Euro Danger!

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By Mike Conlon | May 10, 2011

Where there’s smoke, there is fire and it is no different for the Greece and the Euro zone. The stories that are being floated insinuate everything from Greece leaving the Euro zone, restructuring debt, or receiving further bailouts. At this point it is difficult to determine what is actually going to happen, but one thing is clear: Greece is in need of help.

Yesterday S&P poured gasoline on the fire and downgraded Greece’s credit rating again, and the current rates Greece would have to pay to re-finance are not feasible in the market. So there is heightened structural risk for the single currency.

In the UK, retail sales figures came in better than expected, but the market is looking ahead to tomorrow’s GDP estimate, which is likely to set the bar low so that the BOE can act surprised when it comes in “better than expected”.

China’s trade balance figures came in better than expected with better exports and worse imports. If they cared to have a stronger Yuan as I mentioned yesterday, perhaps they would be willing to buy more of other people’s stuff. Chinese CPI data is due out tomorrow and there is an expectation that they will raise rates again to try to slow growth.

Oil prices are lower to start the day, as the CME raised margin requirements for oil, but stocks and other commodities are trading higher.

In the forex market:

Aussie (AUD): The Aussie is mixed despite better than expected trade balance figures as the potential for a Chinese slowdown could affect Australia greatly.

Kiwi (NZD): The Kiwi is mostly lower after the IMF came out and said that the Kiwi was over-valued by roughly 20%. Thanks guys! (Click chart to enlarge)

Loonie (CAD): The Loonie is mostly higher today despite lower oil prices as the soundness of the Canadian economy is has been highlighted today after last week’s elections which the market perceives as adding to fiscal responsibility.

Euro (EUR): With all that is going on with Greece, it’s easy to lose sight of the fundamental data that still exists. Tomorrow will bring CPI data and Friday will be the GDP report. The Swiss franc is lower today as CPI data came in less than expected.

Pound (GBP): The Pound is mostly lower as the market is expecting tomorrow’s GDP estimates to be reduced, despite today’s better than expected retail sales figures which showed a gain of 5.2% vs. an expectation of 2.5%. How much longer the UK can deny better than expected data is anyone’s guess. (Click chart to enlarge)

Dollar (USD): The Dollar is showing some strength today despite higher stocks and commodities (except oil) prices as there is still some risk from the Euro zone pushing the safe-haven play.

Yen (JPY): The Yen is lower across the board as the Nikkei was higher on better than expected stock earnings which out-weighed Euro debt concerns.

While there is certainly a great deal of risk in the marketplace emanating from Greece and the Euro zone, the market doesn’t seem to be overly concerned about it. While everyone expects some sort of resolution to be forthcoming, the way in which it is handled could have a major impact.

As I mentioned above, there are many different competing financial interests that could be affected by different outcomes, and the ECB should have come up with a credible plan for Greece (and the others) long ago, as no one expected these problems to just disappear.

But without them we would have little to talk about so the outcome will be important going forward. But I don’t expect Greece to leave the Euro zone, nor do I expect to see a major restructuring of debt. What is most likely is that Germany will reluctantly agree to further aid, and the IMF will get Greece more favorable terms.

However until this occurs, it is wise to be cautious.

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EURO to Survive a Greek Haircut?

As expected, the Greek tragedy dominates the markets. It’s a long performance with no intermissions. The rumors of another Greek bailout package (EUR+60b), to come into force next month, is providing a ray of hope for risk investors.

Credit markets are in corrective mode this morning, with broad tightening across the curve. The indices have nearly reversed all the Greek inspired widening since yesterday. The EUR is also getting a lift from Bin Smaghi’s comments that a debt restructuring (code name for default) would cause more problems than it solves. It’s so true, European banks would have to finally clean their balance sheets to withstand a genuine Greek ‘haircut’ and the market believe they are in no position to withstand this scrutiny. The problem is that Greece needs growth in its tax revenue to finance all this and that’s not easily forth coming.

This months 6-month Greek T-bill auction has also attracted a healthy demand this morning. The sovereign was able to offload +1.625b at a yield below the psychological +5% (+4.88%) with a bid-to-cover ratio of 3.58.

The US$ is stronger in the O/N trading session. Currently, it is higher against 11 of the 16 most actively traded currencies in an ‘subdued’ session.

The USD is lower against the EUR +0.07% and higher against GBP -0.13%, CHF -0.49% and JPY -0.44%. The commodity currencies are weaker this morning, CAD -0.04% and AUD -0.06%.

After three consecutive months of gains, Canadian housing stats declined at a faster pace than expected last month (-3.2%). Most of the weakness was focused in multi-starts (-5.1%) as singles rebounded. This would suggest that the drag on growth for April will likely be more modest than the headline suggests, couple with S&P’s cutting their rating for Greece has temporarily dampened some of the investor demand for riskier assets. The loonie has been able to pare some of yesterdays losses on the back of a tepid rise in commodities after the over extended price movement last week.

Last week, the CAD retreated from a three-year high as commodities plunged on concerns for Greece’s continued Euro membership, pushing investors to seek temporary sanctuary in the world’s go to safe heaven currency, the dollar, and this despite another stellar jobs report north of the forty-ninth parallel (+58k and +7.6%). With corporate CAD buying interest not appearing until above 0.97, the loonie remains at the mercy of energy prices. If one eliminates all the noise, investors wish to be better buyers of the currency on dollar rallies (0.9623).

The global commodity boom is supporting the Australian trade surplus. Data this morning shows that the trade balance rose to a +1.7b surplus in March from a downwardly revised-87m deficit in February. Increased exports of iron ore (+30%, m/m) and coal (+27%) is driving the +9.2%, m/m rise in total exports, outpacing the +1.2%, m/m rise in imports. The recent commodity boom is leading to an increase in both the price of and demand for hard commodities and the Aussie dollar outright. Stronger Chinese trade data O/N (+$11.4b), a sign that tighter monetary policy is ‘not crimping the Asian nation’s growth’ is also a plus for Australia economy.

The currency has been able to rebound from last weeks lows after the RBA sounded ‘surprisingly’ hawkish in its Statement of Monetary Policy. The hawkish Statement came in well above market expectations of forecasts remaining unchanged. Governor Stevens is signaling that ‘current mildly restrictive monetary policy is not enough to contain inflation pressures in the pipeline’. Furthermore, the RBA is indicating that market pricing of one hike over the next year is not enough. Underlying inflation is now expected to be above its 2-3% target band by the end 2013.

Aussie yields are still the highest in the G10 and do look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on pullbacks for the time being (1.0788).

Crude is lower in the O/N session ($101.52 -$1.03c). Oil prices rebounded yesterday from the plummeting nature of last weeks actions, on signs that global economic recovery remains intact. Market participants believe that the recent purging in most asset classes is somewhat overdone and that we are experiencing a technical rebound after last weeks-15% haircut, the biggest drop in three-years. The market will be weary of this weeks inventory report, expecting another build in inventories.

Not helping the black-stuff was last week’s EIA report, which was much more bearish than expected. The data showed crude stocks rising +3.4m barrels greater than the +2m barrel build expected by the street, signaling less demand from refiners. On the flip side, gas stockpiles fell-1m barrels, while inventories of distillates (heating oil and diesel), fell -1.4m. Analysts had expected that gas stocks would rise +100k barrels. They were looking for distillate stocks to climb +400k. Gas consumption dropped -2.2% to +8.94m barrels a day last week.

Higher oil prices have been denting demand growth and it’s this drop-off, combined with the overall retreat in commodities, and a rising dollar that forced this drastic easing of oil prices this month. The market had been overbought and last week’s purging is largely a momentum thing. Expect the energy market to find more support below these current levels.

Gold has rebounded as investors take advantage of last week’s free fall in prices to enter the market. The uncertain macro-economic and political environment has encouraged investors to want to own their piece of gold. The yellow metal, as a non-yielding asset, has a higher opportunity cost when interest rates rise. Big picture, the commodity has become the currency of choice because of the heightened currency volatility and on the back of a questionable dollar value.

The metals bull-run is far from over with speculators continuing to look to buy the metal on these deeper pullbacks, however, with inflation expectations dipping this month has the weaker ‘long’s’ remaining on the back foot and second guessing their outright positions ($1,515 +$12.10c).

The Nikkei closed at 9,818 up+24. The DAX index in Europe was at 7,480 up+70; the FTSE (UK) currently is 5,993 up+51. The early call for the open of key US indices is higher. The US 10-year eased 1bp yesterday (3.16%) and is little changed in the O/N session.

Treasuries prices are caught in a tug-of-war as they trade within striking distance of their lowest yields this year. European growth and debt concerns has investors reducing some of their risk appetite, while the issuance of $72b’s worth of product this week and the belief that US retail sales will surprise is trying to push yields higher.

The US treasury plans to sell $72b of long-term debt this week, starting with today’s auction of $32b-3, tomorrow’s $24b-10’s and Thursday’s $16b long-bonds. At the moment they certainly appear rich on the curve, expect dealers to try to cheapen that curve.

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What the Forex Markets Tell Us about Gold & Silver

All investors, regardless of stripe, must now be aware both of the bull market for gold/silver and the bear market in the US dollar. Despite all of the rhetoric, however, it seems that little is actually understood about how these two phenomena are actually connected. Ultimately, this connection (or lack thereof) has serious implications for both markets.

Many gold investors insist they are buying gold as a proxy for shorting the dollar. Commentary on gold prices is full of apocalyptic warnings about the current financial system and criticism of fiat currencies, which are backed by nothing except for good faith. They argue that buying gold is the best (or even the only) hedge against the eventual collapse of the dollar.

Unfortunately, I don’t think this argument holds up to close scrutiny. First of all, gold and silver [I am including silver in this analysis not because of any deep relationship to gold, but only because of the association ascribed by other commentators and an observable market correlation] prices have risen much faster over the last year (and decade, for that matter) than even the strongest currencies. Furthermore, gold is rising faster than the dollar is falling. In terms of the Swiss Franc â€" which is to forex markets as gold is to commodities markets â€" gold has risen more than 17% since the start of 2010.

Second, the putative correlation between gold and forex markets asserts itself sparingly (as you can see from the chart below, which plots gold against an index that shows dollar bearishness), and in difficult-to-understand ways. For example, gold stalled during the financial crisis, while the price of silver suffered a veritable collapse. Does it make sense that when financial anxiety was highest, interest in gold and silver ebbed? Along similar lines, the recent rally in the dollar followed the recent correction in gold and silver â€" NOT the other way around. If anything, this shows that gold investors are taking their cues from the broader commodity markets, and not from forex markets.

Third, the macroeconomic case for gold is flimsy. While I don’t think it’s fair to attack gold on political grounds, I still think it’s reasonable to try to ascertain what forces are supposedly being hedged against. If it is inflation that gold buyers are worried about, why aren’t other all investors equally concerned? Based on futures markets â€" whose credibility is just as solid as gold markets â€" inflation expectations are around 2-4% across the G7. If instead it is sovereign debt default that gold investors are concerned about, again, I have to ask why other markets don’t share their concerns. Credit default swap rates are higher for Japanese and European debt than for US Treasury securities, but the yen and euro remain positively buoyant against the dollar. Again, how do gold investors explain this contradiction?

To me, it seems obvious that gold and silver are rising for reasons that have very little to do with fundamentals. Monetary expansion has driven a wave of money into financial markets, and a significant portion of this has no doubt found its way into gold, silver, and other metals. In fact, it seems that last week’s correction was driven partly by higher margin requirements for speculators. Finally, their cause is being helped by low interest rates, since the opportunity cost of holding gold (which doesn’t pay interest) in lieu of dollars (which does) is currently close to zero. When interest rates rise, it will certainly be interesting to see if there is any impact on gold.

In the end, I don’t have a strong understanding of gold and silver markets. For all I know, their rise is genuinely rooted in supply/demand, as it should be. My only wish is that investors will stop pretending that it has anything to do with the dollar.

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Introduction to Technical Analysis: Morning Fake-out

© 2004 - 2011 Forex Blog.org. Currency charts © their sources. While we aim to analyze and try to forceast the forex markets, none of what we publish should be taken as personalized investment advice. Forex exchange rates depend on many factors like monetary policy, currency inflation, and geo-political risks that may not be forseen. Forex trading & investing involves a significant risk of loss.

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Commodities Collapse!

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By Mike Conlon | May 6, 2011

As we all know by now, the inputs that make up the global economy are all inter-twined and that’s what makes the forex market so interesting. Yesterday, commodities prices collapsed across the board, bringing down prices in oil, precious metals, and even agricultural products. Oil is now under $100, gold under $1500, and silver back to under $35.

This begs the question as to what is actually driving prices higher, and what caused this sudden decline. While I think declining commodity prices are a good thing as this can relieve headline inflation, the role of speculators, the US Fed and other Central banks, and supply and demand dynamics must all be examined.

But there was an interesting confluence events occurred yesterday which is likely the reasoning for such a sell-off. While in the US we had a dismal initial jobless claims numbers, the ECB rate policy statement did not confirm that further rate hikes would be coming and deferred to the flexibility the ECB has. The market took this as dovish and began selling Euros, which helped the Dollar rally the most in nearly 2 years.

So adding it all up, we have weakening global economic data, potential pauses in rate hikes abroad which cause Dollar strength, the end of QE2, and the Non-Farm Payrolls report later this morning which all could support a strong Dollar position. However, at this point we can’t rule out further Fed easing if the data continues to get worse here in the US.

So what we’ve been waiting for all week, the US Non-Farm Payrolls Report is expected a gain of 185K jobs.

In the forex market:

Aussie (AUD): The Aussie is mostly higher despite lower commodity prices to start the day as the yield differentials are just too hard to ignore.

Kiwi (NZD): The Kiwi is also higher for the same reasons as the Aussie.

Loonie (CAD): The Loonie is mostly higher as a better than expected employment report shows that there is economic improvement in Canada. Canada added 58.3K jobs vs. an expectation of 20K, and the unemployment rate ticked lower to 7.6% from 7.7%. (Click chart to enlarge)

Euro (EUR): The Euro is mostly lower after the market perception over the ECB statement yesterday is that there may be a pause in rate hikes. The Euro is improving this morning after the NFP figure was released. (Click chart to enlarge)

Pound (GBP): The Pound is mixed as “mum is the word” out of the BOE yesterday. By not issuing a policy statement yesterday, the Pound should continue to strengthen vs. Euro.

Dollar (USD): Wow again. NFP came in showing a gain of 244K jobs, which was much better than the expected 185K and quite a shock to the market. The one negative is that the unemployment rate moved higher to 9% from 8.8%, though it is uncertain what is driving that number.

Yen (JPY): The Yen is weaker across the board as it appears to be “risk-on” again in Japan after yesterday’s holiday.

It looks like some of the correlations that the markets rely on may be breaking down a bit as it appears as though the market is not sure what to make of the data.

On the one hand, good economic data here in the US means that Bernanke and the Fed could let QE2 expire without having to take further monetary action, which should strengthen the Dollar as it has been kept unusually low thanks to that policy.

But on the other hand, good economic data also means that the US economy is recovering, which could put the risk trade back on again, which would mean selling Dollars and buying commodities and higher yielding currencies.

Right now oil is still trading lower, the Euro has just gone positive vs. USD as it is weakening across the board. Stock markets are flying higher, so at this point it looks like the risk appetite is out-weighing the thought that the end of QE2 could bring Dollar strength.

I expect to see some volatility over the ensuing trading days as the market works this all out!

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

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

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Forex Week in Review: May 1-6

It was a week many would like to forget. A week of surreal price movements across all asset classes. The perfect storm of price movement, with investors exiting the one directional, inflation premium commodity trade with gusto, after the CME cost hiking, the rumors of a Soros fund exiting ‘the’ trade and a less hawkish Trichet omitting the code words ‘most vigilant’ from his communique. Now the market has to endure European finance officials in Luxembourg for an unscheduled meeting as rumors of Greece possibly wanting to leave the Euro zone has market sentiment remaining on the defense at week’s end. Below are some of the highlights of the week:

EUROPE

• Euro area manufacturing PMI data for April was revised higher from 57.7 to 58.0, above expectations set for a flat 57.7 reading. The data is consistent with strong growth and provides a comforting outlook on the sector, especially in the light of the stagnant recent Ifo reading.
• Swiss SVME PMI indicator fell unexpectedly to 58.4 from 59.3 last month, while markets were looking for a 59.8 reading.
• Swedish PMI surprised to the upside in April, rising from 58.6 to 59.8 m/m with consensus set at 58.5.
• Unlike Norway who had a sharp downward PMI revision, as the headline fell to 55.6 from 57.4.
• UK manufacturing PMI badly disappointed with a drop to 54.6, the lowest level since last September. The market expected a 57.0 print and, to make matters worse, the March reading was revised down from 57.1 to 56.7. With a weak domestic orders component, does not bode well for growth momentum going into second quarter.
• In Sweden, the Riksbank’s minutes confirmed the very hawkish stand of the executive board.
• Portuguese/German 10-year spreads have tightened on news of agreement on an aid package between the Portuguese caretaker government and EU institutions. The deal still has to be approved by the Portuguese opposition and the EU governments.
• The Euro-zone services PMI was revised down slightly to 56.7 from the preliminary 56.9, coupled with the upward revision to manufacturing PMI, leaves the indicator on firm footing.
• UK construction PMI came in at 53.3, well below the 55.9 expected. Money supply data remained soft, the preferred measure of money supply for the MPC, the three-month annualized rate of M4 ex-intermediate OFCs eased to +1.0% from +1.7% in February.
• UK services dropped to 54.3 in April from 57.1 in March, well below the 56 consensus forecast. With all UK PMI surveys (manufacturing, construction and services) sharply lower this week points to sluggish growth entering the second quarter. This should keep the BoE dovish.
• German factory orders surprised the market with a sharp drop of -4% m/m in March with February print revised lower to +1.9% from +2.4% previously and pushed the annual growth rate to only +9.7% y/y, down from 19.6% in February.
• German industrial production beat expectations rising +0.7%, m/m vs. +0.5%.
• UK PPI printed higher than expected, with the output PPI rising +5.3%, y/y last month vs. +5.1% forecasted. Perhaps higher commodity prices might be starting to filter through.
• Both the BoE and the ECB held rates steady at +0.5% and +1.25% respectively. Trichet’s well documented less hawkish tone had the market pricing out near term inflation premium.
• In Norway, manufacturing production printed stronger than expected at +0.9%, m/m, vs. expected +0.6%. The annual rate accelerated to +3.0%, y/y from +2.0% in February.

Americas

• In Canada, Prime Minister Harpers Conservatives won a ‘majority’. To date, the Tories have pursued policies that have been fairly friendly to the CAD.
• US Treasury Secretary Geithner reiterated that global economies would benefit if China allowed its ‘substantially undervalued’ currency to strengthen. Expect more rhetoric to seek the appreciation of the Yuan ahead of the US-China Strategic Economic Dialogue next week.
• US manufacturing slowed last month (60.4), but not as much as expected (59.5). However, rising costs remain a problem (85.5). The ISM report contrasts the Fed’s regional surveys which show that manufacturing expanded in April. Manufactures continue to experience significant cost pressures from commodities.
• US factory orders climbed for a fifth consecutive month in March (+3%). A broad based increase in orders as well as rising prices for food and oil were factors behind the bigger than expected gain.
• US ADP’s estimate of +179k for private non-farm payroll growth fell short of market expectations (+200k). On the plus side, March data was revised higher by +6k to show a gain of +207k jobs.
• The much weaker than expected US ISM non-manufacturing data has given the investor another reason to be concerned about the US economy and further justifying the Fed’s ‘extended’ monetary policy. The ISM plunged 4.5 points to 52.8 in April, well below expectations (57.4).
• US weekly initial claims jumped to +474k, up from the previous weeks +431k. As long as the headline number stays above +400k, this would imply a slower recovery than the Fed would like.
• US Non-farm productivity rose at a +1.6% rate in the first quarter, beating the streets estimate of +1.1%. The preliminary estimate of hourly compensation (+2.7%) was half-a-percentage point higher, boosting the estimated growth rate of unit-labor costs to +1.0% versus a decline of 1.0% in the fourth quarter.
• Canadian Ivey PMI came out at 57.8, unadjusted 57.7, plummeting from 73.3 last month, has added some pressure to the ‘risk off’ tone mid-week.
• March’s Canadian building permits came in much stronger than expected, with a massive +17.2% increase after a strong +9.8% gain in February.
• NFP expanded by +244k last month, the biggest gain in a year, after a revised +221kincrease the prior month. The jobless rate climbed to +9% (first increase since November).
• Canadian employers added a net +58.3k jobs in April after a decrease of -1.5k in the previous month. The jobless rate unexpectedly dropped to +7.6%.

ASIA

• China’s April PMI fell -0.5 points to 52.9 with new orders falling -1.4 points to 53.8. Some proof that China’s economy is decelerating amid rising financial stress for non state owned companies, wide spread labor shortages, and emerging power interruptions. Does the weaker data curtail policy tightening?
• As expected, the RBA left their rate policy on hold (+4.75%). Their following communiqué was hawkish compared to the April release, but certainly caught the rate’s market on the back foot, who had pushed yields higher going into the meeting in the wake of higher than expected first quarter inflation. Governor Stevens’s communiqué ran a balanced mix of downplaying first quarter inflation due to the floods, noting strength in the labor market and a pickup in corporate credit growth but weakness in household credit. However, he went on to say that ‘the marked decline in underlying inflation from the peak in 2008 has now run its course.
• The Reserve Bank of India hiked policy rates +50bps to +7.25% and +6.25%, respectively on the repo and reverse-repo, more than the consensus forecast for +25bps.
• New Zealand building permits rose only +2.2% m/m in March after the sharp fall of -9.8% m/m in February.
• Japan Finance Minister Noda went out of his way this week to distinguish the current yen movement from the pre-intervention period. He noted that the moves stem from weakness in the dollar, not from yen strength.
• New Zealand reported a higher than expected +1.4% q/q rise in employment in the first quarter.
• Australian retail sales were weak in March, down -0.5% m/m vs. an expected +0.5% gain.
• The RBA’s Monetary Policy Statement also emphasized the possibility for further policy divergence. The statement came in more hawkish than market expectations of forecasts remaining unchanged. Policy makers indicated that market pricing of one hike over the year ahead (to May 2012) is not enough. Inflation is expected to be above its +2-3% target band by end 2013.

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Forget inflation-Ireland seeking external debt advice help EUR?

India has hiked, New Zealand stands pat, Trichet talks tough, Bernanke hangs loose and Gillard is flood taxing, which is another form of tightening. Inflation is on everyone lips, we are either denying it, embracing it, but the world is definitely talking more about it. UK is a mess. They currently have GDP issues with inflation overtones, an austerity plan running amuck has consumers becoming less confident about their prospects, suggesting that their economy will not be receiving help from household spending soon. A dovish Governor Carney worried about the strength of his loonie, a currency that the world wants to own a piece of. Rates are not an issue with the BOJ, its their credit rating. S&P’s has stepped in this morning and downgraded the country’s credit. As a result, investors will be expected to unwind some of their recent acquired risk. Hawkish comments by Bini Smaghi, highlighting the importance of headline inflation as opposed to the core inflation, has put the squeeze on the weak EUR shorts this morning. Keep an eye on Ireland, its believed they are seeking external advice on how to restructure their debt. A delegation is supposedly contacting Felix Rohatyn, the architect of NY’s debt restructuring in the ‘70’s.

The US$ is stronger the O/N trading session. Currently, it is higher against 13 of the 16 most actively traded currencies in a ‘volatile’ O/N session.

Yesterday’s new US home sales blew past expectations. It increased by +17.5%, rising to a seasonally adjusted +329k vs. market expectations of +299k (+3.1%) in December. Digging deeper, the median sales price last month was $241.5k, up +8.5% year-over-year, while sales were down -7.6% for the same month in 2009. The same excuse’s that apply to this week’s S&P/Case-Shiller house price index are also providing pressure on new home sales. High unemployment in the US coupled with elevated foreclosures continues to depress the market and their values. This is strong proof that we are probably in ‘that double-dip’. Sales for a period last year surged on the back of a federal home-buyer tax credit. The programs expiration has only added to the US housing woes. Lower prices provide affordability, but with prices remaining in a downward spiral, no one benefits. What’s potentially more frightening is the size of the ‘shadow inventory’ that remains on the sidelines. New home sales are notoriously volatile and subject to large revisions, particularly at this time of year.

OK, to the meat of yesterday. There were no surprises by the Fed’s decision to keep rates unchanged. The extended period remains in play. No change to QE2 and its ‘promised’ end date. I though helicopter Ben’s aim was to get long yields down? No one dissented. No real change to their economic assessment, OK, maybe a tad more optimistic with policy makers noting that ‘growth in household consumption picked up’. They admit that the recovery is continuing, but as expected, suggest this is insufficient to cause a significant improvement in the labour market. Is employment not a lagging indicator? Have the private sector not added +1.3m jobs to their payroll last year? In reality, the high unemployment rate is a factor of the ‘magnitude of jobs lost in the recession’. The labour market needs time. On prices, the Fed noted the increase in commodity pries but said that inflation expectations remain stable and that underlying inflation has been trending. In other words, the Fed is reluctant to rock anybody’s boat just yet.

The USD$ is lower against the EUR +0.01% and higher against GBP -20%, CHF -0.34% and JPY -0.77%. The commodity currencies are weaker this morning, CAD -0.34% and AUD -0.72%. ‘Much ado about noting’ had the loonie again trading in a tight range despite a rally in equities and commodities. The loonie did find some buying interest after the Fed kept their stimulus measures in place, as investors sought some higher-yielding assets. With the Fed maintaining its plan to buying treasuries can only be an advantage for the currency as investors become more comfortable with risk assets and this despite softer than expected December inflation data earlier this week reinforcing expectations that the BOC will move cautiously on rising interest rates. Higher energy prices (+13%) and some base-year effects were behind the pickup in headline inflation in December (+2.4%). Disinflationary pressures from excess capacity are expected to continue to restrain core-inflation (-0.3%). Governor Carney said last week that the Canadian economy has ‘considerable slack’ that will keep core inflation below +2% until the end of next year. But, with the pick up in global appetite for risk, speculators will now be looking for better levels to sell the dollar (0.9951).

The AUD has traded under pressure in the O/N session, ever since Prime Minister Gillard announced a one-off tax from 1 July 2011 to fund post-floods reconstruction. The market has seemingly interpreted this as a form of fiscal tightening which eases the pressure for RBA to tighten monetary policy. Dealers have promptly lowered their bets on an increases to the benchmark interest rate over the next year. Pricing over the next 12-months fell-7bp to +22bp after this morning’s announcement.Weaker inflation and the devastation caused by floods will very likely delay further RBA hikes beyond the first quarter. Last weeks data out of its largest trading partner, China, has the market convinced that the PBOC will move to hike their reserve rates. Their actions will reduce further the demand for the commodity sensitive growth currency. The credit downgrade by S&P’s of Japan is also capable of taking some ‘risk’ off the table. Offers again appear at parity (0.9918).

Crude is lower in the O/N session ($86.60 -73c). Yesterday, crude rebounded from its two-month lows on speculation that Chinese demand this year boosted bets that the commodity’s slump was exaggerated. The gains were capped after the weekly EIA report revealed that inventories ballooned. Weekly stocks climbed +4.84m barrels to +340.6m vs. expectations of a +1.2m barrels rise. Not to be out done, gas supplies increased +2.4m barrels, against expectations of a +2.1m. The only negativity came with distillate supplies (heating oil and diesel) decreasing-100k, less than the expected-300k. Refinery’s in puts averaged +14.1m barrels per day, which was-212k barrels below the previous week’s average as refineries operated at +81.8% capacity. Weekly imports averaged +9.4m barrels per day, up by +386k barrels. Over the last four-weeks, imports have averaged +8.9m barrels, a +517k barrels per day above the same four-week period last year. Earlier this week the Saudi Oil Minister indicated that OPEC may increase production levels to meet increasing global fuel demand. His comments have certainly put a medium term cap on the black stuff. He indicated that global demand was expected to increase around +2% this year. OPEC believes that supply and demand are ‘in balance’. Fundamentally, there is far more oil in storage, more fuel capacity and more idle oil wells to limit a stronger market rally in the medium term. Technically, an $85 barrel remains on the horizon.

Gold prices have not gravitated far from this weeks three-month low as equities rally, eroding further demand for the metal as a haven. With increased risk appetite in the market, investors are shying away from the commodity seeking ‘price appreciation’. Currently, the market does not expect gold to outperform other asset classes. With global confidence growing, one gets the feeling that the bulls are trapped and will soon be pushing that panic sell button. Fundamentally and technically the trend has turned rather badly against the longs. Month-to-date, the commodity has fallen -6.3% and only weeks after recording a +30% annual return. Buying has been less than modest with the commodity off to its worst start in 14-years. Has the gold peaked or is simply a short-term correction? The metal has shred $100 from its December highs. With the Euro-zone being able to sell their bonds, there’s less of a flight to quality, which could cause this asset class to be staring at a sub $1,300 a once soon. The market remains a seller on up ticks ($1,340+$5.60).

The Nikkei closed at 10,478 up+77. The DAX index in Europe was at 7,152 up+25; the FTSE (UK) currently is 5,980 up+12. The early call for the open of key US indices is higher. The US 10-year backed up 8bp yesterday (3.41%) and is little changed in the O/N session. Stronger US housing data coupled with increased global optimism had the US curve backing up ahead of the difficult $35b five-year auction and the FOMC statement. The auction came in very strong. The notes were issued at 2.041% vs. 2.149 last month. The bid-to-cover was 2.97 compared to 2.76 from the four auction average. Indirect bidders (institutions and Cbanks) took 45% vs. the 39.2% four-auction average. Direct bidders (money managers and hedge funds) took down 10% after taking 6.2% last month. Since the FOMC statement yesterday, it seems that some investors are not buying into the laissez-faire Fed inflation approach and are pressurizing the long end of the curve. This obviously suits banks, borrow short and lend long. Today we get the last of this weeks $99b auctions, the $29b 7’s.

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British Pound Faces Contradictory 2011

The last few years have been volatile for the British Pound. In 2007, it touched a 26-year high against the US Dollar, before falling to a 24-year low a little more than one year later. During the throes of the credit crisis, analysts predicted that it would drop all the way to parity. Alas, it has since managed to claw back a substantial portion of its losses, and finished 2010 close to where it started.

At the moment, however, there are two contradictory forces tugging at the Pound, which could send up upwards against the Euro but lower against the US Dollar. The first is the sovereign debt crisis in the EU, which flared up dramatically in 2010 and currently threatens to crippled the Euro. I will offer more commentary on this issue in a later post; for now, I just want to point out its role in supporting the Pound. While the Dollar is the Euro’s chief rival, many traders have turned to the Pound (and the Swiss Franc) because of their regional proximity. “As long as the euro-zone debt crisis is in the focus of the market, it will be the main driver of euro-pound,” summarized one strategist.

The second force (or set of forces) is propelling the Pound in the opposite direction. Basically, the UK economy remains depressed. Thanks to an unexpected contraction in the fourth quarter, GDP growth in 2010 was an exceptionally modest 1.7%. This was hardly enough to compensate for the average annual growth of .1%/year from 2006 to 2009, and send the Pound tumbling. Forecasts for 2011 and 2012 have since been revised downward to about 2%.

In order to spur Britain’s export sector, the Bank of England has deliberately acted to hold down the Pound, which it has managed to achieve through a combination of quantitative easing and low interest rates. “For a long time that’s what we were targeting, and we managed to get it down by about 25 percent â€" the exchange rate, that’s had a huge benefit to the U.K. economy,” a former member of the monetary policy committee recently admitted.

An unintended byproduct of this policy has been price inflation. At 3.75%, the inflation rate is among the highest in the industrialized world, and certainly the highest among G4 currencies. At the very least, the Bank of England will have to suspend any aspirations to match the Fed in printing more currency and expanding its QE program. It will probably also have no choice but to raise interest rates, which it might otherwise not have done until the economy is on more solid footing. The markets are currently projecting an initial rate hike of 25 basis points in the third quarter, and for the benchmark rate to exceed 1.5% by the end of the year, compared to .5% currently.

It’s difficult to say how the currency markets will make sense of this. Given that real interest rates will remain negative (due to inflation), it seems unlikely that any yield-seeking investors will suddenly start targeting the British Pound. In addition, given that the risk of ‘stagflation’ in the UK is now real and that the government is set to assume a record amount of new debt over the next few years, risk-averse investors will probably stay away. According to the latest Commitment of Traders report, speculators are already starting to establish bearish positions against the US Dollar.

While the Pound looks vulnerable, the big unknown is ultimately the EU fiscal crisis. If one of the peripheral members leaves the Euro, as some commentators predict will finally happen, then all bets (for the Pound, etc.) are off.

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DC To Davos!

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By Mike Conlon | January 26, 2011

Last night the politicians were out in full force as were the financial elite in Davos in what has become nothing more than self-aggrandizement exercise whereby we are supposed to feel confident that our economic problems will be solved among platitudes and champagne! Color me unimpressed.The State of the Union speech came and went last night with no appreciable clarity that would inspire confidence that the US government is prepared to “get real”. While the business climate here in the US has improved, we still have a LONG way to go to reduce that 9.4% unemployment rate which continues to drag on the economy.

Later this afternoon, the FOMC rate decision is expected and while no change to policy is expected, listen to the economic forecast to see what they are basing their projections on.

Across the pond, the BOE minutes revealed that indeed another policy-maker has blinked, as the thought of that higher CPI data has caused another to join the push for a rate hike. This has sent the Pound higher this morning, but it must be noted that the awful GDP number reported yesterday was not factored into the dissent, so I don’t see how it is possible to raise rates when contracting GDP figures point to a double-dip recession.

Later tonight, we will get the RBNZ rate decision from New Zealand where no change is expected, but pay close attention to whether or not the comments appear to be hawkish or dovish.

So today is a bit of a mixed bag, with stocks and commodities initially higher to start the morning.

In the forex market:

Aussie (AUD): The Aussie is mixed as investors can make neither heads nor tails of all of the jabber surrounding the markets. There’s no additional economic data due out this week, so expect the Aussie to trade on risk themes.

Kiwi (NZD): The Kiwi is lower across the board to start the day ahead of tonight’s rate policy decision. While there expected to be no change, a change in sentiment could produce big moves in either direction though I am inclined to say that the Kiwi should go down on dovish rhetoric. (Click chart to enlarge)

Loonie (CAD): The Loonie is mixed to start the day, catching a bid from higher oil prices and the expectation that the FOMC meeting may forecast stronger US economic growth which would benefit Canadian exports.

Euro (EUR): The Euro is mostly trading flat to lower as all eyes are focused on the shindig at Davos. There is no significant news for the Euro zone today, though German import price index did increase more than expected.

Pound (GBP): The Pound is higher across the board as another dissenter joined in the call for an interest rate increase. However, it must be noted that this is unlikely to be the case after the negative GDP number reported yesterday BEFORE austerity measures actually kick in. So this may be a “sell the news” type of opportunity here in the Pound. (Click chart to enlarge)

Dollar (USD): The Dollar is strengthening ahead of today’s FOMC meeting which is at 2:15 EST for those who trade the market. Be careful around the announcement, as volatility can sometimes produce crazy movement. New home sales are due out later this morning.

Yen (JPY): The Yen is mostly higher as all of the indecision in the market has induced a bit of demand for safety. The Nikkei was down overnight which sometimes has an inverse correlation with the Yen which would induce some Yen buying.

With all of the talk surrounding this week in the markets, there’s a bit of sleight-of-hand going on as it seems to be a case of “listen to what I say, but don’t watch what I do”. The Davos meeting has become a billionaire’s retreat where the champagne and caviar flow and the new “financial rockstars” of the world decide on the new paradigm of how they are going to steal fromâ€"er I mean help, the average citizen.

Meanwhile, the hot air keeps coming out of Washington DC and it’s getting tiresome already. Just fix the problem already! Quit talking about it! We get it! There’s a problem!

We don’t need more talk, we need action. And it all starts with employment. I didn’t hear anything last night that would lead me to believe that anyone has a clue what’s going on. But hey, maybe we can all get jobs at Davos, servicing our financial rock stars!

In the meantime, there is still great risk in the marketplace, and you should look to continue to invest in strong economies, and sell those that are weak.

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

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

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

Topics: What To Look At In The Market |

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The Great Unwind!

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By Mike Conlon | May 20, 2010

I talk often about carry trades in the currency market which go hand in hand with the risk themes that drive daily price action.  When there is confidence in the financial markets, investors look to take on risk and seek out higher yielding assets.  They can do this by selling the currency of a low interest rate country and buying the currency of a higher interest rate country, thereby capturing interest through yield differentials.  This is known as a carry trade.

The currency pair that represents the greatest “carry” among the most actively traded pairs is the AUD/JPY pair which can also be used as a proxy for risk-taking in the market.  Currently, the positive carry of this pair is roughly 4.4%, as rates in Australia are at 4.5%, and rates in Japan are .1%.  So just by owning this pair, an investor would earn that rate difference.  This is a common trade when there is confidence in the financial markets.

Currently, there is little confidence in financial markets, as the EU debt crisis has brought to light many problems in the global marketplace.  And unless you have been living under a rock for the past few weeks, this should not come as news to you.

So what we are seeing is major risk-aversion in the markets, and no pair is getting hit harder than the above mentioned as investors unwind a risk-taking position.  In addition, global stock markets and commodities are selling off, adding additional fuel to the fire as investors run to the “safety” of the Japanese yen and US dollar.

In the forex market:

Aussie (AUD):  The Aussie is the biggest loser this morning, as risk-aversion is causing the un-wind of carry trades.  It is currently at an 8 month low vs. the US dollar, as gold prices have sold off to the 1178 level.  Gold is often used as a proxy against inflation, which does not appear to be as great a concern as deflation is, as the world prepares for a global slowdown.  Concerns about a Chinese slowdown could really derail the world economy, but all eyes are on the Euro crisis for now.

Loonie (CAD):  The Loonie is also selling off as commodity prices, particularly oil at 68, are lower across the board.  The Loonie does not benefit as much as the Aussie (or Kiwi) from carry trades, as low rates in Canada do not encourage carry trades.  The Loonie may be better off in the long run, as the US is its largest trading partner, and the US keeps throwing money at its financial woes instead of adopting austerity measures that the rest of the globe seems to be taking.

Kiwi (NZD):   The Kiwi is selling off for the same reasons as the Aussie; however in NZ they just announced that they will be cutting income taxes but raising sales taxes to encourage savings and debt reduction.  This will help NZ reduce its foreign debt as financial discipline is needed in the region.

Euro (EUR):  The Euro is higher vs. the commodity currencies above on the carry un-wind as well as risk aversion pervades the marketplace.  Now this may seem counter-intuitive to some as the major risk in the market is the Euro, which appears to be stabilizing as banter about Euro intervention is thrown about.  In somewhat decent news, PPI figures in Germany were higher showing signs that massive deflation has not taken hold.  Yet.

Pound (GBP):   Retail sales were higher in the UK for the third month in a row, in what may be short-lived gains in consumer sentiment.  With the new government looking toward austerity measures and a return to fiscal responsibility, and the BOE pledging to stay the course on monetary policy, the Pound may continue to be weaker vs. the Yen and the Dollar.

Dollar (USD):   US jobless claims came in higher than expected though continuing claims fell, most probably the result of discouraged workers losing their benefits.  This does not bode well for the US economy which, quite frankly is only seeing strength because everything else looks so bad.  US equity futures are lower, though off of their lows of the morning.

Yen (JPY):  GDP figures came in worse than expected to 4.9% vs. an expectation of 5.5%.  The export led recovery did not encourage consumers to spend, and higher yen values due to risk-aversion could derail exports going forward.  Nevertheless the yen is higher on the flight to safety trade, despite the fact that the BOJ may have to do more to combat deflation.

What we are seeing now is a global “ratcheting down” of economic bubbles that ran rampant over the last few years.  As different economies around the globe pare back spending and attempt to get their debt under control; economic slowdown is the natural consequence.

This is going to send a ripple effect through the global market place and fears of a global double-dip recession may not only be founded but likely.  I believe there is much more pain to be felt in the market place and have little confidence that world leaders can come up with a solution.

Because of the fractured nature of the world economy and competing interests, a solution may be impossible.  In my opinion, we are going to start to see either debt defaults or massive money printing which will eventually lead to inflation.  But that could be YEARS away.

So for now, think globally, but act prudently locally.

And take advantage of these extraordinary times by trading forex and shoring up your own personal balance sheet!

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

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

Tags: account, AUD, Aussie, Australia, BOE, cad, canada, carr, carry trade, commodities, commodity, course, crisis, currenc, currencies, currency, currency market, currency pair, currency trading, dollar, dow, economic, economy, EUR, Euro, fear, financial, forex, forex market, free, fx, fxedu, gbp, gold, Il, interest, interest rate, intervention, invest, investor, Japan, jpy, Kiwi, live, loonie, lower, market, mie, Mike Conlon, money, news, nzd, oil, pair, pairs, pound, practice, practice account, recession, retail sales, RSI, sentiment, short, ssi, stock, time, trade, trades, USD, Yen

Topics: What To Look At In The Market |

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Canadian Dollar Still on the Slide

Worries that the Greek debt crisis could spread to other European countries, has caused the Canadian dollar to fall almost four cents to its US counterpart in the past week. The dollar was worth about 94.22 cents US Thursday morning in New York, down 1.55 cents from the close on Wednesday.

Investors are worried that a prolonged recession in Europe could lower demand for energy and other resource commodities. This could potentially affect the country directly as Canada is a major commodities exporter.

Source: The Canadian Press

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Forex Glossary Y

Forex Glossary Y

Yard - Slang for a billion.

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Forex Glossary W

Forex Glossary W

Wedge Chart Pattern – Chart formation that shows a narrowing price range over time, where price highs in an ascending wedge are incrementally less, or in a descending wedge, price declines are incrementally smaller. Ascending wedges typically conclude with a downside breakout, and descending wedges typically terminate with upside breakouts.

Whipsaw - slang for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal.

Wholesale Prices – Measures the changes in prices paid by retailers for finished goods. Inflationary pressures typically show up here earlier than the headline retail.

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Forex Glossary U

Forex Glossary U

UK HBOS House Price Index – Measures the relative level of UK house prices for an indication of trends in UK real estate sector and their implication for overall economic outlook. This index is the longest monthly data series of any UK housing index, put out by the largest UK mortgage lender (Halifax Building Society/Bank of Scotland).

UK Producers Price Index Input – Measures the rate of inflation experienced by manufacturers when purchasing materials and services. This data is closely scrutinized since it can be a leading indicator of consumer inflation.

UK Producers Price Index Output – Measures the rate of inflation experienced by manufacturers when selling goods and services.

UK Claimant Count Rate – Measures the number of people claiming unemployment benefits. The claimant count figures tend to be lower than the unemployment data since not all unemployed are eligible for benefits.

UK Jobless Claims Change – Measures the change in the number of people claiming benefits over the previous month.

UK Average Earnings Including Bonus/ Excluding bonus – Measures the average wage including/excluding bonuses paid to employees. This is measured QoQ from the previous year.

UK Manual Unit Wage Costs – Measures the change in total labor cost expended in the production of one unit of output.

Unemployment Rate – Measures the total workforce that is unemployed and actively seeking employment, measured as the percentage of the labor force.

University of Michigan's Consumer Sentiment Index – Polls 500 US households each month. The report is issued in a preliminary version mid – month and a final version at the end of the month. Questions revolve around individuals attitudes about the US economy. Consumer sentiment is viewed as a proxy for the strength of consumer spending.

Unrealized Gain/Loss - The theoretical gain or loss on Open Positions valued at current market rates, as determined by the broker in its sole discretion. Unrealized Gains' Losses become Profits/Losses when position is closed.

Uptick - a new price quote at a price higher than the preceding quote.

Uptick Rule - In the U.S., a regulation whereby a security may not be sold short unless the last trade prior to the short sale was at a price lower than the price at which the short sale is executed.

US Prime Rate - The interest rate at which US banks will lend to their prime corporate customers.

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Forex Glossary S

Forex Glossary S

Settlement - The process by which a trade is entered into the books and records of the counterparts to a transaction. The settlement of currency trades may or may not involve the actual physical exchange of one currency for another.

Short Position - An investment position that benefits from a decline in market price. When the base currency in the pair is sold, the position is said to be short.

Simple Moving Average (SMA) – A simple average of a pre – defined amount of price bars. For example, a 50 period Daily chart SMA is the average closing price of the previous 50 daily closing bars. Any time interval can be applied here.

Spot Market - A physical market in which foreign currencies and commodities are bought and sold for cash at the current market price, settled "on the spot" and delivered immediately.

Spot Price - The current market price. Settlement of spot transactions usually occurs within two business days.

Spot Trade - The purchase or sale of a foreign currency or commodity for immediate delivery (as opposed to a date in the future). Spot contracts are settled electronically.

Spread - The difference between the bid and offer prices.

Square - Purchase and sales are in balance and thus the dealer has no open position.

Sterling - slang for British Pound.

Stop Loss Order - Order type whereby an open position is automatically liquidated at a specific price. Often used to minimize exposure to losses if the market moves against an investor's position. As an example, if an investor is long USD at 156.27, they might wish to put in a stop loss order for 155.49, which would limit losses should the dollar depreciate, possibly below 155.49. Refer to Trading Handbook for FOREX Loss Policy.

Support Levels - A technique used in technical analysis that indicates a specific price ceiling and floor at which a given exchange rate will automatically correct itself. Opposite of resistance.

Swap - A currency swap is the simultaneous sale and purchase of the same amount of a given currency at a forward exchange rate.

Swissy - Market slang for Swiss Franc.

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Forex Glossary O

Forex Glossary O

Offer (ask) - The rate at which a dealer is willing to sell a currency. See Ask (offer) price

Offsetting transaction - A trade with which serves to cancel or offset some or all of the market risk of an open position.

One Cancels the Other Order (OCO) - A designation for two orders whereby one part of the two orders is executed the other is automatically canceled.

Open order - An order that will be executed when a market moves to its designated price. Normally associated with Good 'til Canceled Orders.

Open position - An active trade with corresponding unrealized P&L, which has not been offset by an equal and opposite deal.

Over the Counter (OTC) - Used to describe any transaction that is not conducted over an exchange.

Overnight Position - A trade that remains open until the next business day.

Order - An instruction to execute a trade at a specified rate.

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Forex Glossary L

Forex Glossary L

Leading Indicators - Statistics that are considered to predict future economic activity.

Leverage - Also called margin. The ratio of the amount used in a transaction to the required security deposit.

LIBOR - The London Inter-Bank Offered Rate. Banks use LIBOR when borrowing from another bank.

Limit order - An order with restrictions on the maximum price to be paid or the minimum price to be received. As an example, if the current price of USD/YEN is 117.00/05, then a limit order to buy USD would be at a price below 102. (ie 116.50)

Liquidation - The closing of an existing position through the execution of an offsetting transaction.

Liquidity - The ability of a market to accept large transaction with minimal to no impact on price stability.

Long position - A position that appreciates in value if market prices increase. When the base currency in the pair is bought, the position is said to be long.

Lot - A unit to measure the amount of the deal. The value of the deal always corresponds to an integer number of lots.

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Forex Glossary K

Forex Glossary K

Kiwi - Slang for the New Zealand dollar.

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Forex Glossary J

Forex Glossary J

Japanese Economy Watchers Survey – Measures the mood of businesses that directly service consumers such waiters, drivers, and beauticians. Readings above 50 generally signal improvements in sentiment.

Japanese Machine Tool Orders – Measures the total value of new orders placed with machine tool manufactures. Machine tool orders are a measure of the demand for machines that make machines, a leading indicator of future industrial production. Strong data generally signals that manufacturing is improving and that the economy is in an expansion phase

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