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!

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EUR sympathizes with Sterling

No one really cares that the Spanish 3 and 6-month Bill auction saw a huge improvement over December, with its bid to cover ratio doubling. It’s the fourth quarter UK GDP (-0.5% vs. +0.5%) print that’s caused Cable to plummet and the EUR to sympathize. The extreme cold weather, the unquantifiable factor, had the quarter reflecting a full 1% deviation from the median forecasts. Sterling has found some buyers, but continues to look heavy, with the currency expected to dominate trading even further the longer it cannot find traction. Even with the double-dip fear revived, initial market reaction has overshot the mark. Dealers expect better levels to own EUR/GBP and sell Cable outright.

The US$ is stronger the O/N trading session. Currently, it is higher against 14 of the 16 most actively traded currencies in a ‘volatile’ O/N session.

Today’s US consumer confidence release is the first of a slew of data that is expected to begin a strong week for USD. Combined with large net Treasury issuance, this week’s data could push US yields higher, benefiting the currency. Some of the luster has been taken away by the dismal UK release this morning. Markets are calling for double-dip recession in the UK. The dollar may shine because of uncertainty and not necessarily on the back of stronger data.

The USD$ is higher against the EUR -0.42%, GBP -1.30%, CHF -0.10% and JPY -0.20%. The commodity currencies are weaker this morning, CAD -0.14% and AUD -0.27%. The loonie traded under pressure yesterday, especially on the crosses, but in a tight range ahead of this morning’s CPI data. Oil rhetoric from OPEC members had the CAD trading skittishly in a tight range. The fear of China extending a tighter monetary policy has also had commodity sensitive currencies on the back foot. An unexpected Canadian November retail sales print on Friday (+1.3%) gave the CAD some positive temporary momentum that ended up being an ideal opportunity for some speculative longs to offload their positions. Year-to-date, the loonie has benefited by association with stronger US data. The BOC dovish position, after keeping rates on hold at +1% last week, has also helped to push the loonie to back off from its strongest level in two-years as the market digests rates being on hold and an economic recovery being threatened by a European fiscal crisis. Investors will see if the dovish BOC stance is justified after this morning inflation numbers. If so, expect dealers to be pricing rate hikes even further out the curve (0.9963).

The AUD immediate reaction was to fall -0.5% after the release of the CPI data showing headline inflation falling to +2.7%, y/y from +2.8% in the fourth quarter, vs. a market expectation of +3%. Since then, it has managed to claw back some of this losses, but not with much conviction, especially with softer commodity prices widespread. Market pricing of RBA rate hikes for the next 12 months fell to 28bp from 35bp. Weaker inflation and the devastation caused by floods will very likely delay further RBA hikes beyond the first quarter. Futures dealers expect the RBA to resume its tightening bias in the second half of the year, given rising wages, construction and housing related costs and energy and food prices. 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. Earlier this week, Treasury Secretary Swann stated that the country faces an ‘enormous’ economic fallout from floods. ‘Queensland’s rapid development has meant that its economic performance has a much bigger influence over our national economy’. With growth expected to slow this quarter, a tightening policy would not be the prudent course of action. Currently, the market pricing of rate cuts (4.75%) for the RBA February policy meeting and of rate hikes later in the year remains broadly unchanged. Offers again appear at parity (0.9937).

Crude is lower in the O/N session ($87.60 -27c). Crude prices never had a chance at taking on the $90 level yesterday, especially after 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. Last week the IEA raised its estimates for this year’s global demand for a fourth consecutive month as the economic recovery seems to be gathering momentum. They anticipate that global consumption will increase by +1.69%. Last week’s US inventory report provided another excuse to offload oil contracts. Crude stockpiles increased +2.62m barrels to +335.7m. Not being left behind were gas supplies rising +4.4m to +227.7m barrels. It’s worth noting that the four week gas demand was +2%, y/y, higher and averaged +9m barrels a day. US refineries ran at +83% of total capacity, a drop of -3.4%. The supplies of distillates (diesel and heating oil) rose by +1m to +165.8m barrels vs. an expected weekly increase of +900k barrels. OPEC believes that supply and demand are ‘in balance’. 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. The commodity is expected to test key support levels around $85.

After capping its third consecutive weekly loss on speculation that borrowing costs will rise as the US economy recovers, gold prices are again piggybacking their two month lows with some bottom feeders happy to want to own some as global equities rally, eroding the metals appeal. Even the announcement by the Central Bank of Russia planning to buy 100 metric tons of gold to replenish their reserves has done little to spur frantic bullish buying now that key support levels are being tested. To date, buying has been modest in the commodity, off to its worst start in 14-years and down -5.7%, year-to-date, only weeks after recording a +30% return. There is serious discussion being given to whether the gold market has peaked or if it is simply making a short-term correction. Recommendations by hedge funds to cut long positions last week, has the lemming one directional trade firmly eyeing an exit door. Aiding the metal is the Euro sovereign-debt crisis and this despite the Euro-finance minister’s pledge to strengthen a ‘safety net for debt-strapped countries’. On a macro level, analysts expect the losses may be limited on concern that inflation will accelerate. Technical analysts believe that gold ($1,327 -$17.20) will outshine other precious metals in 2011 and peak somewhere above $1,600 in 2012. Current trading however does not feel like it.

The Nikkei closed at 10,464 up+119. The DAX index in Europe was at 7,080 up+13; the FTSE (UK) currently is 5,924 down-20. The early call for the open of key US indices is lower. The US 10-year eased 2bp on yesterday (3.40%) and is little changed in the O/N session. The belly of the US curve printed six-week high yields last week, as economic data in the US and the Euro-zone boosted speculation that a global recovery is building momentum which dampens the need for government debt as an alternate for safe heaven requirements. The 2’s/Bond spread tightened for a second consecutive day ahead of today’s $35 short-bond issue and on speculation that the increases in long-bond rates cannot be sustained (+393bp). In total this week, the Treasury will auction $99b of new debt which should require dealers to make more room to take down product and flatten the curve. Stronger fundamentals are creating a choppy trading environment with medium term support levels for 10’s becoming questionable (+3.50%).

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Be Careful What You Wish For!

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By Mike Conlon | June 25, 2010

Overnight, the US Congress unexpectedly came to a deal and has agreed on bill regarding financial reform and regulation.  The uncertainty surrounding this bill has been weighing on the markets, as it was unclear what the outcome might be.

As news trickles out of the 2000+ page document and what it means for the banks and the market in general, at least the uncertainty has been removed.  Uncertainty= volatility.  Now, whether or not this bill will actually accomplish what it is intended to remains to be seen.  What my experience tells me is that no matter what is in the bill; Wall St. has already prepared for likely scenarios and has already devised ways to circumvent regulation.  In addition, enacting legislation of this magnitude always comes at a cost, and the brunt of that cost is likely to be paid for by consumers, and not the banks themselves.  Banks will simply pass through the new cost so that executives can still buy beach houses.  If you don’t believe this will happen, take a look at bank stocks that are trading higher in the pre-market.

This comes ahead of this weekend’s G-20 meeting, where the US will push other nations to consider enacting similar reform.

Economic data is out showing that US GDP grew 2.7%, vs. an expectation of 3% and personal consumption figures were at 3% vs. an expectation of 3.5%.  This falls in line with what the Fed said the other day that we are seeing growth, albeit moderate.

Overnight, Japanese CPI figures came in at -.9% vs. -1.1% showing signs that deflation may be subsiding.

The market started out in risk taking mode, but it appears that may be reversing.

In the forex market:

Aussie (AUD):  New Australian PM Gillard has backed away from the mining tax that was the eventual downfall of her predecessor and is open to discussion and negotiation.  The tax was largely seen as anti-investment in one of Australia’s biggest industries.

Kiwi (NZD):   The Kiwi is lower despite a widening trade balance surplus but the market is concerned about a potential Chinese slowdown which could hamper demand for exports.   However, this figure fell short of expectations (814M vs. 850M).

Loonie (CAD):  The Loonie is higher this morning as its major trading partner (the US) appears to be the only country not entertaining the idea of reduced spending.  Unlike the other commodity currencies which are more tied to China, expect the Loonie to benefit as long as the US maintains its spending spree.

Euro (EUR):  The Euro is lower continuing the trend of heightened fear from the debt crisis.  Today marks the fourth day in a row that European stocks are lower as we head into the G-20 weekend.

Pound (GBP):  The Pound is mixed this morning and it will be interesting to see what (if anything) comes out of the G-20 meeting.  The UK “tax and axe” strategy is diametrically opposed to the US strategy of “spend, extend, and pretend”.

Dollar (USD):    The Dollar is somewhat mixed today as the market figures out exactly what this new financial regulation means.  In addition, GDP figures were lower than expectations, but showed that growth, while moderate, is occurring.

Yen (JPY):  The Yen is higher this morning, as CPI data showed that deflation came in less than expected.  In addition, minutes from the rate policy meeting showed that there was actually talk of inflation.  The Nikkei was down overnight, and speculation that the G-20 will not come to a consensus over global economic policy has strengthened demand for the safe-haven of the Yen.

All of my years on Wall St. have taught me one thing:  that politicians in Washington DC cannot compete with the brainpower of Wall St.   Today, champagne is flowing as the uncertainty over the worst-case scenario from financial regulation has been lifted.  True, this isn’t a “home-run” for Wall St.; but I can tell you that they have been prepared for EVERY possible scenario to come out of this and already have plans in place to line their pockets at the expense of the general public.

While regulation is good in theory, it always brings about unintended consequences and in the end it is always the consumer that gets hurt.  Now that this is out of the way, the G-20 meeting will be the focus of the weekend but don’t expect anything of substance to come out of it.

The major problem here in the US is jobs.  Period.  Next week’s Non-Farm Payrolls report will show if we are gaining any jobs in the private sector.  If this is a bad number, look out below.

So there is potential for risk over the weekend, but my guess is the G-20 will be a non-event.

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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US Lowers GDP Estimate

The US government has lowered its Gross Domestic Product estimate from 3 percent, to 2.7 percent for the second quarter of the current year. A reduction in consumer spending levels was the main reason given for the downgrade. Despite the reduction, this marks the third straight quarter that the economy has expanded and somewhat eases concerns of the possibility of a “second-dip” recession.

On a more negative note however, the result is weak when compared to the growth levels experienced in the aftermath of previous recessions. This, together with ongoing problems in Europe, has some analysts concerned that the global economy will continue to struggle for some time yet.

High unemployment also continues to place a damper on any recovery. The number of new jobless claimants did decline by 19,000 new claims last week, but still, nearly half a million people filed for benefits. The number of people receiving extended benefits also rose.

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Investors Should Not Worry about EURO

With today's post, I want to take off my currency trader hat and put on my investor hat.

You might be tempted to argue: But wait, these two aren't mutually exclusive. Isn't it possible to wear both hats? While itâ's theoretically plausible for a trader to take a long-term view of the markets based on fundamental analysis, I don't think it's likely in practice. In the end, a good investor will always have a longer time horizon than a good currency trader. In short, someone who bought shares in Apple 20 years ago is now probably a millionaire. Someone who went long the USD 20 years ago has probably since lost his investment due to inflation.

But seriously, currency traders must adapt to the zero-sum nature of forex markets by shortening their time horizon. Stock market investors, on the other hand, are not bound by this constraint. In fact, by holding stocks for a long enough time period, investors can actually turn this into an advantage.

As a result of the Eurozone sovereign debt crisis, for example, some analysts are calling for foreign (i.e. not using Euros) investors to dump their European. investments. This recommendation is not necessarily a dismissal of European companies (though an argument could be made on this basis as well), but rather is a reflection of concerns that returns will be negatively impacted by the declining Euro. Since foreigners can only purchase shares using their home currencies indirectly (through ADRs and ETFs), they feel the effects of currency fluctuations every time they enter and exit a position. Those that entered into a position prior to the Euro’s decline, by extension, will naturally be hurt if they try to exit before the Euro has had a chance to recover.

But therein lies the problem with this approach. Those that dump their shares now solely over exchange rate concerns are simply locking in their losses, just like American stock market investors who sold their stocks in March 2009 when the DJIA was below 7,000. By instead waiting a year (or longer!) such investors could have at least partially neutralized the impact of these crises. Of course, if recovery in the Euro was perceived as inevitable, then portfolio investors naturally wouldn’t think about divesting from EU capital markets. The concern is that the Euro will continue to decline, perhaps to the point of breakup.

I don’t want to dig myself into a hole by making a 5-year prediction for the Euro, especially since there is a part of me that is concerned that it will continue to decline. Based on history, however, there is very little reason to believe that will be the case. I’m not talking about economic fundamentals â€" about how the US fiscal position is equally precarious and how currency markets might recognize this and turn on the Dollar â€" but rather about the nature of forex markets.

Simply, currencies fluctuate. Since its introduction 10 years ago, the Euro has fallen, then risen, then fallen, then risen, then fallen again to its current level. If you initially invested in Europe 2 years ago, the exchange rate would erode your returns if you tried to sell now. If you invested 5 years ago, you would break even. If you invested 10 years ago, you would come out ahead. In the end, it’s only a question of perspective. Still, if you maintain your positions for long enough, either you will break-even from the exchange rate or it will only marginally affect your returns (on an annualized basis).

Consider also that you can hedge your exposure to a falling Euro by simply buying Dollars. If you are concerned about exchange rate risk, you can do this every time you open a position. For example, if you were to buy European shares today and simultaneously short an equal quantity of Euros, you would be perfectly hedged against any further decline in the Euro. The cost of the hedge is the sum of any transaction costs, management fees, and negative carry that you incur as part of the currency trade.

In short, unless you deliberately want to speculate on exchange rates, don’t worry about them! If your investing horizon is long enough, their fluctuations will neither help nor hurt you in a meaningful way.

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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 T

Forex Glossary T

Technical Analysis - An effort to forecast prices by analyzing market data, i.e. historical price trends and averages, volumes, open interest, etc.

Tick - A minimum change in price, up or down.

Tomorrow Next (Tom/Next) - Simultaneous buying and selling of a currency for delivery the following day.

Trade Balance – Measures the difference in value between imported and exported goods and services. Nations with trade surpluses (exports greater than imports), such as Japan, tend to see their currencies appreciate, while countries with trade deficits (imports greater than exports), such as the US, tend to see their currencies weaken.

Transaction Cost - the cost of buying or selling a financial instrument.

Transaction Date - The date on which a trade occurs.

Turnover - The total money value of all executed transactions in a given time period; volume.

Two-Way Price - When both a bid and offer rate is quoted for a FX transaction.

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Forex Glossary R

Forex Glossary R

Rally - A recovery in price after a period of decline.

Range - The difference between the highest and lowest price of a future recorded during a given trading session.

Rate - The price of one currency in terms of another, typically used for dealing purposes.

Resistance - A term used in technical analysis indicating a specific price level at which analysis concludes people will sell.

Retail Sales – Measures the monthly retail sales of all goods and services sold by retailers based on a sampling of variety of different types and sizes. This data gives a look into consumer spending behavior, which is a key determinant of growth in all major economies.

Revaluation - An increase in the exchange rate for a currency as a result of central bank intervention. Opposite of Devaluation.

Risk - Exposure to uncertain change, most often used with a negative connotation of adverse change.

Risk Management - the employment of financial analysis and trading techniques to reduce and/or control exposure to various types of risk.

Roll-Over - A rollover is the interest paid or earned on an open position held past the close of the NY trading at 1700 ET reflecting the interest rate differential between the two currencies.

The spot forex market is traded on a two-day value date. For example, for trades executed on Monday, the value date is Wednesday. However, if a position is opened on Monday and held overnight (remains open after 1700 ET), the value date is now Thursday. The exception is a position opened and held overnight on Wednesday. The normal value date would be Saturday; because banks are closed on Saturday the value date is actually the following Monday. Due to the weekend, positions held overnight on Wednesday incur or earn an extra two days of interest. Trades with a value date that falls on a holiday will also incur or earn additional interest.

Round trip - Buying and selling of a specified amount of currency.

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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 M

Forex Glossary M

Manufacturing Production – Measures the total output of the manufacturing aspect of the Industrial Production figures. This data only measure the 13 sub sectors that relate directly to manufacturing. Manufacturing makes up approximately 80% of total Industrial Production.

Margin - The required equity that an investor must deposit to collateralize a position.

Margin Call - A request from a broker or dealer for additional funds or other collateral to guarantee performance on a position that has moved against the customer.

Market Maker - A dealer who regularly quotes both bid and ask prices and is ready to make a two-sided market for any financial instrument.

Market Risk - Exposure to changes in market prices.

Mark-to-Market - Process of re-evaluating all open positions with the current market prices. These new values then determine margin requirements.

Maturity - The date for settlement or expiry of a financial instrument.

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