German Political OxyMorons!

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By Mike Conlon | May 19, 2010

The German people are known for being hard-working, efficient, industrious people.  They are not known for their charismatic personalities or ability to excel in politics.  While this is not a bad thing, it is coming back to haunt the Euro zone as Germany is making unilateral decisions that affect the financial markets.

Just yesterday, Germany enacted a “naked short-sell” ban on financial stocks and bonds and wants to limit the use of CDS only to those who actually own the bonds.  While in and of itself this is not a bad policy, they needed to get the other members of the EU on board with this action.  They did not consult the other nations, which consequently raised suspicion in the market that they “had something to hide” and sent the Euro plummeting lower to 1.21 and change.

In what many view as yet another political blunder by Germany in the handling of this crisis, the market has started to realize that this ban will largely ring hollow without the other nations on board, and that this announcement was more about dumb German politics than anything financial related.  They really should take a look back to the first few months of Obama’s presidency; the guy was so used to being on TV that every time he spoke the markets tanked!  When he finally learned to be quiet, the markets were able to rebound.

Hey Germany, if you want to save the Euroâ€"just shut up already!  In any event, we are seeing risk taking in the market as the commodity currencies have sold off, as has the Pound as the UK rate policy meeting minutes came out.  The Euro has rebounded from very oversold levels, and US CPI came out slightly negative vs. a slightly positive expectation.

In the forex market:

Aussie (AUD):  The Aussie is down big-time this morning, as the German short ban-induced sell-off caused major risk aversion.  Other factors contributing to the sell-off are (in no particular order): potential slowdown in China, Greek debt concerns, and lower commodity prices.  In addition, consumer confidence levels are at 19-month lows, despite the fact that wages grew at the fastest pace in almost a year.

Loonie (CAD):  The Loonie is lower for the same reasons as the Aussie, especially dragged lower by oil prices which are in the $68.5 range.  Canadian CPI is due out on Friday, but if risk themes persist an increase around the globe, then no amount of inflation will give the market confidence that the BOC will hike rates at the June meeting.  The bottom line is that you cannot raise rates if the threat of a global double-dip recession exists.

Kiwi (NZD):  The Kiwi is the biggest loser this morning on risk aversion, but in addition, RBNZ Governor Bollard came out saying that NZ needs to reduce its budget deficit and should forego growth prospects in favor of austerity to rebalance its economy.  He also said that a gradual depreciation of the Kiwi would be desirable, so investor sentiment has shifted away from a mid-year rate hike as had been previously expected.

Euro (EUR):   Years from now, both economics and poli-sci classes are going to use this EU debt crisis as a case study of what not to do.  The announced bailout was supposed to be the final straw, the end of the play.  And like a bad movie that just won’t seem to end, Germany keeps giving the markets reason to question the credibility of the Euro which in turn inspires risk aversion and a lack of confidence around the globe.  Meanwhile construction output in the region was higher.  So the Euro has bounced back, as the market has realized that it was just German stupidity and not a hidden time-bomb.  If this keeps up, then the Euro could be finished very quickly.

Pound (GBP):  The Pound is lower as but is rebounding a bit as the BOE rate policy meeting minutes were released showing a dovish stance.  Policy-makers voted unanimously to leave rates and bond purchase programs unchanged, which falls in line with the potential austerity measures about to be under-taken.

Dollar (USD):   The Dollar is higher on risk aversion, but is giving back some gains as the market is moving away from the major threat level induced by Germany.  CPI figures came in less than expected showing a decline of .1% vs. an expected gain of .1%.  While not a major difference, this really shows that we are still in a deflationary mode even with all of the tremendous government spending which was supposed to prop-up prices.

Yen (JPY):  The Yen is higher, especially against the commodity currencies as risk-aversion caused a major unwind of carry trades.  In addition, industrial production figure came in better than expected heading into tomorrow’s GDP report which is expected to show positive growth led by exports.  This may help Japan take measures to reduce its extraordinary debt.

The only thing I can say regarding the global economy is that there is major risk in the marketplace right now.  Countries around the globe are preparing to tighten their belts and are looking to return to fiscal responsibility.

The only real country not on this path is the US, as politics rules and economics drools!  So Washington DC is going to continue to re-fill the punch bowl to keep the masses at bay, rather than do what is economically responsible but politically suicidal.

I don’t know how confidence is going to return to the Euro zone and if it will happen anytime soon.  A gradual decline of the Euro is OK, but these break-neck moves need to be stopped if the global economy is going to function properly.

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!

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Oil Prices Fall on Stronger Dollar, Weaker Demand

Oil prices continue to be a victim as investors flee for the safety of the US dollar. A plunging euro and concern that the EU debt crisis could result in lower demand for energy, have pushed oil to and eight-month low.

By early afternoon trading in Europe today, the benchmark crude for June delivery was down $1.23 to $68.18 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 54 cents to settle at $69.41 on Tuesday. Since the beginning of May, oil has declined more than 20 per cent from $87.15 a barrel on May 3.

Source: Associated Press

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Failed Euro Bailout Would Buoy Yen

Given that only a week has passed since the bailout of Greece was formally unveiled, it’s still too early to determine whether the plan will be success. Regardless of how it ultimately plays out, though, the bailout (not too mention the concomitant crisis) is shaping up to be THE big market mover of 2009. As investors reposition their chips, some early front-runners are emerging. It might surprise you that one such leader is the Japanese Yen.

On the surface, the Japanese Yen would seem to be an excellent candidate for shorting, especially in the context of the the Greek fiscal crisis. Its fiscal and economic fundamentals are abysmal, and by most measures, it’s debt position is among the least sustainable in the world, behind even Spain, Portugal, and the US. At the same time, the Yen has risen by an unbelievable 8% against the Euro in the last week alone, and many analysts are predicting it will emerge as one of the winners of this episode.

Why? First of all, with confidence in the Euro flagging, the Yen (and the Dollar) gain luster as the only viable reserve currencies. Regardless of what you think about Japan’s fiscal fundamentals, the longevity at the Yen means that it is inherently safer than the Euro, which may not even exist (in its current form, at least) in a few years time. Second, the current consensus is that the Euro bailout will fail, and as a result, risk tolerance is running low at the moment. With this in mind, it’s no surprise that traders are unwinding their carry trades and that the Yen â€" “The low-yielding currency of a deflation-prone economy of high savers…entrenched as the world’s funding currency” â€" has rallied.

Analysts have been quick to point out that the rest of Asia (among other regions) are on the other side of this trend. The concern is that the bailout won’t be enough to prevent a repeat credit crunch and that confidence in investments/currencies that are perceived as risky will remain low.

China could be hit especially hard. Since the Chinese Yuan is pegged to the Dollar (and even it wasn’t), it has risen by a whopping 15% against the EUro over the last six months, severely crimping exports to the EU. In addition, “Chinese exporters rely very heavily on bank letters of credit to finance their shipments…When banks have trouble borrowing money themselves â€" as has been happening as a result of worries about European banks’ possible losses from the region’s sovereign debt crisis â€" they tend to cut sharply the issuance of letters of credit for trade finance.” It’s no wonder that the Chinese stock market has tanked 21% so far in 2010, and that the Central Bank continues to delay revaluing the RMB.

Of course, if the plan turns out to be a success, than the opposite will probably obtain. “In this case…the currency of any emerging market or advanced economy exposed to the Asian region’s impressive, China-led economic growth,” will probably rally. “It could be the South Korean won, the Australian dollar, or the currencies of commodity-producing countries like Brazil.” The Japanese Yen, meanwhile, will probably be hit with a dose of reality, followed by a double dose of the carry trade.

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