NY Traders Expo!

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By Mike Conlon | February 18, 2011

It’s that time of the year again folks! 

Join FX EDU at booth # 5613 for The New York Traders Expo on February 20-23, 2011 at the Marriott Marquis Hotel. This is the ultimate opportunity to meet face-to-face with industry leaders.  FXEDU will be conducting numerous tutorials on trading and trade strategies throughout the expo and will be offering unbelievable discounts on our courses, in addition to giving away thousands of dollars worth of prizes to those who stop by.  Test out the hottest products and software, and learn techniques you can use now that will minimize your risk and increase your profits. Every speaker at The Traders Expo is carefully selected because of his or her proven ability to teach trading techniques that can lead to a lifetime of success. Register now and prepare for four days that will get you on track for a profitable future! Call 800/970-4355 and mention priority code 021879 or register online. 

In addition, come see me give a talk on the reasons that you need to be in the forex market and how you can become a better trader in under 30 minutes/day. My workshop, “Trade Forex Like a Professional in 30 Minutes or Less a Day”, will be given on Monday, February 21st at 3:30PM.  You can view the event details here. 

So I hope to see you all at this amazing event, which will feature some of the best minds in the business and show you the cutting-edge in trading today. I hope to see you there!!! 

For those of you who can’t attend, please check out our currency trading courses! 

If you wish to get started in the forex market, click here.  Don’t miss out on the world’s fastest growing market!

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Week in Review-Feb 18th

Risk-sensitive currencies are surviving despite a China reserve requirement ratio hike and confirmation from Egyptian authorities that Iran had formally requested permission to transit the Suez Canal. ECB board member Bini Smaghi comments that the Central Bank will have to watch inflation closely has the ‘bullish hawks’ squeezing the weak EUR bears positions. Investors, in these thin markets are again adding some geopolitical and G20 risk premium to their portfolios. The most logical reason for not wanting the dollar, despite the US inflation components edging higher this week, is the belief that an ambivalent Fed is falling behind the curve. The lack of confidence in the US administration’s ability to deal with its issues has investors questioning owning the reserve currency. Below, we have some of the highlights of the week.

EUROPE

• Euro-zone Industrial production fell -0.1%, m/m, in Dec. after rising a revised +1.4% in November. The market was seeking a flat reading. IP was flat in Germany and up +3.8% in Portugal, but weaker in Spain (-0.8%) and Ireland (-1.7%). Analysts believe the weather suppressed production in Germany. However, the softness in Spanish and Irish numbers again promotes further EUR negative sentiment.

• The Euro-group finance ministers met to discuss peripheral financing issues and again did not agree on specific measures. The principal innovation from the meeting was agreement of the size of a future (post-2013) backup facility at EUR 500bn, supplemented by an IMF contribution. No specifics on the mechanics or financing of this facility or clarification on measures to enhance the pre-2013 EFSF. These details will need to wait until March summits, creating risk for peripheral sentiment.

• News of complications in the restructuring plans of German’s West Lb again heightened Europe’s financial sector concerns.

• Euro flash GDP came in weaker than expected, rising just +0.3%, q/q vs. a +0.4% consensus. National releases so far across Europe showed a still weak recovery in the periphery, as Portuguese GDP contracted in 4th Q, while the Greek economy showed little sign of improvement. In core Europe, German and French GDP growth was softer in the 4th Q due to adverse weather. However, y/y, German GDP still grew a robust 4%.

• The ZEW survey in Germany showed strength in the current economic assessment but weaker than expected forward sentiment in February. Next week’s Ifo will give the market a clearer picture of German momentum into March.

• UK January inflation was +4.0%, y/y, softer than market fears of +4.3%. However, Governor King’s letter to Chancellor Osborne explaining the inflation overshoot of target contained two surprisingly hawkish twists. Inflation will be ‘as likely to be above the target as below it two to three years ahead’ based on market assumptions for the Bank Rate to rise. King also noted that the split in the committee and said that ‘every member of the Committee is determined to act to adjust policy in order to bring the (inflation) risks into balance’. Market is trying to price in a rate hike by May or if not sooner. The inflation report is making it difficult.

• Surprisingly in the inflation report, BOE pushed its GDP trajectory a bit lower, kept the central projection for inflation in two years’ time under the 2% target, assuming market rates at just 2%, and also assuming that the Bank Rate remains unchanged. This would suggest that King would need to see a significant tightening in the UK labor market and signs of labor regaining pricing power over wages before turning ‘hawkish’.

• UK Jobless claims unexpectedly climbed +2.4k last month vs. an expected -3k decline. Growth in average weekly earnings also slowed to +1.8% in Dec. from +2.1% previously.

• UK CBI export orders rose to the highest level since July 1995. The CBI headline improved to -8 in February from -16 last month. The forward looking output expectations component strengthened to 23, the third consecutive monthly gain. This should point to another strong PMI release in February, as our economist noted, and supports the notion that the benefits from a weak GBP are starting to kick in.

• UK retail sales rebounded sharply last month and although Dec. saw a big downward revision. UK core sales advanced +1.6%, m/m (the biggest in a year), however, Dec. sales was revised lower from -0.3% to -1%, m/m. In nominal terms, sales are up +5.3%, y/y (highest rate since May 2008). This will support the hawks on the MPC.

• Chancellor Merkel nominated her economic advisor Jens Weidmann for President of the German Bundesbank

• ECB board member Bini Smaghi said that the Central Bank will have to watch inflation closely to keep rising costs in check. The market has interpreted the comments to signal that the ECB is again looking towards a possible interest rate hike to combat inflation in the coming months.

• Today and tomorrow will see France hosts the finance ministers and heads of the central banks of the G20 bloc. The ministers will follow up on the pledges made by the leaders at in Seoul in November, particularly regarding exchange rates. The market can expect a communiqué on Saturday. The meeting will discuss global imbalances. There may be agreement on the need for better monitoring of current-account deficits and surpluses.

Americas

• Headline (+0.3% vs. +0.5%) and core-US retail sales (+0.3% +0.5%) continue to rise but disappointed the aggressive upbeat expectations. Analysts are questioning the price versus volume effects in calculating the market disappointment. There is talk about a downward revision to 4th Q GDP. The backward revisions certainly took some of the steam out of the Jan report. Both the headline and core were revised lower in December and it was just the core print adjusted for the November release.

• US import prices accelerated higher last month, doubling to +1.5%, higher than market expectations. This is the fourth consecutive month of price increases (4-month annualized rate more than +15%). These numbers will have the Fed being challenged on its price stability policy. Year-over-year, import prices are up +5.3%, while export prices are +6.8% higher. Obviously, export prices got a boost from the Fed’s QE2 stance.

• Manufacturing in the NY region grew at its fastest pace in eight-months (+11.92 to +15.43). Analysts note that with capacity utilization at historical lows, there remains plenty of room for manufacturing to aid consumer consumption in the economic recovery. It’s worth noting that the Empire index has been relatively consistent over the past year. Analysts are optimistic that business will begin open their coffers and spend more of their cash hoards on capital goods.

• The FOMC minutes did not sway from recent market opinion. The improved economic views were not enough to change the outlook very much. Near term growth, unemployment and prices all improved, but this strength does not seem to be carried through to the longer term view. We have witnessed the split on the speakers circuit of late, however, consensus does not need to change policy just yet. Some members felt that ‘if more data showed stronger evidence of recovery it could justify changing the pace and size of current asset purchases’.

• US Jan. housing starts advanced +14.6% to +596k. The aggressive rise easily offset the softer permits surprise of -10.4% declines to +562k. Analysts note that even with the abnormal weather variable and regulatory changes, the print looks ‘consistent with a moderate underlying improvement’. Noting that mortgage rates continue to tick higher, the overall picture though somewhat upbeat will definitely not be leading US economic recovery any time soon.

• US producer prices advanced for a seventh consecutive month in January (+0.8%). It’s not surprising to see that most of the support came from energy prices (+1.8%). The stronger than expected core-PPI reading (+0.5% vs. +0.2%), coupled with stronger data of late, is expected to eventually put pressure on the Fed’s doves to abandon any plans of further monetary accommodation, like QE3. The market is beginning to expect the debate over monetary policy to ‘return to more normal lines’ in the second half of this year.

• US industrial production disappointed, declining -0.1% vs. a market expected rise of +0.5%. The surprise is palatable because of December’s upward revision from +0.4% to +1.2%.

• Canadian December manufacturing data recorded a big miss (+0.4% vs. +2.3%), however the impact was eased by the modest positive prints on capital inflow (+9.63b) and leading indicator data (+0.3%).

• US inflation (headline CPI +0.4%) is still being bullied by gas prices. Strip transportation (+0.23%) and the gas component out of the report, and we have inflation going nowhere in the US economy (core-CPI +0.2%). It’s not generalized inflation, but, price shock being expressed mostly by commodities.

• The US jobless claims headline (+410k) happened to give back some of the previous week’s gains. Initial jobless claims increased by +25k. Apart from last week’s +385k print, it is the second lowest level seen this year. The less volatile four-week moving average moved a touch higher to +417.8k and remains supportive of a firmer NFP report for this month.

• The Philly Fed print blew everyone out of the water (35.9 vs. 19.3). This is strong proof that ISM may not have peaked. The strength can be attributed to a surge in shipments and higher prices. The gain in shipments is on the back of a solid quarter of new-orders.

• Canadian Wholesale trade (+0.8%) is expected to add to December’s GDP print, while housing starts, hours worked and manufacturing sales will act as a drag. It is the fifth-consecutive month of gains and came with a significant price effect.

• Canadian inflation disappointed the medium term hawks. In non-seasonally adjusted m/m terms, headline CPI advanced +0.3%, while core remained flat. In a seasonally adjusted m/m terms, headline CPI was up a more modest +0.2%, and +0.1% at the core level. The absence of inflation pressures combined with a mixed growth picture should keep the BoC on hold until late this year.

ASIA

• Japanese GDP contracted only -0.3% in the 4th Q vs. market expectations of -0.5%. This was largely due to 3rd Q revision to +0.8% from +1.1%, q/q. With yields so low, the JPY will remain vulnerable as other G10 countries begin to tighten.

• Value of loans in Australian managed to advance +2.5% in Dec. Home loans increased +2.1%, m/m, doubling the +1.0% forecasted. Investment lending was up +3.0%, offsetting the revised -2.0% contraction in Nov.

• Chinese Jan. trade surplus was +$6.5b (smallest surplus in nine-months). The 12-month rolling surplus fell back to $177b from $185b in Dec. The narrowing surplus was due to record high imports of $144b, up +51.4%, y/y. Exports were up +38%, y/y, to $151b. Strong proof that Chinese demand remains solid.

• The recalibration of the Chinese inflation release (+4.9% vs. +5.3%) is having only a modest affect on risk and Asian currencies. The lower than expected, but elevated print is proof that rising food, housing inflation, will keep headline inflation elevated and require Chinese policy tightening to be front-loaded. This is obviously a risk to domestic growth, handcuffing the PBOC in being more hawkish on their exchange rate policy.

• RBA minutes stated that a ‘slightly restrictive’ policy stance was appropriate as a resources boom boosts incomes. The minutes offered no new real news, but stated clearly that the medium-term outlook for the Australian economy remains robust.

• The NZ PMI rose +0.6% to +53.7 in Jan. Input prices rose +0.9%, q/q, while output prices only rose +0.2%, with producers not passing on costs in full. The ANZ consumer confidence fell -9% to 108.1 in Feb.

• China raised reserve requirements by 50bp, accelerating its pace of tightening (+19.5%). The markets appear to be getting more comfortable with the notion that the PBOC can achieve a soft landing without disrupting global markets.

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The Obama Budget and the Dollar

Last week, the Obama Administration released its fiscal 2012 budget to much fanfare. Unfortunately, the budget makes only a token effort to address the rising National debt, and forecasts a budget deficit of $1.1 Trillion. While the release of the budget failed to make a splash in currency markets, traders would be wise to understand its implications for the future.

The budget proposes spending of $3.7 Trillion in 2012, and forecasts receipts of only $2.6 Trillion. As usual, entitlements (Social Security, Medicare, and Medicaid: $2 Trillion+), Defense ($760 Billion), and net interest on debt ($250 Billion) are projected to consume the brunt of spending. The Departments of State, Education, Energy, and Veterans Fairs will receive an increased allocation, while almost all other Departments face drastic cuts. (For more comprehensive breakdowns, the WSJ and NY Times offer excellent graphical representations of how the federal budget is funded and disbursed).

The proposed budget allows for a deficit of $1.1 Trillion (7% of GDP), which unbelievably represents a significant decrease from the $1.6 Trillion (11% of GDP) that is projected for fiscal 2011. The Congressional Budget Office (CBO) forecasts the deficit to return to a more “sustainable” level of 3% of GDP beginning in 2014, which should allow the national debt to remain constant in relative terms for the following decade. Beginning in 2021, however, entitlement spending is projected to skyrocket, which would cause debt to rise similarly.

CBO projections are based on a handful of rosy assumptions. First of all, it assumes that the US economy will grow at 3%+ for the indefinite future. Second, it assumes that deficit spending can be financed at reasonable interest rates. Third, it assumes that tax receipts will rise from current lows and revert back to historical levels. Given the ongoing economic uncertainty, high unemployment rates, tax cuts, rising interest rates, the difficulty of cutting spending, etc., there is reason to believe that actual deficits will be even higher.

In fact, net interest payments on national debt will rise 33% over the next year even as Treasury rates remain at record lows. If the economic recovery gathers momentum (something that the budget is counting on), risk appetite and interest rates must rise. In addition, given that the national debt will probably double from 2009 to 2012, it seems likely that investors will demand an increased risk premium for lending to the US. On the other hand, demand for Treasury Securities continues to remain strong: “Net long-term securities transactions showed total buying of $65.9 billion in long-term U.S. securities in December, after purchases of $85.1 billion the month before.” Many Central Banks continue to be net buyers.

In addition, there are some commentators that think the Fed will abet the US government in deflating the real value of its debt. Since the majority of US Treasury Securities are not inflation-protected, 15 years of high inflation (~5%) would be enough to decrease the real debt burden by half. Especially when you account for “contingent obligations,” this might be the only feasible way for the government to deal with its debt burden over the long-term. Then again, higher inflation would probably drive proportional increases in yield, such that the Treasury Department would have a tough time rolling over existing debt (let alone in issuing new debt) at reasonable interest rates.

The main variable in all of this is politics. Specifically, this budget is still only a proposal. The actual budget won’t be ratified for at least another six months, and only after tense negotiations with the Republican Party. (There is also the possibility that it won’t be passed at all, which is what happened with the fiscal 2011 budget). “House Majority Leader Eric Cantor, a Virginia Republican, said his party will propose ‘very bold’ changes to entitlements in their 2012 budget resolution.” Anything short of this wouldn’t dent the projected deficits and would push Social Security / Medicare closer towards the brink of insolvency.

In the end, the deficit merely represents business as usual for the US government. Barring a double-dip recession, it probably won’t be enough to seriously impact the Dollar’s status in the short-term as preeminent global reserve currency. However, that could start to change over the next decade, as the government either takes steps or does nothing to mitigate the looming entitlements crisis. At that time, the long-term viability of the Dollar (and the financial system as we know it) will become clear.

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Falling On Deaf Ears!

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By Mike Conlon | February 17, 2011

At least that’s what appears to be going on here in the US, as yesterday’s PPI figures showed rising prices ahead of today’s all-important CPI report. Yet the minutes from the FOMC meeting told an entirely different story.

Bernanke and the Fed remain committed to the idea that either rising inflation is unimportant or that it is not taking place at all! So this is either a case of complete incompetence or intellectual dishonesty. Either way, the picture is not pretty.

Meanwhile, politicians in Washington are arguing over the proposed government budget yet no one is willing to tackle the major problems that affect the deficit so extend and pretend continues. Perhaps Bernanke and the Fed are aware of this so they continue to enable bad behavior rather than forcing politicians to make hard choices.

Today’s CPI report will show where inflation is “officially”, but I expect some sort of major disconnect that will leave the market scratching its head. Much like this month’s ubiquitous Non-Farm Payrolls report, I expect this figure to be an outlier.

I’ve been harping on the UK as of late and apparently someone over there has taken notice. Well not exactly, but the lone dissenter at the BOE came out and said that higher rates and a stronger Pound might actually be GOOD for the UK economy. Thus the Pound is slightly higher. Maybe Andrew Sentence is a closet reader of forex trading blog!

Lastly, it looks like news out of the Middle East is showing that unrest is spreading to various regimes, and a story yesterday about Iranian warships sent oil higher. There is still a good deal of event risk coming from that region of the world, and I’m not certain that the global financial markets are respecting the potential impact.

So markets are mostly flat this morning, waiting on the US CPI data which is expected to show inflation of 1.6%.

In the forex market:

Aussie (AUD): The Aussie is slightly higher this morning after stocks were higher in the Pac Rim markets. There is a slight bias toward risk-taking ahead of today’s CPI data.

Kiwi (NZD): The Kiwi is also higher slightly higher even though consumer confidence figures came in lower overnight. In addition, PPI inputs were higher but PPI outputs were lower which could suggest declining business margins. Industrial production figures were higher from last month. (Click chart to enlarge)

Loonie (CAD): The Loonie is trading mostly higher ahead of Canada’s CPI data which is due out tomorrow.

Euro (EUR): There hasn’t been a lot of news emanating from the euro zone lately which always makes me a bit cautious. The Euro is mostly lower as the current account deficit has increased from the previous reading. (Click chart to enlarge)

Pound (GBP): The Pound is mostly higher after comments from BOE policy-maker Sentence suggested a stronger Pound and higher rates was good for the UK economy. This is not a new stance, however, as he has been voting for rate hikes for some time.

Dollar (USD): I just had to wait this morning for the CPI report to see if what I suspected was right. Sure enough, the number is suspect. The headline came in exactly as expected, showing 1.6% headline inflation, yet the monthly figure increased by .4% vs. expectations of a .3% gain. It is now getting to the point where you can’t even rely on the data so it’s becoming almost a non-issue. Initial jobless claims came in at 410K, moving back to the “fours” after last week’s dip into the “threes”.

Yen (JPY): The Yen is showing a bit of strength this morning after a recent bout of weakness as safe haven demand has returned after yesterday’s FOMC report showed that the Fed isn’t going to change its stance any time soon.

The markets have had a muted response to the CPI data and its almost as if no one cares anymore. Jobless claims here in the US are also a non-issue, unless of course you are one of the 400+K people being laid off each week.

Government reports show that inflation is low, yet if you do anything today you know that is not the case. Trips to the grocery store or the gas station confirm what you already know. But it’s almost as if there is a magic vacuum that sucks those figures right out of the official reports so the Fed can continue to justify its easy money policy.

Confidence in government is an un-measurable metric in the economy, and my guess is that it is near an all-time low. The market reaction to today’s data confirms that. So I expect to see some range-bound action today.

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

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

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Australia to Lead the Way in 2011

The outlook for Europe and the U.S. remains mixed but on one thing all pundits can agree; 2011 will be Australia’s year. And even though the new year got off to an auspicious start with floods and other bouts of terrifying weather, Australia’s economy is well-positioned to continue to expand at an accelerated rate. In fact, the Reserve Bank of Australia (RBA) recently revised its 2011 growth forecast.

Noting that the recent floods and the expenses incurred in the aftermath will have a “material effect on the near-term profile of gross domestic product”, the RBA predicted that by June, the economy will be expanding at an elevated clip. The RBA now projects the economy to grow by 4.25 percent in 2011 from its estimate late last year calling for 3.75 growth. The RBA also notes it expects consumer prices to climb by 3 percent compared to its earlier estimate of 2.75 percent.

The revised outlook had an immediate impact on the Australia dollar as investors increased the odds of an interest rate increase. The current benchmark rate â€" known as the Official Cash Rate â€" is 4.75 percent and already far exceeds rates in western regions. The Official Cash Rate sets the interest financial institutions borrow money on the overnight market and a change in the cash rate has a trickle-down impact on retail rates. The extremely aggressive stance by the RBA is seen by the street as a strong hint that the Overnight Cash Rate will be pushed higher within the next few months.

Aussie Dollar Outlook

For 2010, the Australian dollar â€" with the exception of the Japanese yen â€" made significant gains against the major currencies. The outlook for 2011 calls for much of the same:

To understand the RBA’s reasoning, one need only consider the impact an expected increase in shipments of coal and iron ore to China will have on Australia’s exports. Even though China has made attempts to slow the pace of growth, its insatiable appetite for the resources its all-important heavy manufacturing sector relies upon will continue to expand. Australia is well-positioned from both a resources standpoint and geographically to benefit.

There is a dark cloud in what is otherwise a very sunny outlook; the higher Australian dollar adds to the cost of all exports and for markets unable to so easily absorb these extra costs, a decline in foreign sales is unavoidable. This has already become an issue in the manufacturing sector which has seen several months of declining sales.
 
Inflation is also a concern and while the RBA expects to contain expansion to within an acceptable rate, the prospect of further interest rate hikes is considered highly probable. In this age of low-yields in Europe and the United States, expect investor interest in Australia to spike even more in light of the RBA’s latest assessment.

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Hedging High Forex Uncertainty

In forex, everything is relative. That is no less the case for forex volatility, which is low relative to the spikes in 2008 (credit crisis) and 2010 (EU Sovereign debt crisis), but high relative to the preceding 5+ years of stability. On the one hand, volatility is approaching a two year low. On the other hand, analysts continue to warn of high volatility for the foreseeable future. Under these conditions, what are (currency) investors supposed to do?!

Despite the steady pickup in risk appetite in 2010, there remains a whole a host of forex risk factors. On the economic front, GDP growth remains anemic in western countries, unemployment is high, and consumer confidence is low. Budget deficits and national debts are rising, perhaps to the point that default by a major industrialized countries is inevitable. Emerging market countries seem to be ‘suffering’ from the opposite problem, whereby rapid growth, high commodities prices, and capital inflow has caused inflation to rise precipitously. Some Central Banks will be forced to hike interest rates, while others will try to maintain an easy monetary policy for as long as possible. Political crises flare-up without warning, the Euro risks breaking up, and inclement weather is wreaking havoc on food production.

As a result, most currency-market watchers expect 2011 to be a continuation of 2010. In other words, while we might be spared a major crisis, a generalized sense of uncertainty will continue to pervade forex. According to JP Morgan, “Implied volatility on options for major exchange rates averaged 12.34 percent this year, compared with an average of 10.6 percent since January 2000.”  The currency team of UBS predicts, “The divergence between the strength in emerging markets and the unusual levels of uncertainty in the world’s major economies will cause…super volatility,” whereby massive swings in exchange rates will become the norm.

In this environment, there are a number of things that currency traders should do. The first step is simply to be aware that volatility remains high, which means that wider-than-average fluctuations shouldn’t be a surprise. The next step is to decide whether you think that this volatility will remain at an elevated level for the near-term, or whether you expect it to continue declining. (It’s worth pointing out that volatility is not necessarily a perception of absolute risk, but investor perception of risk). The final step is deciding if/how you will tailor your trading strategy in response to changes in volatility.

In fact, you don’t necessarily need to limit your exposure to volatility. If you are a fundamental investor with a long-term approach, you may very well choose to write-off short-term fluctuations as noise. (Of course, if you are a short-term swing trader, you can’t afford to be quite so indifferent). In addition, if your primary interest is in another asset type, you may choose not to hedge any currency risk. Perhaps you believe that the base currency will continue appreciated and/or you relish the exposure to currency movements as an added benefit of asset price exposure. Along these lines, “During the planning stages of the UBS Emerging Markets Equity Income fund, UBS Global Asset Management considered offering investors a hedged share class. The team abandoned the idea when investors showed a preference for unhedged share classes.”

In addition, hedging currency risk is expensive, especially for exotic/illiquid currencies, and currencies characterized by above average volatility. Not to mention that currency hedges can still move against investors, resulting in heavy losses. Still, in 2010, “Corporations from the U.S., Japan and Europe increased the percentage of projected income protected against swings in exchange rates to a record,” which suggests that fear of adverse exchange rate movements still predominates.

Finally, there are those that want to construct second-order currency strategies based entirely on volatility. Using basic options techniques, such as spreads and straddles, it’s possible to profit from volatility (or lack thereof) regardless of which direction the underlying currencies move in. In fact, the CME Group recently introduced a new product series which seeks to perform this very function. Investors can already buy and sell futures based on short-term volatility in the EUR/USD, which will soon be replicated for all of the major currency pairs.

For those of you who like to keep it simple, it’s probably enough to monitor the JP Morgan G7 Currency Volatility Index, which is a good proxy for the risk associated with trading (major) currencies at any given time. When this index spikes, chances are the US Dollar and other safe haven currencies will follow suit.

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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.

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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!

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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.

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Less Money Needed!

« The Party’s Over! | Home

By Mike Conlon | June 30, 2010

There was encouraging news overnight as the ECB said it would lend banks less than analysts had predicted, showing signs that the European banking system may not be in as weak a state as the market thinks.   In addition, German unemployment changed less than expected and the unemployment rate remained steady showing signs of economic stability.  Euro zone CPI figures fell back to 1.4%, slightly better than analyst expectations.

In the UK, consumer confidence figures fell to 6-month lows as residents prepare for budget cuts, and BOE policy-maker Adam Posen said that UK recovery is tentative and could risk sliding back into recession.  Look for continued loose monetary policy unless inflation figures really heat up.

In the US, the ADP employment change came in less than expected and could serve as a harbinger of Friday’s Non-Farm Payrolls report.

In Australia, bank lending and house price gains showed that the economy has been resilient in the face of rate hikes but whether that trend continues remains to be seen.

Canadian GDP figures came in flat, showing neither growth nor contraction but missing analyst expectations of a .2% gain.

So today is a bit of a mixed bag, with earlier risk-taking on the European bank news giving back some gains.  Stocks are mixed to slightly lower with commodities relatively flat.  Today is the last day of the second quarter, so we could see some window dressing which could mean volatility in stocks.

In the forex market:

Aussie (AUD):  The Aussie is giving back some gains after bank lending and home price figures showed how strong the Australian economy has held up despite the RBA’s rate hikes to cool the economy.  While the trading day started off in risk-taking mode, the Aussie may decline if we flip to risk aversion.

Kiwi (NZD):  The Kiwi is lower this morning as the RBNZ said in its annual Statement of Intent that it will continue to remove economic stimulus as the NZ economy recovers.  Part of this statement has been construed as backing away from tighter monetary policy, citing global economic conditions.

Loonie (CAD):   A bit of a reversal for the Loonie this morning as well, as risk-taking waned and GDP figures came in lower than expected.  GDP stalled after gaining for 7 straight months as retail sales declined as the government removed temporary tax relief measures.

Euro (EUR):  The Euro is higher across the board this morning as the ECB said it will lend less to banks to cover their debt payments than the market was expecting.  This shows that the financial health of European banks may not be as bad as expected and that they are largely able to meet debt obligations.  There has been major fear about the sovereign debt exposure of these banks, and this announcement took that fear down a notch.

Pound (GBP):   The Pound is lower this morning as comments from the BOE said that recovery is tentative and consumer confidence figures fell to 6-month lows as budget concerns weighed heavily.  However, house price figures rose to 2-year highs in a sign that the property market may be stabilizing.

Dollar (USD):   The Dollar is mixed as the ADP employment change showed a gain of 13K vs. an expectation of 60K jobs gained.  Friday’s Non-Farm Payrolls report will really show how far along we are in the employment picture and economic health, but this worse-than-expected figure may be foreshadowing.

Yen (JPY):   The Yen is showing some strength against all but the Euro as risk aversion appears to winning the morning battle.  Yen started the trading lower as Asian stocks continued to sell-off, but then reversed on the Euro bank news, only to reverse again on the ADP jobs report.

Yesterday’s sell-off may have been an over-reaction to negative sentiment in the market but the important thing to remember is that global economies are still fragile.  As various governments remove stimulus, economies will now be forced to stand on their own.

In the US, it’s all about jobs, jobs, jobs.  As long as people are unemployed and unable or unwilling to spend, economic recovery is going to be fragile.  Part of the problem is that we don’t have policies in place that encourage private sector growth, as looming tax hikes to support out of control spending weigh heavily on private business.

So this most recent scare is all about confidence.  It is obvious that people don’t have confidence in their government’s ability to improve conditions.  It doesn’t matter what the policy is, there is NO confidence right now.

However, there are pockets of economic strength around the globe and those who are employed are experiencing a MUCH different economy than those who aren’t.  Some are beginning to say that this is the “new normal”; where we will have economic growth AND high unemployment.  I beg to differ.

I understand that emergency stimulus measures were necessary to prevent us from going over the cliff but enough is enough.  The sooner the government removes the training wheels from the economy, the sooner citizens will learn how to ride again.  Because at this point, the US government is holding us back, and not letting us move forward.  Friday’s NFP will either confirm or deny this assertion, and the market will respond accordingly.

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

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

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Krugman Uses the "D" Word

It has only been two days since the wrap-up of the G20 meeting, but already, second-guessing has shifted into high gear. Two statements in particular caught the attention of the markets; the first of these, officially removed the concept of a global “bank tax� off the table. The second, put forward a timeline for reducing government stimulus spending.

The axing of a coordinated bank tax came as no surprise. It was clear that some countries wanted to move forward on charging a levy, while others were vehemently against it. As it stands now, individual countries will act as they see fit. The agreement around spending and deficits on the other hand, presents a far more interesting story line; interesting because some big names are lining up publically to trash the idea.

In his article published earlier this week in the New York Times, economist Paul Krugman argued the point that this is the worst possible time to worry about deficits. In his view, moving too quickly from undisciplined spend-thrifts (my words) to fiscally-responsible penny-pinchers (again, my words), is the very formula that led to the depression of the 1930s. Krugman believes that failing to maintain spending levels, can only result in one outcome.

“We are now, I fear, in the early stages of a third depression,� writes Krugman, a depression brought about by a “failure of policy�.

Seriously? A depression?

According to Krugman, there have been two previous depressions. One in the 1870s, and the “Great Depression� of the 1930s. Krugman believes we are following the same path that preceded the last depression. So, at the risk of oversimplifying the causes of the last depression, let’s look at the major contributors that brought about the depression, and look for commonality with today’s situation:

1. Loss of Market Valuation and Bank Failures

As the stock market lost value â€" approximately $40 billion within the two months following the so-called “Great Crashâ€� â€" a series of bank failures were triggered. Even by today’s standards, $40 billion is a lot of cash â€" imagine what it meant to the economy in 1930 when US GDP was just over $91 billion.

2. Decline in Public and Government Spending

Naturally, a loss equal to about 43 percent of the country’s total yearly GDP, resulted in severe deflation. The lower demand for goods and services had a devastating impact on employment, and as more people found themselves out of work, spending fell even further.

3. American Economic Policy

In order to protect businesses in America’s important manufacturing sector, the government introduced the Smoot-Hawley Tariff in 1930. The intent was to impose duties on imported goods in a bid to make US products more attractive for domestic consumers. As should have been predicted, other countries retaliated with similar tariffs, making American goods less competitive globally. The domestic market lacked the capacity to pick up the slack of the lost foreign sales, reducing further, overall demand.

The common theme these three contributing factors share is that they all lead to reduced spending. In his book “Essays on the Great Depression�, Bernanke placed much of the blame for the depression on economic policy that neglected to protect failing banks, while at the same time, allowing the supply of money and credit to contract.

Despite the public backlash sure to follow, Bernanke was not about to allow the same thing under his watch. Banks were rescued and stimulus money was spent. Given his recent remarks committed to the continuance of an expansionary policy, it is obvious that Bernanke and Krugman are in agreement that governments must continue to support the recovery.

After Years of Spending, Why the Sudden Swing Now to Deficit Cutting?

Of course, not everyone agrees with this approach. Several countries in Europe find themselves face to face with out-of-control deficits. Spooked by the sovereign debt crisis in Europe, Germany, and most recently Great Britain, have opted to follow a self-imposed austerity path to reduce government debt. Germany’s budget last month, includes 80 billion euros (US$107 billion) in spending cuts, while the David Cameron-led coalition in Britain, has also announced significant spending reductions as well as steep tax increases.

I don’t believe anyone an argue against the need to reign in deficits; rather, I think it is the timing that concerns critics. Certainly, countries cannot continue to rack up massive deficits each year, but nor is it to anyone’s advantage to choke off a recovery before it has chance to gain greater traction. This would, to use Krugman’s words, be a “failure of policy�.

“Around the worldâ€�, notes Krugnam, “most recently at last weekend’s deeply discouraging G20 meeting â€" governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.â€�

In the end, a compromise was reached that enabled all the G8 countries, with the exception of Japan, to find language they could support. The solution proposed by Canadian Prime Minister Stephen Harper, and supported by President Obama, called for a continuation of the planned stimulus spending in the short-term, with a longer-term goal of reducing deficits by 50 percent within three years.

It is hoped I’m sure, that the pledge to maintain spending to be followed by deficit cutting later on, sends a positive message to the markets. However, I fear that what is still missing, is a stronger commitment to a coordinated approach to ensuring sufficient stimulus over the next six to eight months.

The UK has already passed a budget to reduce spending, as has Germany. Greece has had austerity measures forced upon it in exchange for receiving emergency funding, thereby setting a precedent for other EU countries like Spain and Portugal on the brink of needing their own emergency bail-out. No matter what was promised in Toronto, it appears that Europe is determined to scale back on spending.

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Emerging Markets Rally, Despite Eurozone Debt Crisis

It looks like emerging market investors took my last post (“Investors” Shouldn’t Worry about the Euro) to heart, since emerging markets (EM) have continued to rally in spite of the Euro’s woes. To be sure, EM stocks, bonds, and currencies all dipped slightly in May when the crisis reached fever pitch, but they have since recovered their losses and are once again en route to record highs.

That’s not to say that that surge in risk-aversion wasn’t justified. In fact, investors are continuing to punish the Eurozone as well as a handful of other risky areas. However, analysts have concluded that in the case of emerging markets as a whole, this mindset doesn’t really make sense.

Simply, the fiscal and economic condition of is stronger than in developing countries. Whereas previously crises were known to originate in developing countries and spread to industrialized countries, this latest series of crisis turned that notion on its head. The credit and housing crises were largely the product of speculation in the West, and the sovereign debt crisis originated in Europe. While it’s possible that investor concern would self-fulfillingly cause the crisis to spread to emerging markets, any impact would probably be muted.

“There is recognition that emerging market balance sheets are strong and the debt to GDP ratio is below 40 per cent compared to the western world, where it is over 100 per cent in many countries,” summarized one analyst. “The vast majority of emerging market countries ‘have the tools to tackle inflation and will succeed, having reasonable independence from their central banks,’ ” added another.

Thus, the funds continue to pour in. “Net inflows into emerging market debt totalled $30.6bn (£20.7bn, €25bn) from the beginning of the year to late May compared with $33bn for the whole of 2009.” Here’s another sign of EM confidence: “IPOs in developing countries raised $29.3 billion this quarter, almost three times the amount in industrialised nations.” Meanwhile, the MSCI Emerging Market Stock Index has just finished its strongest rally since 2005, and the JP Morgan Emerging Market Bond Index (EMBI+) is closing in on another record high. This is frankly incredible when you consider that around half of the countries with the largest weightings in the index have experienced debt crises of varying severity over the last decade.

As far as forex investors are concerned, the confidence in EM capital markets should also extend to currencies. The carry trade is heating up (thanks to the cheap Euro), and will probably only expand as EM Central Banks move to raise interest rates to combat inflation, as alluded to above. If the Eurozone debt crisis intensifies, then you can expect some kind of pull-back. As with recent retracements, however, it will be only temporary.

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Consumers Disappoint!

« Asia Leads The Way! | Home

By Mike Conlon | June 11, 2010

Well so much for that.  US retail sales figures disappointed this morning, coming in at a loss of 1.2% vs. an expected gain of .2%.  While these numbers show that economic recovery is still fragile here in the US, much of this can be attributed to the lack of hiring by businesses.  In addition, this also shows that households are saving more which may not be a bad thing, and much of the decline was in big ticket items as the economy prepares for the retraction of stimulus measures.

Across the pond, the UK reported worse than expected industrial production figures, sending the Pound lower across the board.  This further adds to the fears that the UK may be facing a protracted slowdown as they attempt to control their budget deficits.

On a somewhat related note, US Treasury Secretary Geithner has turned up the heat on China.  He has come out and said that the Chinese exchange-rate policy (and Yuan peg to the dollar) is preventing a balanced global recovery and causing inflation in China.   Official reports showed an increase of 3.1% in consumer prices, the fastest rise in 19 months.  In addition, Chinese workers are striking demanding higher wages as inflation heats up.

So this morning we are seeing some mild risk-aversion, as the Friday “unwind” occurs as traders are still hesitant to go into the weekend holding risk assets, with potential Euro landmines the primary fear driver.

In the forex market:

Aussie (AUD):  The Aussie is lower this morning on risk aversion and a technical pullback after yesterday’s good economic news from the Pac Rim countries.  Uncertainty over whether or not China will do anything to cool inflation has contributed to Aussie selling.

Loonie (CAD):  The Loonie is lower on risk aversion, despite the fact that industrial capacity showed the largest increase on record.  The Loonie has been higher lately as oil has been higher, though it is pulling back from $75 this morning.  Oil will be a major factor going forward, as a potential moratorium on drilling offshore in the US is in the works due to the political backlash of the BP oil spill.

Kiwi (NZD):  Despite the risk in the market, the Kiwi is higher across the board due to yesterday’s rate hike, though that could change by session end.  Digestion of the economic reports show that NZ could be in for a series of rate hikes through the rest of the year as accelerating growth could push inflation much higher.

Euro (EUR):  The Euro is lower also on risk themes, and the “Friday unwind” may be still be causing investors to ditch Euros over the weekend as risk fears still permeate the market.  However, policy-makers in Germany raised their economic outlook for GDP higher.  Still the looming threat of debt problems keeps investor cautious for now.

Pound (GBP):   The pound is lower across the board as manufacturing weakened in the UK and fears that the economy may not be on sound enough footing to handle expected government fiscal belt-tightening.  This comes even as a UK survey of consumer’s inflation expectations reached its highest levels in over 6 months.  This may be a case of, “the consumer is not always right”.

Dollar (USD):   Disappointing US retail sales figures have sent the dollar higher as risk aversion has picked up going into the weekend.  However, the decrease wasn’t broad-based.  The largest decreases were in building materials stores and auto sales.  This comes ahead of the end of the home buyer tax credit, so it probably should have been expected.  Households are saving more as the employment picture is still grim, and unless the government does something to encourage private business to start hiring, the retraction may continue.

Yen (JPY):  Good gains in the Asian stock markets overnight pushed the Yen lower, though it is rebounding and has gained strength due to the unwind of carry trades as traders dump their risk assets for the weekend in favor of the safe haven the Yen provides.  The Dollar and Yen are just about flat today vs. one another.

Today is an example of how bad government policy can distort economic figures and get everyone “drinking the Kool-Aid”.   It should come as no surprise that retail sales are down as government stimulus measures are retracted, yet they fall for it every time.

The bottom line is jobs.  Period.  Not temporary census workers, not more bloated government bureaucracy, but jobs from the private sector.  American consumers have finally woken up to the fact that you shouldn’t be spending money you don’t have, especially if you can’t get a job to afford stuff.

That game had gone on for way too long, and it is amazing to me to see some the debt levels people carry.

So what does the government do to help create jobs?  Nothing.  They hand out government cheese to keep the masses at bay and create a hostile environment for business through the threat of increased regulation and higher taxes.  If you were an employer, would you be hiring?

Heck no!!!

And until hiring picks up again, expect the economy to drift downward as consumers lose faith in the recovery.  And if consumers, who represent some 70% of US GDP, continue to save and not spend, then we could see a potential deflationary spiral as demand dries up.

This could lead to the dreaded “double-dip”.  Not a pretty picture in my eyes.  The only double-dip I want to see is in an ice cream cone!

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

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

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Spain says has not, will not make EU aid request

Spain’s economy ministry said on Friday it had not made a request for economic aid from the European Union, after a newspaper report that the EU was preparing to activate a package in case Madrid asked for it.

“This is a lie. There’s no rescue. There’s nothing asked for, nor will there be, nothing, but nothing. I don’t know where they got this from,” an economy ministry spokesperson told Reuters. Without citing sources, the FT Deutschland said the EU was preparing for an aid application in the months ahead for access to the fund set up to lend to euro zone countries that run into Greek-style payments problems.

Reuters

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EU Crisis Punishes Korean Won

The South Korean Won has been one of the biggest losers from the EU sovereign debt crisis. After a stellar 2009, the Won is off to a shaky start in 2010, and has lost 12% of its value in the last month alone. According to analysts, The won is “most sensitive to risk aversion” of any currency in Asia â€" or even the world. Thus, when the President of Hungary likened his country’s fiscal situation to that of Greece and inadvertently ignited fears that the crisis was spreading, the Korean Won immediately fell by 5% â€" the largest decline in 17 months.

Given all of the economies/currencies from which to choose, it seems bizarre that investors would gang up on the Won. That is, until you consider that South Korea’s fiscal situation is somewhat unique and that funding crises tend to hit the country especially hard. Summarized one analyst: “We are concerned that the negative market view of events in Europe will not dissipate and that the longer the stress continues, the more concerns will arise that the peripheral funding crisis could segue into a more extended funding crisis and into lower growth expectations.”

To elaborate, South Korea’s short-term foreign currency debt is extremely high (60% of foreign exchange reserves). That’s primarily due to Korean exporters’ hedging activities, which for risk management purposes, need to be offset by short-term borrowing by banks in the money market. Since this debt needs to be rolled over frequently, South Korea is especially vulnerable to liquidity crunches. In fact, the Won has been called a “VIX currency,” since it tends to fall when volatility (proxied by the VIX index) rises. Hence, the Won lost 50% of its value during the peak of the credit crisis, and has already declined 10% this time around.

The Central Bank is doing its part to relieve the liquidity shortage and stem the Won’s decline. It has already placed modest limits on speculative derivative transactions with the goal of limiting capital flight. It is pressing to renew currency swaps with the Fed and the Bank of Japan in order to increase the supply of alternative currency. In addition, it has taken to intervening directly in currency markets by selling Billions of Dollars on the spot market. Explaining the first market intervention in more than a year, the Central Bank declared, “The dollar’s surge against the won today was overdone. The authorities will try to prevent one-way currency moves.”

There are also a handful of market analysts who attribute the Won’s fall to the ongoing conflict with North Korea. In response to the sinking of a warship in March, South Korea has responded by imposing trade sanctions on North Korea, which in turn has responded with threats of “all-out war.” From a forex standpoint, “The largest concern is that the cutting off of economic links raises the risk of a sudden regime collapse, resulting in the South facing a huge influx of refugees. This would have a significant â€" and possibly prolonged â€" impact on the Korean won.”

How should one proceed? If indeed you believe that the Won is being harmed by the prospect of conflict with North Korea, you might be inclined to agree with the notion that, “The recent sell-off in the won has been overdone and should correct, assuming that the North-South tensions will ease in the months ahead.” In fact, if war is avoided, the current bear market could be an excellent buying opportunity, and the Won could still be on track to rise to 1,100 USD/KRW by year-end, conforming to analysts’ median expectations.

On the other hand, if you believe that the Won’s woes are largely attributable to the EU fiscal crisis, there is very little reason to hold the Won, since that crisis will probably only get worse before it gets better: “The Korean market was precariously positioned, with high multiples, above-trend earnings, heavy positioning towards risk and ominous technicals suggesting little sponsorship for strength.” In this case, the Won could easily fall to 1,300 â€" or worse â€" before the year is out.

In any event, South Korea will host a meeting of the G20 this week, which should yield more clarity into what the rest of 2010 has in store for the Won.

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Ban The Shorts!

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By Mike Conlon | June 9, 2010

Both France and Germany have called on the EU to ban short-selling on certain stocks and government bonds with the intention to curb speculation in the market.  While I am never a fan of this type of regulation, there does need to be some sort of “fix” for the market as speculation has gotten a little out of hand.

However, there are always unintended consequences to this type of action, and this could end up hurting their ability to raise capital.  This could also hurt the forex market, as Euro-related pairs lack the volume to trade orderly.  Nevertheless, there still is a ton of risk related to the Euro, with sovereign debt defaults the primary driver.

In addition, ECB President Trichet helped push the Euro higher with comments on the state of the Euro.  As I mentioned yesterday, expect the game of “show and tell” to pick up, with officials telling us how great everything is but showing us little.

Also today, the US Fed Beige Book report comes out, with Bernanke expected to echo his comments from the other night.

In the forex market:

Aussie (AUD):  Consumer confidence fell for the 3rd straight month down under, nevertheless the Aussie is higher on risk appetite.  Fears of a global slowdown (particularly in China) and the raising of interest rates have added to the sentiment that the economy will slow in Australia.

Loonie (CAD):  The Loonie is also higher this morning as oil prices have bounced higher and equity futures are set to open higher on risk-taking in the market.

Kiwi (NZD):  The Kiwi is higher ahead of its interest rate policy meeting tomorrow, where the market is anticipating a 75% chance that the RBNZ will raise rates 25bp to 2.75%.  Put me in the camp that is betting against the rate hike, as I feel the NZ economy rides on the coattails of Australia, and that the risk in the market may be too great to warrant a hike just yet.

Euro (EUR):  The Euro is mixed this morning, trading higher against the safe-haven currencies, but lower against the commodity currencies.  Comments from the ECB have helped push the Euro higher slightly, but let’s not forget about the huge risk the Euro poses as they struggle to get their fiscal houses in order.

Pound (GBP):  The Pound has a bid this morning after a 4-day decline as investors seems more confident in the UK’s ability to combat their fiscal woes, much more so than the EU.  The UK trade balance missed estimates, but narrowed from last month’s reading.

Dollar (USD):   Today we get “Fedspeak”, as Bernanke gives his beige book report to Congress.  I do not expect any change in language from the Fed Chief, and at this point I’m guessing that we will not see a rate hike this year.  The Dollar has been higher this year on the flight to safety trade, and at this point I believe that inflation is a non-issue.

Yen (JPY):  The Yen is lower this morning as risk-taking inspired carry trades are taking place ahead of the New Zealand rate decision.  Japan will report its own GDP figures tomorrow, which are expected to show moderate but steady growth.  In addition, new Finance Minister Noda said he would like to see price gains above 1%, but didn’t make that an “official” inflation target.   Japanese deflation has plagued its economy for some time.

As I mentioned yesterday, this is “cheer-leading” week for the various markets, as the lack of hard economic data is supplanted by discussions of various economic situations.

I am always skeptical when it comes to government announcements and prefer to analyze the hard data myself. But with that in mind, you have to pay attention to what they are saying.

As a trader, it is important to trade what you see and not what you think should happen.  If Bernanke wants the market to go up, you should play along even if you think the fundamentals don’t match.  However, be sure to exit quickly at the first sign of market sentiment change as the market is always right, regardless of what is said.

So pay close attention to the technicals as the various market participants digest the rhetoric.

Do you have a strong grasp of technical analysis?

If not, be sure to check out our affordable currency trading courses!

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

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China Records 50% Increase in Exports

China released its latest exports figures which included a 50 percent increase year-over-year for the month of May. North American stock futures turned positive on the news, and oil jumped a dollar to $73 a barrel.

“Definitely, there has been a search for a bottom for this recent freefall and yesterday’s stock action was very encouraging in that regard, particularly the final push at the end of the day,” said Rick Meckler, president of investment firm LibertyView Capital Management in New York.

“You got a very, very strong finish which easily could have been a continued rout of stock prices. So whenever you get that, it’s like sticking your toe back in the water.”

Source: Reuters

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Jobs Disappoint!

« Stock Markets Soar! | Home

By Mike Conlon | June 4, 2010

US Non-Farm Payrolls came in at a less than expected 431K vs. an expectation of 520K.  While this does reflect job growth from last month’s gain of 220K, the number is disappointing as census workers were included in this reading.  This shows that job growth in the private sector is not happening as quickly as the market would like to see and offers proof that we may be in a “jobless recovery”.

In addition, news out of the Euro zone is that Hungary may need a bailout as default may be imminent.  This could set off a chain reaction which causes the bailout facility to be accessed by other countries with similar problems.

What this adds up to is major risk aversion, as traders will not want to go into the weekend long risk assets in the event of further complications in the Euro zone.  US stock market futures are down significantly, as is oil, trading back to 72.5.

In the forex market:

Aussie (AUD):   The Aussie is lower this morning on risk aversion coming from the Euro zone.  However, sales of gold to Europe have increased dramatically as the Euro zone debt crisis induced a flight to safe-haven assets.

Loonie (CAD):  The Loonie is also lower on risk-aversion, despite a better than expected employment report.  Data showed an addition of 25K jobs vs. an expectation of a 15K gain.  The unemployment rate remained unchanged at 8.1%.

Kiwi (NZD):   The Kiwi is lower as well for the same reasons as the Aussie.

Euro (EUR):  Well it was just a matter of time before the debt crisis reared its ugly head again.  To think that the problems plaguing the Euro zone were solved with the announcement of the bailout facility would have been naïve.  Hungary’s announcement that it is in a “grave situation” as a result of the previous governments lies and manipulated figures which gave a false picture of its economy.  Euro zone GDP figures came in as expected, but this reading from the previous quarter may not paint a proper picture of the state of overall Euro zone economic health.

Pound (GBP):  The Pound is mixed; trading higher against risk currencies but lower vs. Dollar and Yen.  The Halifax report showed that home prices fell for a second straight month; however this report appears to be conflicting with other reports on home prices.  The takeaway here is that housing prices are likely to remain flat.

Dollar (USD):   Well what can I say about this employment number that’s positive?  Truthfully, not much.  The majority of job gains reported in this month’s NFP were temporary jobs created by the government in the form of census workers.  I suppose I am doing my part to “help” the economy by hiding from these people, thereby attempting to offset spending as population is under-reported giving the government one less reason to spend my hard-earned tax dollars.  In addition, the longer it takes to track me down, the longer one of these workers may be employed!  It’s a win-win for everybody.  But seriously, I try not to rail on politics but this is a disaster on so many levels.  Massive deficits, tax hikes coming down the pike, and the private sector unwilling to create jobs out of FEAR that their taxes will be going up to pay for massive entitlement plans are going to be the economic death of this great nation.  But the Dollar is higher on risk-aversion, so that means that the masses can be placated by still being able to afford cheap foreign stuff, while government fat cats finance new beach houses (yes you Al Gore) paid for by my yet to be born grand-children.  A sad day for Amerika.

Yen (JPY):  The Yen is higher on risk aversion and the unwinding of carry trades.

When bad economic policies are put in place by cowardly government figures, bad things will happen.  The government has been the largest creator of jobs for some time, and most of these are unproductive, and do not contribute to economic growth.  I have nothing against government workers, and I believe everyone who wants a job should have one.

But the insidious transfer of wealth from the private sector to public sector weakens our economic strength.  I’m tired of hearing about the “failed economic policies” of the past and the need for “change”.

These policies are NOT failed; they were under-regulated.  The same people trumpeting this mantra are also some of the same people responsible for those policies.  Excessively low interest rates and the housing bubble are the root cause of our economic problems, not free market principles.

The sooner people start to wake up and understand this, the sooner we’ll be able to get out of this mess.  Of course you have to pull them away from their cheap plasma TV to care for more than half a minute.

Nevertheless, the forex market trades on and there are tremendous gains to be made by those brave enough to understand what is going on and how to profit from it.

Are you one of those people?  If not, become one!

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

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

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Euro Continues to Slide

The euro fell to yet another new four-year low falling as low as $1.2019 in by mid-day trading in Europe. The euro has weakened on worries about Europe’s growth prospects and the effects of government spending cuts being pushed through in the wake of the eurozone debt crisis.

Source: Yahoo News

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EUR/USD: The Next Benchmark is Parity

The Euro has now declined for six consecutive months against the Dollar. It is down 25% from its 2008 high and 15% in the year-to-date. It declined 8% in the month of May alone. En route to a four year low, the Euro also fell below the 50% retracement level ($1.21) of its rally from 2000-2008. It’s now too clear where the Euro is headed: parity.

That’s right. Parity. We’re not talking about the Canadian Dollar or even the Australian Dollar. We’re talking about the Euro, which only yesterday was trading at a lofty $1.60 against the Dollar. According to CLSA Asia Pacific Markets, “The euro will sooner or later go to parity with the U.S. dollar.” Meanwhile, “The research firm Capital Economics predicts that the euro will reach par with the U.S. dollar by the end of next year.” There wasn’t even a perfunctory attempt by either firm to justify the prediction. Given the way that the Euro has been trading, it probably wasn’t necessary.

Since the last time I reported on the Euro, the bad news has continued to pour in. Spain officially lost its AAA credit rating, and concerns are mounting that the crisis is spreading to Hungary (not even on the radar screen last week) and Italy: “While Italy may not be as structurally vulnerable as Greece or Portugal, the relative underperformance of Italian credit default swaps this month suggests that investor concerns may be rotating away from Greece.” As if it wasn’t bad enough that investors had lost confidence, now banks won’t even lend to each other.

The $1 Trillion bailout, meanwhile, has done nothing to assuage the markets. “The markets are trading in real time, while the politicians are moving in bureaucratic time. We’re promised something maybe in October â€" that’s a hell of a long time in the financial markets’ eyes,” underscored one economist. Germany appears to be isolating itself from the rest of the EU, thanks to its ban on the short-selling of certain financial movements- a move that was not matched by other member states. “Concerns are also growing because Belgium is unlikely to have a government in place when it takes over the EU presidency on July 1 and markets are worried the EU’s institutions and leaders are ill-equipped to handle a crisis of this magnitude.”

The main issue, which critics of the bailout have been quick to point out all along, is that the fiscal problems that precipitated the crisis are still extant. Spain, for example, currently has the third largest budget deficit in the EU, and yet, it is struggling to make meaningful cuts and pass the necessary “austerity measures.” Germany has tried to unilaterally amend the EU treaty in order to force member states to balance their budgets, but to no avail. If a full-blown crisis is to be avoided, significant structural reforms will have to implemented, and soon.

For many, that the crisis will not be resolved is a foregone conclusion, and they have instead embraced the possibility of ECB intervention to stem the Euro’s decline. The last time the ECB intervened was in 2000, shortly after the Euro was introduced and when it was trading around 87 cents to the Dollar. Experts are divided over whether intervention is likely or even possible. Some have thrown out $1.10 or $1.00 has hypothetical levels at which the intervention would be likely, but the fact of the matter is, no one knows. Any intervention would necessarily involve the Fed and the other important Central Banks of the world. Don’t forget that when the Euro collapsed at the onset of the credit crisis, the Fed quickly underwrote a series of swaps to the ECB, and it could prove to be a willing participant this time around.

The ECB is naturally being coy, with President Jeane-Claud Trichet declaring: “Let us be clear, it is not the euro that is in danger.” Its monetary policy is still extremely accommodative, via low interest rates and a form of quantitative easing. This makes it favorable for investors to bet against the Euro, and is starting to earn the ECB the ire of EU politicians and economic policymakers. Given that the Euro’s decline has become self-fulfilling, pressure on the ECB will continue to mount, until the Euro reaches parity, and/or it has no choice but to intervene to prevent the common currency (and its raison d’etre!) from collapsing entirely.

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