesday night. In addition, money flows are potentially returning to the Aussie after the RBA raised its outlook.
Loonie (CAD): The Canadian employment report just came out and showed a gain of 69.2K jobs vs. an expectation of 15K, handily beating the estimate. The unemployment rate remained steady at 7.8%. (Click chart to enlarge)

Euro (EUR): The Euro is slightly positive ahead of the US NFP report and has been in a tight range holding just above 1.36. While there was no meaningful data out this morning, the debt summit could produce fireworks if the sides don’t move any closer to resolution.
Pound (GBP): The Pound is somewhat mixed as a reading of house prices showed a gain of .8% for last month vs. an expectation of a decline of .3%. While on reading does not make a trend, this does contribute to the overall sentiment that inflation is rising in the UK.
Dollar (USD): All eyes will be on the NFP report where the US economy is expected to add 140K jobs. The unemployment rate is expected to tick higher to 9.5%, though that may be a function of the participation rate scenario that I mentioned above. Back in the day on the trading desk, we used to wager on the number so I will proffer my guess. My feeling is that the economic data has been too rosy of late so I think the number may disappoint. So I’m calling for a gain of 94K. Note: this is not a trading recommendation or advice, but rather a guess.
Yen (JPY): The Yen is slightly lower as Asian markets were higher overnight and it really is just puttering around waiting for the NFP number. A better than expected number will likely encourage some Yen selling and risk-taking through carry trades, and a worse than expected number could induce Yen strength as a safe haven going into the weekend with Egypt situation still unresolved.
Today’s NFP report really serves as a barometer for the economy and this is one of the reasons why it is so closely watched. While the economic data of late has been better than expected, my intuition always tells me that when expectations are high, they sometimes disappoint.
I am not trying to be Debbie downer here, its just that I think that while the economy is recovering, I don’t think it is happening as fast as people would like to believe. If I’m wrong, I’ll be more than happy to admit as much.
But realize that just because I have a certain view, doesn’t mean that I am married to it and as a trader I will perfectly happy to throw that view aside and join the trade to go the other way.
I also wanted to mention the situation in Egypt, which is still uncertain as to what the likely outcome is going to be. So we could see some selling later in the day and Dollar strength as the flight to safety trade picks up ahead of the weekend.
So be careful around the NFP number as the volatility will be intense. And trade 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!

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

Weekly Forex Review

A messy NFP report has many scratching their heads. When Canada can create twice the number of jobs than its much bigger cousin we could be in big trouble. A Trichet ‘balanced inflation’ statement coupled with geopolitical risk premium being applied has taken the wind out of the EUR bulls sails this week. Below, we have some of the highlights of the week.



EUROPE

• Manufacturing PMI releases across Europe surprised to the upside with Ireland (+5.6pts) and Italy (+4.2) posting sharp increases, driven by strong forward looking orders components. Elsewhere in the Euro periphery, Spanish new orders also improved but Greece remained the weak spot with January manufacturing PMI still deep in contraction territory. The Euro-zone final manufacturing PMI printed slightly better than flash estimate at 57.3 with the German index holding at an elevated level. The data supports ECB tightening prospects, but the financing stress, especially through March and April, will undermine ECB pricing again in the weeks ahead.
• German joblessness fell further than expected last month (-13k) sending the German unemployment rate down to its lowest level since March 1992 (+7.4%).
• In Switzerland, retail sales were particularly weak at -0.4% in December from revised +1.8% in November. Manufacturing PMI fell slightly in January, but orders and employment components were more resilient, posting a smaller rise for the month. Overall, leading indicators point to fairly robust growth in 1st Q.
• Sterling all week got its bid from surprising headline prints. In the UK, January manufacturing PMI hit a record high at 62. New orders rose to 65.6 from 59.3 and employment rose to 58.8, from 57.8. Both indicators are at their highest levels in history and suggest that the manufacturing sector’s share of the private sector is creating jobs. Inflationary pressures are also strengthening as input prices surged to 84.9 from 80.3 and output prices to 62.8 from 58.6. The market anticipates that there is an increasing risk that MPC rhetoric continues to shift in a hawkish direction, especially after the UK services PMI rebounding sharply last month to 54.5 vs. 51.3. UK data this week suggests that the weaker 4th Q GDP growth had been largely weather related.
• Spain is committed to achieving a fiscal deficit of +3% in 2013 and their deficit target in 2010 is in no doubt.
• Ireland was downgraded one notch to A- by S&P’s, and a further downgrade is possible as the government tries to contain bank-rescue costs.
• Germany is making its agreement to an expanded rescue effort for Europe’s most-indebted countries conditional on tighter finance controls.
• Trichet did not disappoint, as expected kept base rates on hold at +1%. Most of the EUR’s early week gains had come on the back of investors believing that the recent hawkish comments from Trichet warrant a Euro-zone rate hike sooner rather than later. His communiqué was less hawkish even after a firm January CPI. ‘Inflation risks are balanced and could shift to the upside which would require careful monitoring’.

AMERICAS

• The first of US job indicators got off on the correct foot, ADP +187k. The second, weekly jobless claims remain volatile, retreating -42k to +415k and reversing nearly 80% of the prior week’s gain.
• The composite manufacturing and non-manufacturing ISM picked up in January, adding +2.3pts to 59.6.
• The US service sector continues to accelerate, unexpectedly picking up last month (59.4 vs. 57.1). January marks the fifth consecutive month of accelerating activity and the highest index in six-years. It’s worth noting that the services sector accounts for two-thirds of the economy, a third of exports and 80% of all private-sector jobs. Most of the subcomponents posted gains, including new-orders, backlog of orders, current ‘production’ and employment. US momentum continues.
• Canadian employment numbers blew analysts estimates out of the water, beating them by four times (+69.2k vs. +18.2k). The unemployment rate jumped two ticks to +7.8%. Just less than 2/3rd of the report was supported by the Public sector. Is that sustainable? The gain was split between full-time (+31.1k) and part-time jobs (+38.0k). Less of the headline job rise will flow through to an expansion of hours worked given the 55% weighting on part-time jobs.
• The market witnessed a messy NFP release, with a disappointing headline print (+36k vs. +136k) and a market appealing unemployment rate (+9% vs. +9.5%). It was not a weather report despite headlines on the massive number of people who could not make it in to work due to snowstorms. Making it to work or not is not the relevant issue. It’s whether you were still counted on payrolls for any part of the reference period that matters. There are 43.8% of Americans or 6.2m been out of work for six-months or longer. It solidifies Bernanke’s QE2 agenda.

ASIA

• A moderation in China’s PMI (-1 to 52.9) is reducing fears of an aggressive PBOC tightening cycle. Stronger European PMI’s are helping to support the EMEA currencies because of their dependence on core European growth. Historically, PMI on average rises slightly in the month of January, however, analysts believe that the Chinese New Year holiday may have been somewhat distorting.
• Cyclone Yasi, the perfect storm, hit already flooded Australia, managing to miss many of the major centers. The cyclone will probably further dent March quarter GDP following the floods.
• AUD has found some support from a surprisingly hawkish Statement of Monetary Policy from the RBA. The Central Bank has tweaked this years forecast, but, crucially, left its medium-term forecasts for inflation and GDP unchanged at rates that point to further policy tightening over the next year. Policy makers are ‘looking through the near-term flood affect, focusing on continued tightening in the labor market and the investment surge. Pricing for the RBA over the next year rose another +5bps to +37bps Geopolitical reduced risk sentiment has pared the AUD advance.
• BOJ officials are trying to ‘jawbone’ Yen lower. Hidetoshi Hamezaki said they are watching the FX markets ‘carefully’ for they are having a toxic effect upon Japanese corporate profits.
• Chinese New Year holidays

WEEK AHEAD

• The US Treasury department will sell $72b new bonds next week, matching market consensus ($32b-3’s, $24-10’s, $16b-30’s).
• UK will be the focus of the week in Europe with its production numbers, Asset Facility and the BOE rate announcement.
• We will get building permits and housing starts out of Canada, ending the week with its Trade number.
• Bernanke is due to testify on the economic outlook and monetary and fiscal policy before the House Budget Committee. We will finish the week with the US’s Trade Balance and Preliminary UOM Consumer Sentiment release.
• Down-under, the market will focus on the Aussie job numbers out mid-week.

Powered By WizardRSS

Despite Recent Rise, Euro Still Looks Weak

As the Euro moves past $1.38 per Dollar towards a 1-year high, many traders are wondering if perhaps the common currency’s woes aren’t in the past. This would be a mistake. That’s because most of the forces behind the Euro’s rally actually have very little to do with the Euro.

The main cause of Euro strength has been a pickup in risk appetite. Investors are becoming increasingly more confident in the prospects for global economy recovery, and the crisis mentality is rapidly fading. Ironically, the flurry of positive economic data emanating from the US has been terrible for the Dollar. You can see from the chart below that except for a gap in 2010 Q4 (due to a flareup in the EU sovereign debt crisis….more on that below), the US stock market rally has coincided with a shift away from the Dollar and towards the Euro.

In fact, the Euro still remains extremely vulnerable to the ebb and flow of investor risk tolerance. That applies not only to events endogenous tot the EU, but also to global market shocks. That means that any reminder of the Eurozone’s fiscal issues (such as last week’s downgrade of Ireland’s credit rating) is likely to be reflected in a weaker Euro. For another example, look no further than the recent political turmoil in Egypt and the wider Middle East. Summarized one analyst, “In itself, Egypt is not that big an economy. But there is some worry about the supply of oil through the Suez Canal. It does impart a negative vibe on risk.”

The Euro’s recent appreciation is also rooted in technical factors. What began as a modest rally quickly turned into a upward surge as investors moved to cover their short positions. The WSJ reported that “much of the recent rally was fueled by hedge funds and other speculative investors covering short positions…Investors are ‘not going out and buying the euro because they love it.’ ” This apparent short squeeze can be seen in the sudden and massive reversal of positions that was documented in the most recent CFTC Commitment of Traders Report.

On a related note, there are signs that Euro puts (which allow investors to hedge Euro exposure by giving them the right to sell) are unusually cheap at the moment. “Demand for euro puts, which give investors the right to sell the euro in the future, appears to be growing, relative to euro calls, which allow them to buy, analysts say. That reverses a recent trend that had investors actively selling euro puts or sitting on their hands as the euro climbed…[and] suggests investors are becoming more biased towards selling the euro.” If speculators think that the options market is mis-pricing risk, they might start buying up puts and exert downward pressure on the Euro.

The only factor which could be construed as legitimately positive for the Euro pertains to interest rate differentials. Currently, Euro rates are just as low as in the US and the rest of the G4 world. However, that could soon change. The European Central Bank (ECB) is notoriously hawkish when it comes to conducting monetary policy. If you recall, it foolishly raised its benchmark interest rate during the height of the credit crisis. With inflation already running above 2%, you can bet that it will only be a matter of time before it reacts in kind. For the sake of contrast, consider that the Fed is still in the process of easing, via QE2.

While rate hikes would certainly provide a boost for the Euro, it is unlikely that rate differentials will be wide enough to spur any serious among yield-seeker in the immediate future. In short, I think the downside risks to the Euro (which is apparently on the verge of “disintegration,” according to George Soros) far outweigh any further upside support, and I think the rally will peter out soon.

Powered By WizardRSS

Not a Hawk, But A Dove?

« Retail Sales Tales! | Home

By Mike Conlon | January 24, 2011

At the most recent ECB rate policy meeting, President Trichet took the markets by surprise in issuing what were perceived to be “hawkish” comments with regard to potential inflation and the policy response to it. This weekend in an interview, he backed away from those comments saying that rates were “appropriate”.

In the Euro zone, PMI figures came in mixed with Industrial new orders coming in lightly higher than expected, though neither report is a major market mover. In addition, there is some pressure on Irish bond yields this morning as they attempt to come up with a budget plan.

There’s no data due out for the US trading session, and earlier data from the Euro zone appears to be muted at best. The big news this week will be the FOMC meeting on Wednesday, followed by GDP figures on Friday. Also this week the market will get a multitude of stock earnings reports, so keep an eye on the correlative effects on the forex market.

Overnight in Australia, PPI figures showed an increase of 2.7% which was higher than the previous reading of 2.2% though lower than the expectation of 3.2%. Nevertheless the Aussie is trading higher, ahead of tomorrow’s more significant reading of CPI data.

Lastly, reports out of Japan have brought the potential for further currency intervention back in play as a government report said that excessive Yen strength “cannot be tolerated”.

So this morning’s action is marked by Euro weakness and a bit of Dollar strength.

In the forex market:

Aussie (AUD): The Aussie is higher across the board as PPI figures show price growth and tomorrow’s CPI data will show whether of not traders believe we will see more than 1 rate hike this year, which is the current consensus.

Kiwi (NZD): The Kiwi is also higher this morning as Yen weakness is driving demand for positive interest rate differentials and although the only news on tap for the Kiwi this week is Wednesday night’s RBNZ rate decision, look for it to trade similarly to the Aussie.

Loonie (CAD): The Loonie is mixed this morning ahead of tomorrow’s CPI data report which will show how they are faring with regard to inflation as oil prices are slightly lower to start the morning, trading just below 89.

Euro (EUR): The Euro is lower across the board on the Trichet dovishness and the potential political gridlock in Ireland with regard to instituting a budget. This is a fairly light week of news out of the Euro zone, with some consumer and business confidence figures due out later this week. (Click chart to enlarge)

Pound (GBP): The Pound is mostly lower this morning ahead of tomorrow’s GDP report. While this is an important report, it may be slightly less significant than Wednesday’s BOE rate policy meeting minutes from which we will see if any policy-makers have changed their tune with regard to inflation and the BOE response to it. (Click chart to enlarge)

Dollar (USD): The Dollar is tracking mostly higher this morning as Euro and Yen weakness send money flows to USD. While there is no news out today in the US, keep an eye on Wednesday’s FOMC decision and statement.

Yen (JPY): The Yen is weaker across the board as the government rhetoric surrounding a weaker Yen and possible intervention in the market (again) if need be has encouraged some selling.

As I mentioned last week, inflation should be on the minds of every Central Banker around the world. This week we will get a birds-eye view of whether or not this is becoming a concern or whether or not they are content to allow inflation to rise.

Right now there really is a “us vs. them” mentality out there when it comes to monetary policy. Governments would love to have inflation to help themselves repay their debt burdens in currency that is worth less (not worthless!). But in the meantime, higher prices reduce consumers’ purchasing power and acts as a hidden “tax” as things cost more, particularly food and energy.

How this helps an economy is beyond my comprehension as all I see coming out of it is floundering and stagnation. Not quite a recipe for health!

I’m going to keep an eye out for the statement from the FOMC and the minutes from the BOE to see if there are any courageous policy-makers left willing to take on government fat-cats and banking interests.

So for now my trading is for the short â€"term, until a clearer picture emerges.

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

Business | Christians | Coupons | Discussions | Gamers
Legal | Politics | Sports | Teens | Webmasters

Irish Drama far from over

The Irish coalition’s downfall has been one of the most remarkable events in Irish politics. Expect more volatility in this Dáil’s final days

IT IS NO exaggeration to say that the downfall of Brian Cowen’s Government has been one of the most remarkable events in Irish political history. Politics will probably never be the same again.

Over the past 10 days, the pace of events has been bewildering. Cowen’s decision to resign as leader of Fianna Fáil on Saturday, while remaining on as Taoiseach, was stunning, if inevitable. People scarcely had time to digest it when the Green Party announced its decision to leave Government yesterday.

All the extremities of language have been used in an attempt to describe what has happened, but they cannot convey the astonishing sequence of events. Most incredible of all has been the blundering of a party whose hallmark has always been its ability to win and hold power.

In one sense, though, Fianna Fáil’s self-destruction was probably inevitable. The scale of the crisis brought about by the collapse of the Celtic Tiger economy was bound to manifest itself in seismic political change sooner or later.

The expectation was that Fianna Fáil would face its moment of truth in the general election when the voters got a chance to vent their anger. What was so surprising was the manner in which the party began to implode before its term of office expired.

And the drama is far from over. In the next few days, the Dáil will have to find a way of dealing with a situation in which the Opposition has effective control of the business of the House.

The decision of the Green Party to withdraw from coalition was an inevitable reaction to the leadership crisis in Fianna Fail. The action put paid to its own plans to get prized legislation like the Climate Change Bill and waste levies into law, but the party is still sticking to its pledge to get the Finance Bill through.

The Irish Times

Business | Christians | Coupons | Discussions | Gamers
Legal | Politics | Sports | Teens | Webmasters

Latin America Enters Currency War

A few years ago, I wouldn’t deign to discuss such obscure currencies as the Chilean Peso and the Peru New Sol. But this is a new era! These currencies â€" and their Central Banks â€" are being thrust into the spotlight as they join more established Latin American countries in the fight to contain currency appreciation.

Major Latin American currencies have collectively appreciated more than 29% since March 2009. (When researching this post, I discovered the fantastically apropos JP Morgan Latin American Currency Index, which is based on the currencies of Mexico, Columbia, Brazil, Argentina, Peru, and Chile, and is displayed in the chart above). That includes a nearly 45% gain in the Brazilian Real and a 30% rise in the Mexican Peso, with more modest gains by the Peru New Sol, Chilean Peso, and Colombian Peso. The Argentinean Peso seems to be dragging the entire index down, having never recovered from the sovereign debt default in 2008.

Over this period, capital has poured into Latin America: “Net private inflows surged to $203.4 billion last year from $57.5 billion in 2003, according to the World Bank. Stock market indices in the region are closing in on all-time highs, and bond prices have risen (i.e. 32% gain in Colombian bonds in 2010) to such an extent that spreads to Treasury Securities â€" the most common comparison â€" have narrowed to record lows. Perhaps this not for naught, as the region recorded economic growth of 5.7% in 2010 on the basis of rising commodities prices, aggressive/fiscal policies, and an overall global economic recovery.

Faced now with rising inflation (6% in Brazil, 4.5% in Chile, 11%+ in Argentina, etc.) and declining export competitiveness, Latin American countries have moved to stem the appreciation of their respective currencies. Brazil, whose finance minister coined the term ‘currency war’ and has been one of the most aggressive interveners in the forex markets, has been the most active. Its Central Bank continues to buy massive quantities of Dollars, it has raised taxes on capital controls, and most recently it moved to limit the ability of banks to short Dollars as a means of betting on the Real’s appreciation.

Meanwhile, “Chile, which hadn’t bought dollars in the foreign-exchange market since 2008, announced Jan. 3 it would purchase a record $12 billion, equal to 43 percent of the country’s currency reserves. In Colombia…the central bank is buying at least $20 million a day in the spot market. Peru purchased $9 billion last year, the second-biggest amount ever. While Mexico has so far refrained from intervention, it recently negotiated an IMF credit line which it could potentially tap for the purpose of holding down the Peso. All together, the Central Bank reserves of the six currencies mentioned above rose 16.5% in 2010 and now exceed $500 Billion.

It’s difficult to discern whether this intervention is having any impact. On the one hand, the raising of reserve requirements will certainly make it difficult for domestic banks to short their own currencies. In addition, some foreign speculators are getting spooked about all of the uncertainty and have moved to limit their exposure to Latin America. “There might be every macro reason in the world to love the Brazilian currency, but the randomness of policy to try and stop appreciation makes us want to have a smaller position,” explained one fund manager.

On the other hand, there is the possibility that legitimate institutional investors will also be scared away, which is problematic because Latin America remains reliant on foreign capital to fund its lavish fiscal spending and growing trade deficits. “There’s always a danger that by having capital controls, you can force some good capital to stay out of the country,” summarized one analyst. There are also concerns that Central Banks are losing sight of the bigger picture: “Central banks view the level of exchange rates as the priority rather than using them to help slow inflation.”

The problem, ultimately, is that Latin American countries want to have their cake and eat it too. The President of Colombia spoke recently of 5% GDP growth and the country’s desire to “put itself in the coming years among the most dynamic economies in the world,” but has whined about the upward pressure on the Peso. Brazil’s newly elected president has also spoken of becoming a global economic leader while its Finance Minister continues to sound off on the currency war. Meanwhile, Chile’s economy remains heavily tilted towards copper exports (it is apparently the world’s largest producer), and then wonders why rising prices have lifted the Chilean Peso. All blame the Fed’s Quantitative Easing Program for their currency woes and use China’s currency peg as basis for intervention.

In short, the appreciation of Latin American currencies has largely mirrored fundamentals. Individually and as a group, their exchange rates are still well below the bubble levels of 2008. Most of the rise over the last two years has merely offset the precipitous declines that took place during the height of the credit crisis. In addition, given the divergence in performance between individual currencies, it’s clear that investors (whether speculative or passive) are discerning. They have flooded the commodities producers with cash, while continuing to punish Mexico and Argentina over fiscal issues.

For that reason, there is reason to believe that most of the region’s currencies will continue to appreciate. Central Banks might manage to stall that appreciation in the short-term, but once they accept the inevitability of interest rate hikes (as Brazil already has) as the cure for inflation, the long-term upward path will be restored. Summarized one economist, “In these games of cat and mouse, I think policy makers will probably lose. There is too much unregulated capital in the world, particularly in developed countries. These guys will find ways around various restrictions.”

Business | Christians | Coupons | Discussions | Gamers
Legal | Politics | Sports | Teens | Webmasters

The next shoe to drop?

US Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers. Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.

But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid.

Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides.

New York Times

Business Forum | Christian Forum | Coupon Forum | Discussion Forum | Gamers Forum
Legal Forum | Politics Forum | Sports Forum | Teen Forum | Webmaster Forum

Aussie May Have Peaked in 2010

When offering forecasts for 2011, I feel like I can just take the stock phrase “______ is due for a correction” and apply it to one of any number of currencies. But let’s face it: 2009 â€" 2010 were banner years for commodity currencies and emerging market currencies, as investors shook off the credit crisis and piled back into risky assets. As a result, a widespread correction might be just what the doctor ordered, starting with the Australian Dollar.

By any measure, the Aussie was a standout in the forex markets in 2010. After getting off to a slow start, it rose a whopping 25% against the US Dollar, and breached parity (1:1) for the first time since it was launched in 1983. Just like with every currency, there is a narrative that can be used to explain the Aussie’s rise. High interest rates. Strong economic growth. In the end, though, it comes down to commodities.

If you chart the recent performance of the Australian Dollar, you will notice that it almost perfectly tracks the movement of commodities prices. (In fact, if not for the fact that commodities are more volatile than currencies, the two charts might line up perfectly!) By no coincidence, the structure of Australia’s economy is increasingly tilted towards the extraction, processing, and export of raw materials. As prices for these commodities have risen (tripling over the last decade), so, too, has demand for Australian currency.

To take this line of reasoning one step further, China represents the primary market for Australian commodities. “China, according to the Reserve Bank of Australia, accounts for around two-thirds of world iron ore demand, about one-third of aluminium ore demand and more than 45 per cent of global demand for coal.” In other words, saying that the Australian Dollar closely mirrors commodities prices is really an indirect way of saying that the Australian Dollar is simply a function of Chinese economic growth.

Going forward, there are many analysts who are trying to forecast the Aussie based on interest rates and risk appetite and the impact of this fall’s catastrophic floods. (For the record, the former will gradually rise from the current level of 4.75%, and the latter will shave .5% or so from Australian GDP, while it’s unclear to what extent the EU sovereign debt crisis will curtail risk appetite…but this is all beside the point.) What we should be focusing on is commodity prices, and more importantly, the Chinese economy.

Chinese GDP probably grew 10% in 2010, exceeding both economists’ forecasts and the goals of Chinese policymakers. The concern, however, is that the Chinese economic steamer is now powering forward at an uncontrollable speed, leaving asset bubbles and inflation in its wake. The People’s Bank of China has begun to cautiously lift interest rates, raise reserve ratios, and tighten the supply of credit. This should gradually trickle down in the form of price stability and more sustainable growth.

Some analysts don’t expect the Chinese economic juggernaut to slow down: “While there is always a chance of a slowdown in China, the authorities there have proved remarkably adept at getting that economy going again should it falter.” But remember- the issue is not whether its economy will suddenly falter, but whether those same “authorities” will deliberately engineer a slowdown, in order to prevent consumer prices and asset prices from rising inexorably.

The impact on the Aussie would be devastating. “A recent study by Fitch concluded that if China’s growth falls to 5pc this year rather than the expected 10pc, global commodity prices would plunge by as much as 20pc.” [According to that same article, the number of hedge funds that is betting on a Chinese economic slowdown is increasing dramatically]. If the Aussie maintains its close correlation with commodity prices, then we can expect it to decline proportionately if/when China’s economy finally slows down.

Business Forum | Christian Forum | Coupon Forum | Discussion Forum | Gamers Forum
Legal Forum | Politics Forum | Sports Forum | Teen Forum | Webmaster Forum

Retail Sales Tales!

« Chinese Juggernaut! | Home

By Mike Conlon | January 21, 2011

This morning we received three different retail sales reports from the UK, Canada, and New Zealand, each telling a different story about economic progress.  Retail sales are a good barometer of consumer expectations and confidence, and can sometimes forecast inflation fears.  The logic is that if you think prices are going up, you may want to buy today rather than chance paying more in the future.

In New Zealand, retail sales increased 1.5% vs. an expectation of 1.1%, though most of that was led by cars and energy as the core rate actually fell for the second straight month.  So traders need to be careful as this actually shows weakness and not strength, as consumers are more focused on debt reduction.

In the UK, retails sales declined .8% vs. an expected .2% decline for the largest December decline on record.  Higher prices and inclement weather is the excuse given, but overall this may be a sign that already inflation is taking a toll.

In Canada, retail sales figures came in much better than expected, posting a gain of 1.3% for November vs. an expectation of .4%.  This shows economic strength and resilience as the Canadian economy appears to be picking up steam.

In the Euro zone, German business climate and expectations figures came in better than expected, though the current assessment figures came in lower.  This improved outlook has helped buoy the Euro higher this morning.

Lastly, my “ I told you so moment” :  the Dollar is weaker today as yesterday’s prevailing thought that China would attempt to tighten monetary policy seems unlikely as it is looking more doubtful that they will raise rates as they are potentially facing a liquidity problem in overnight lending.  Yesterday I mentioned that I thought the market had it wrong and that I didn’t think they would move to tighten. It’s always something!

In the forex market:

Aussie (AUD):  The Aussie is mostly higher on the Chinese sentiment reversal that occurred overnight.

Kiwi (NZD):   The Kiwi is mostly lower on disappointing retail sales figures, despite the headline number.  However Dollar weakness means that it is higher against at least one currency.

Loonie (CAD):   The Loonie is higher against all but the Euro despite lower oil prices.  Retail sales figures came in better than expected and a bit of inflationary pressure could reverse dovish comments made by the BOC earlier this week at their interest rate announcement.  (Click chart to enlarge)

Euro (EUR):  The Euro is higher across the board as anti-Dollar sentiment and a renewed economic outlook from Germany looks positive for the Euro zone.  However, Fitch rating agency has warned of potential future downgrades which may be tempering Euro gains today.  (Click chart to enlarge)

Pound (GBP):   The Pound has rebounded from earlier losses to now posting gains vs. the majority except Euro.  While retail sales were worse than expected, the prevailing thought is that inflation is to blame for the result which should provide Pound hawks with more ammo to support their notion that the BOE needs to be less accommodative with monetary policy.

Dollar (USD):   The Dollar is weaker across the board as the sentiment that China would tighten has been reversed.  Stocks in the US are lower to start the morning and there is no news on the docket that would be a potential game-changer.

Yen (JPY):  The Yen is higher against all but the Pound and Euro as signs of diminishing deflation are starting to emerge.  Japan has been mired in a deflationary “death spiral” for some time and the government has raised its economic assessment for the first time in 7 months.

We can learn a lot from consumer behavior which manifests itself in the form of retail sales figures as this can give us clues as to where each nation may be with regard to inflation.   Higher retail sales can mean that inflation expectations are higher for the future; and lower sales can be a sign that inflation is already a current concern.

It is no secret that global inflation is on the rise, particularly in emerging markets countries, and the question remains whether or not Central banks will be quick enough to act or whether they will be content to allow inflation to scare people into consumption.

While this may deemed “necessary” by some (Bernanke et al), it really is unfortunate that they feel that the only way to economic recovery is through the potential hardships of the people they are meant to govern.

This story isn’t finished folks, not by a long shot!

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, bank, Bernanke, blog, BOE, cad, canada, central bank, China, course, currenc, currency, currency market, currency trading, dollar, dow, economic, economy, EUR, Euro, fear, forex, forex market, forextrading, free, fx, fxedu, gbp, Il, interest, interest rate, Japan, jpy, Kiwi, live, loonie, lot, lower, market, Mike Conlon, new zealand, news, nzd, oil, pound, practice, practice account, retail sales, sentiment, ssi, stock, stocks, time, trade, trader, USD, Yen

Topics: What To Look At In The Market |

Comments

Business Forum | Christian Forum | Coupon Forum | Discussion Forum | Gamers Forum
Legal Forum | Politics Forum | Sports Forum | Teen Forum | Webmaster Forum

Fed Paper: Power of Technical Analysis in Forex is Declining

Being a practitioner of fundamental analysis, you could say that I’m always on the lookout for hard evidence that fundamental analysis is superior to technical analysis. Thus, I was delighted to discover a working paper (“Technical Analysis in the Foreign Exchange Market“) by the St. Louis Branch of the Federal Reserve Bank, released just this month. Alas, the paper barely touched upon fundamental analysis, but its conclusions on technical analysis in the currency markets were startling. In short, the effectiveness of technical analysis in the currency markets has declined steadily since the 1970s, such that only the most sophisticated/complicated strategies are currently profitable.

Rather than conduct original research, the report’s authors â€" Christopher J. Neely, an assistant vice president and economist at the Federal Reserve Bank of St. Louis, and Paul A. Weller, the John F. Murray Professor of Finance at the University of Iowa â€" performed a meta analysis of the existing research. They cited a litany of studies, covered a variety of topics, sometimes with contradictory conclusions. In order to ensure comprehensiveness, they looked at the profitability of numerous types of technical analysis indicators, across numerous currency pairs, over time, in different types of trading environments, and adjusted for risk.

All of the earlier studies, dating back to the 1960s, established the profitability of technical analysis, even when it was simplistic. Since then, however, most studies have shown steadily declining effectiveness: “TTRs [Technical Trading Rules] ere able to earn genuine risk-adjusted excess returns in foreign exchange markets at least from the mid-1970s until about 1990…and that rule profitability has been declining since the late 1980s.” The same trend has unfolded in the last decade, as traders have relied increasingly on computerized trading strategies: “Kozhan and Salmon (2010), using high frequency data, find that trading rules derived from a genetic algorithm were profitable in 2003 but that this was no longer true in 2008.”

Given that the two authors also concede that the financial markets are undoubtedly inefficient and that currency markets in particular are filled with observable trends, how should we understand this decline in the effectiveness of technical analysis? In one word, the answer is competition. “Profit opportunities will generally exist in financial markets but…learning and competition will gradually erode ["arbitrage away"] these opportunities as they become known.” In addition, there has been a “dramatic rise in the volume of algorithmic trading,” which has given rise to a so-called financial arms race to develop ever-more sophisticated trading strategies.

Indeed, the research shows that “more complex strategies will persist longer than simple ones. And as some strategies decline as they become less profitable, there will be a tendency for other strategies to appear in response to the changing market environment.” In addition, technical analysis that is used to trade exotic (i.e. less liquid) currencies is more likely to be profitable than major currencies, especially the US Dollar.

The report opens the door to further research, by indicating that “Technical trading can be consistently profitable in certain circumstances.” As if it wasn’t already clear, though, the vast majority of technical traders (perhaps all traders for that matter) are destined to be outmaneuvered and will ultimately lose money trading forex. Another way of looking at this, however, is that the the savviest traders â€" those that can spot complex trends and execute trading strategies quickly â€" still have a chance at earning consistent profits.

Webmaster Forum | SEO Forum | Coding Forum | Graphics Forum

Da Bears EUR offside

It’s back to the drawing board for ‘da bears’ as the EUR has gained +6.6% against the dollar since hitting a four-year low in the first week of June. Sitting on its recent highs, glancing back, the lows are looking further and further away. The EUR buoyed by seasonal earnings, stronger European debt auctions and weaker US data seems to want to test its upper technical resistance levels of 1.2950-1.3000. The market remains apprehensive about today’s data. Will this morning’s US retail sales print and the FOMC minutes detract from the latest optimism about growth? The sales figures are expected to provide further evidence that the economy lost momentum towards the end of 2nd Q. While the FOMC communiqué did provide a more downbeat statement, reflecting the weaker tone of the incoming economic data, most likely did not warrant a discussion on quantitative easing. After this, the focus is back to China and GDP print this evening.

The US$ is mixed in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Yesterday’s widening in the US trade deficit from -$40.3b in Apr. to an 18-month high of -$42.3b in May was all due to an increase in the non-petroleum deficit. The real trade deficit, which is what matters for real-GDP growth, widened from $44.2bn to $46.0bn. Analysts project that if it were to remain broadly steady last month, net trade would subtract more than -1% from annualized GDP growth in the 2nd Q. That print, would certainly throw a ‘cat amongst the pigeons’ on the market’s estimate of a -0.2% decline. That been said, analysts will wait for this morning US retail sales data before laying claim to any predictions. One should remember that the trade data was for May, and does not reflect the slowdown in activity that other indicators have highlighted of late.

The NFIB (National Federation of Independent Businesses) small business survey reported a decline in the headline optimism index, from 92.2 to 89.0 in July. This has reversed most of the gains witnessed over the past two months. Digging deeper, the weakness was widespread, with the expected capital expenditure, inventories, earnings and sales sub-categories all falling. Consumer confidence is the key component in driving growth. Of late, global confidence indicators are experiencing a weakening bias.

The USD$ is lower against the EUR +0.01% and GBP +0.42% and higher against the CHF -0.33% and JPY -0.46%. The commodity currencies are stronger this morning, CAD +0.33% and AUD +0.38%. Owning the loonie is like a winning lottery ticket. It continues to pay out. Stellar fundamental reports of late have traders increasing bets that the BOC will hike rates for the remainder of the year. It seems to be a done deal that Governor Carney will raise +25bps next Tuesday and perhaps another +25bps in Sept. At +1%, Carney has the latitude to step back and assess global growth for the 3rd Q, which in fact could persuade policymakers to ‘skip a beat’ and pause, so that they do not get too far ahead of their southern neighbors. With risk appetite being better than it has been over the last trading week favors growth yield sensitive currencies like the AUD and loonie. Any dollar rallies will only give speculators a better ‘average’ opportunity to own the CAD. It’s difficult to find any technical or fundamental reason to ‘not’ own the currency, whether it’s growth, the BOC attempt to normalize rates somewhat (+0.50%) or as a safer-haven proxy. Couple this with commodities has speculators wagering bets that the CAD will outperform other economies whose monetary policy is expected to experience a prolonged period of near-zero benchmark rates. For most of this month, the loonie has followed equities, in fact, the currency has a +85% correlation with the Dow. On the crosses, CAD is holding its own and under normal conditions is seen as a safer way to play a global economic recovery with links to commodities and less banking.

The AUD is trading within proximity of its three week high on the back of buoyant regional bourses and confidence reports. Thus far, stronger reported earnings in the US is pressurizing the ‘must have’ risk-aversion currencies and promoting the growth sensitive, higher yielding and commodity based ones. It seems that the only immediate concern for the currency could be the looming federal election to be called by new PM Gillard. Currently, there is little evidence that the overall positive sentiment is running out of momentum. Last week we saw that there was nothing better to drag a currency higher than strong employment numbers. This week, economic sentiment seems to rule the coop. Last week, Governor Stevens left the cash O/N rate unchanged for a second consecutive month (4.50%). In his following communiqué, the RBA stated that consumer spending and business investment are expanding. Policy makers are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. Because of equities actions, the market is a cautious buyer on pullbacks, wary that the recent strong rally technically may be overdone (0.8833).

Crude is little changed in the O/N session ($77.10 -5c). Crude prices rose yesterday, erasing some of this weeks earlier declines on earning’s optimism that is fuelling an equity rally that may signal an economic recovery in the US. With the dollar also declining vs. the EUR has increased the appeal of commodities as an alternative investment. Last week, the black-stuff had a + 5.5% gain, the biggest rally in six weeks, as a drop in jobless claims ‘bolstered speculation that the country would sustain its economic recovery’. Later this morning the market expects another weekly draw down on stocks, however, the headline print is ‘not’ expected to be as negative as the last report. It revealed a drawdown of -5m barrels, somewhat inline with market expectation because of hurricane Alex, but, it was the other subcategories that were capable of reining in the price advance. Data showed an increase of +1.3m barrels for gas stockpiles and an increase of +300k for distillates stocks (heating and oil). While the headline for crude was bullish, the numbers for gas was bearish. Analysts believe that the gas markets numbers continue to show ‘lackluster demand and will put pressure on the entire energy complex in the days to come’. The EIA revealed a larger than expected increase in natural-gas stockpiles to +78 bcf vs. +60 bcf’s. We continue to remain range bound with the price action as the market is looking for stronger evidence to tackle the technical support and resistance levels.

A number of factors are supporting the ‘yellow metal’s’ largest rally in over a month. Gold is rallying on the heels of positive sentiment expressed by a rally in the equity market, a weaker dollar and finally a Portuguese 2-notch downgrade by Moody’s. Strength in commodities has a positively strong correlation with equities. Pick your poison, as every excuse is legitimate to wanting this commodity to be a part of ones portfolio. Technically, the bullish sentiment had been on hiatus with profit taking testing the medium term support levels. Fundamentally, in the short term the metal will find it difficult to rally aggressively, as historically, this is the ‘slowest’ season for physical demand. Despite this, longer term view, market concerns over global economic growth is supporting the ‘yellow’ metal prices on pull backs. Year-to-date, the commodity has gained +12.5% as investors have been content in using the commodity as a hedge against any European holdings ($1,213 +40c).

The Nikkei closed at 9,795 up +258. The DAX index in Europe was at 6,207 up +16; the FTSE (UK) currently is 5,272 up +1. The early call for the open of key US indices is higher. The US 10-year backed up 7bp yesterday (3.12%) and are little changed in the O/N session. Treasuries extended their losses to a fifth day as the market prepares to take down the last of the $69b’s worth of new product this week (3’s $35b, 10’s $22b and Bonds $12b) and on the back of a global bourse rally, reducing the demand for the safe heaven asset class. Throw in a revised IMF forecast for global growth, warrants dealers to cheapen up the curve and push 10-year yields to threaten the 3.15% resistance level. Yesterday, the 10-year note sale came in at a yield of 3.119%. The bid-to-cover ratio was 3.09, compared with the average of 3.06 over the past 8-auctions. Overall, the auction generated a healthy demand for the benchmark. The indirect bid (proxy for foreign buyers) was 42% compared to an 8-auction average of 38.3%. The direct bid (non-primary dealers) was 10% vs. an average of 15.5%. Current market sentiment has dealers wanting to sell product on up-ticks.

Powered by WizardRSS | Full Text RSS Feeds

Portugal Downgrade!

« US Earnings On Tap! | Home

By Mike Conlon | July 13, 2010

In the European session, Moody’s ratings agency downgraded Portugal two notches to A1 but maintained a “stable” outlook while citing weak growth prospects.  ECB President Trichet maintained that monetary policy is appropriate in an attempt to assuage the market.  Meanwhile, investor confidence figures in Germany weakened, as did wholesale prices.

In the UK, higher than expected CPI figures showed that inflation may not be subsiding as the BOE had expected which halted the Pound’s 3-day decline as expectations for normalized monetary policy have picked up for the second half of 2010.  In addition, home prices expanded to the highest reading since 2007, adding further support for the normalized monetary policy view.

Earnings season in US kicked off yesterday after the bell and generally speaking have been viewed as positive.  Stock index futures are higher in the pre-market, so we are seeing some Dollar weakness generally in line with risk-taking.

In the forex market:

Aussie (AUD):  Overnight, Australian business was unchanged as businesses reported improving sentiment.  However, there is some pressure on the Aussie as concerns over a slowing Chinese economy have increased.

Kiwi (NZD):  The Kiwi is rebounding from earlier lows due to Chinese slowdown concerns as the market is anticipating higher CPI data later this week.

Loonie (CAD):   The Loonie is higher this morning as both US corporate earnings and commodities are higher.  The Loonie will be in focus this week as Canada stands to benefit from good earnings in the US more so than the Aussie and Kiwi as the US is the largest importer of Canadian goods and services.

Euro (EUR):   The Euro is lower this morning on the Portuguese debt downgrade, though Greece had a successful bond auction which has pared losses.  Both German and Euro zone economic sentiment figures came in less than expected, showing a deteriorating outlook for the economy.   Wholesale prices in Germany were also lower, with the index showing a decline of .2% for the month vs. an expectation of a .2% rise, also taking the year-over-year figure down to 5.1% from an expectation of 5.5%.

Pound (GBP):   The UK reported CPI data showing a 3.2% gain, less than the BOE was hoping and still above its target limit of 3%.  The BOE has a dual mandate to keep inflation in check and encourage employment, so it may have its hands full trying to balance economic growth and taming inflation.  Nevertheless, the market sees this as reason to support the view that the BOE may return to normalized monetary policy in the second half of 2010.  In addition, house prices rose 11% to the highest levels in almost 3 years.

Dollar (USD):   The Dollar I slower this morning as corporate earnings season has started and the initial reports are positive for the economy.  Stock futures and commodities are higher in the pre-market, and the inverse correlation of the Dollar to the equity markets appears to be intact this morning and risk appetite is increasing.

Yen (JPY):  The Yen started the morning higher but is giving back gains as the US market becomes the focal point of the trading day.  Risk due to the debt downgrade in Portugal had provided the Yen with a bid, but that appears to be reversing.  This took the Nikkei lower, despite the fact that Japanese consumer confidence advance for the sixth straight month.

The two major themes in the world market right now are US corporate earnings and the continued EU debt crisis.  While US earnings have started out on a positive note, the downgrade of Portuguese debt has counter-acted the positive sentiment.

It is important to note that certain news carries more weight in different market sessions.  For example, the earnings news was initially viewed as positive in the overnight session….until the debt downgrade reversed sentiment in the European session.  Now that the US session is about to begin, the market has returned its focus to the positive news in the US.

This is a familiar pattern that we see time and time again.  Since the majority of the risk in the marketplace stems from the Euro session, there will be times when seemingly good news can be derailed by bad news only to be outweighed by the good news again as the US session begins.

This can provide traders with numerous opportunities to get into positions based on the opening of the US session!  For those who prefer to hold trades overnight, you really need to be careful with stop placement as the potential for swings from risk taking to risk aversion are increased as each trading session opens.

So today will be interesting to see which news today is more favored by the market.  My guess is the good news wins!

If you are not familiar with the different trading sessions and how they affect the forex market, be sure to check out our currency trading courses!

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

Tags: account, AUD, Aussie, Australia, BOE, cad, canada, carr, commodities, course, crisis, currenc, currency, currency trading, data, dollar, dow, ECB, economic, economy, EUR, Euro, Europe, forex, forex market, free, fx, fxedu, gbp, home, Il, index, interest, invest, investor, Japan, jpy, Kiwi, live, loonie, lower, market, Mike Conlon, news, nzd, pound, practice, practice account, rate, RSI, sentiment, ssi, stock, time, trade, trader, trades, Trichet, USD, Yen

Topics: What To Look At In The Market |

Comments

Powered by WizardRSS | Full Text RSS Feeds

Japanese Yen and the Irony of Debt

Since my last update in June, the Japanese Yen has continued to creep up. It has risen a solid 5% in the year-to-date against the Dollar, 12% against the Pound, and an earth-shattering 20% against the Euro. It is closing in on a 15-year high of 85 Yen/Dollar, and beyond that, the all-time high of 79. According to the Chicago Mercantile Exchange, “Long positions in the yen stand at $5.4bn. This is the highest level since December 2009 and represents the biggest bet against the dollar versus any currency in the market.”

As to what’s propelling the Yen higher, there is very little mystery. Two words: Safe Haven. “The yen’s attractions lie in its status as a haven from the turmoil that has engulfed financial markets as, first, the eurozone debt crisis unfolded and, then, fears about a double-dip recession have intensified.” To be sure, there are a handful of currencies that are arguably more secure and less risky than the Yen. The problem is that with the exception of the Dollar, none of them can compete with the Yen on the basis of liquidity. In addition, thanks to non-existent inflation in Japan and low interest rates in other countries, there is very little opportunity cost in simply holding Yen and simply taking a wait-and-see approach.

According to some analysts, interest rate differentials will probably remain narrow for the foreseeable future: “Global bond yields will fall, reducing the incentive of yen-based investors to place funds abroad.” In fact, thanks to low interest rate differentials, the Yen is not even the target funding currency for carry traders. Suffice it to say that investors are not bothered by the fact that Japanese monetary policy is extraordinarily accommodative and that Japanese long-term interest rates are the lowest in the world. For those who are concerned about rising interest rate differentials, consider that this probably won’t become a factor until the medium-term.

On the fundamental front, there are a couple of risks for the Yen. First of all, there is the stalled Japanese economic recovery and the possibility that the strong Yen could further erode the competitiveness of Japan’s export sector, the mainstay of its economy. Yen bulls respond to this by noting both that Japan’s economic recovery has already stalled for 25 years and that should the Yen’s rise actually crimp economic growth, the Central Bank would probably intervene. By all accounts, “The government will continue to keep a close eye on the yen.”

A greater concern, perhaps, is Japan’s massive debt. Near $10 Trillion, public debt is already 180% of GDP, and is projected to grow to 200% over the next few years. Total public and private debt, meanwhile, is by far the highest in the world, at 380% of GDP. The Japanese government is planning to implement “austerity measures,” but political stalemate and election pressures will make this difficult to achieve.  All three of the rating agencies have issued stern warnings, and downgrades could soon follow. Here, Yen bulls retort that as unsustainable as this debt might appear, the majority (90%) of it is financed domestically, through the massive pool of savings. The remaining 10% is eagerly soaked up by foreign investors, who view the debt as a more attractive alternative to cash and stocks. [This is the great irony that I alluded to in the title of this post - that more debt is viewed positively as "liquidity" and does nothing to hurt the Yen].

Speaking of which, the Japanese stock market has risen by only 5% this year, and some analysts are predicting that a long bull market is inevitable. Adding to the fervor, Central Banks have begun to build their positions in the Yen, for the first time in 10 years. It seems everyone is excited about the Yen, even economists: “Within the developed economy space, Japan looks relatively good as an economy that’s likely to be growing faster than Europe or America, and it’s generally considered to have low risk of capital flight.” In other words, the consensus is that there is a very low chance of a “Greek-like debt crisis.”

At this point, the Yen can only be toppled by Central Banks: either foreign Central Banks will hike interest rates and make the Yen unattractive in contrast, or the Bank of Japan will intervene directly to prevent it from rising further.

Powered by WizardRSS | Full Text RSS Feeds

Summer Upon Us!

« Appetite For Risk! | Home

By Mike Conlon | May 28, 2010

For now, the Euro zone debt crisis appears to have been averted.  For now.  The Euro is higher for the second straight day as short-covering is taking place.  As I’ve repeatedly mentioned, every day that the Euro can get by without negative news is a positive for world markets in general.  As a result, we’ve seen recent gains in world equity markets and commodities as they rebound from 9-month lows.

However, don’t be lulled into a false sense of confidence as there still is major work ahead for the Euro.  The trend is still clearly down, and there is possible resistance in the 1.245 & 1.26 ranges.

This morning, consumer spending figures in the US came in worse than expected, exhibiting signs that the consumer-led recovery may have stalled.  Heading into the long weekend here in the US, expect volume to be light as the “summer slowdown” officially kicks off.

So this morning started off as a mild risk-taking day, which could flip to risk-aversion as the market hasn’t forgotten the economic challenges that lie ahead.

In the forex market:

Aussie (AUD):  The Aussie is lower this morning as profit-taking and mild risk-aversion appears to be creeping back into the marketplace.  The Aussie had a nice pop off its lows just below .81 vs. USD.

Loonie (CAD):  The Loonie is also turning lower as the consumer spending figures have helped risk-aversion return before the long weekend.  Oil is higher is back to roughly 74.5, after eclipsing 75 in yesterdays run-up.

Kiwi (NZD):  The Kiwi is lower as well, taking cues from risk themes.  Yesterday’s IMF report that the Kiwi may be overvalued is contributing to the selling, despite the fact that home-building approvals jumped to 8.5%, a two-month high.

Euro (EUR):   The Euro had a bid earlier and tested resistance at 1.245 vs. USD, but selling is now taking place as traders clear their books for the long-weekend.  Short-covering had pushed the Euro higher earlier, but bear in mind that the likelihood of any ECB action has been greatly reduced as activity in the common currency appears to have stabilized.

Pound (GBP):  Consumer confidence in the UK fell to a 5-month low, as the “political honeymoon” may be about to end.  Budget cuts in the UK intended to help with the fiscal deficit may mean that the UK is in for protracted growth going forward.  The Pound is lower across the board.

Dollar (USD):   The dollar is meandering around as consumer spending numbers came in less than expected causing it to receive a bid from mild risk aversion.  The Michigan Confidence survey is due out at 10AM, which could help the Dollar find direction.

Yen (JPY):   The Yen is lower this morning although mild risk aversion is driving market direction.  Overnight, Japan reported an increase in its jobless rate indicating that the export-led recovery may not be translating over as business is still cautious about future global demand.  In addition, deflation continued to plague the economy as consumer prices fell 1.6% which means that BOJ will most likely continue accommodative monetary policy as heightened government pressure to do so will like increase.

The return to fundamentals in the market may be increasing as risk drivers abate with every passing day that the Euro doesn’t implode.  And while there is still considerable risk in the marketplace, expect today to be a lighter trading day as traders square their books for the long weekend holiday here in the US.

Going forward, as world economies appear to be committed to deficit reduction, expect economic slowdowns to occur in addition to the normal seasonal patterns.  The challenge will be trying to contain global deflation, which could bring about another set up problem.

But until that happens, I’m going to be happy to get some sun this weekend and officially kick off summer.  It’s been a crazy month, so I advise you to do the same!

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, cad, commodities, course, crisis, currenc, currency, currency market, currency trading, dollar, dow, ECB, economic, economy, EUR, Euro, forex, forex market, free, fundamental, fx, fxedu, gbp, holiday, home, Il, Japan, jpy, Kiwi, live, loonie, lower, market, mie, Mike Conlon, news, nzd, oil, pound, practice, practice account, rate, RSI, short, ssi, time, trade, trader, trend, USD, volume, Yen

Topics: What To Look At In The Market |

Comments

Powered by WizardRSS | Full Text RSS Feeds