Rough Patch Ahead?

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By Mike Conlon | May 4, 2011

The data is starting to get a bit weaker and the market looks as though it is preparing for an economic “rough patch” that may be just around the corner. While we all know that QE2 will officially be coming to an end shortly, how long that lasts is anyone’s guess.

The first indicator of unemployment here in the US came out this morning, with the ADP jobs report showing gains that were les than expected. This comes ahead of tomorrow’s initial jobless which are expected in the low 400K range (which is higher than we had hoped when we reached the 300k range) and then Friday’s all-important Non Farm Payrolls report.

Overnight, the Central Bank of China issued hawkish statements that combating inflation was their number one concern, so the fear of a Chinese slowdown sent the MSCI Pac Rim stock index lower, taking commodities and commodity currencies lower as well.

Yet the Euro and the Pound are holding up well, as tomorrow’s rate policy decisions are expected to produce no change, yet the ECB policy statement could be hawkish. Retail sales figures in the Euro zone came in lower than expected, and home prices declined in the UK.

This all adds up to a global slowdown, which means that the market is convinced that Bernanke will attempt to come back to the rescue and put the training wheels back on the economy through further easing at the first sign of trouble.

In the forex market:

Aussie (AUD): The Aussie started the morning lower but has flipped to higher as the weak Dollar play is back in action.

Kiwi (NZD): The Kiwi is lower across the board as it is very much influenced by what goes on in the Chinese economy. Unemployment figures due out later tonight could put a positive spin on the NZ economy.

Loonie (CAD): The Loonie is mostly lower as oil prices have pulled back to a $110 handle and the dual problem of being so in bed with the US economy has further contributed to weakness. Nevertheless the weakening Dollar has just pushed the Loonie back toward .95 vs. USD. (Click chart to enlarge)

Euro (EUR): Greek debt restructuring. Declining retail sales figures (-1.7% vs. an expected no change). Portuguese and Irish debt costs ballooning. These might seem like major problems to any other currency that is not considered the “anti-Dollar”. The ECB rate decision will keep rates unchanged, but the statement could surprise. (Click chart to enlarge)

Pound (GBP): The Pound is also higher despite home prices that fell more than expected and the notion that the BOE will not change rate policy at tomorrow’s decision. Unlike the ECB, the BOE will not issue a policy statement.

Dollar (USD): The Dollar’s short-lived bounce from risk aversion has reversed and now we are looking at weakness as there is no confidence that a declining US economy will be allowed to function without the intervention of Bernanke and the Fed. The ADP employment change showed a gain of 179K jobs vs. an expectation of 195K.

Yen (JPY): The Yen is weaker as Japanese markets are closed today.

Well it looks like this is going to be a case of bad news is good news for stocks and commodities heading into the end of QE2. The worse the data gets, the higher the expectation that Bernanke will continue some sort of monetary easing.

Whispers of “QE2.5″ are making the rounds, and the artificial conditions that created thanks to this easy money policy are delaying the problem and not fixing it. While these delay tactics might be appropriate if we trying in earnest to get our fiscal act together, the politics of Washington are preventing certainty in the marketplace.

Questions about taxes, regulation, and government spending have not assuaged businesses, and the prevailing notion is that things are getting worse and not better.

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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Euro Gains as ECB Readies Interest Rate Statement

The euro continued to make gains on the dollar this morning rising 0.5 percent to $1.4901 at 8:30 an in New York. Investors are hopping aboard the euro as speculation grows that tomorrow’s statement from the European Central Bank will strongly hint at further interest rate increases for the Eurozone.

“The ECB has nailed its anti-inflation colors firmly to the mast, and the Fed hasn’t even got around to starting yet,” said Steven Barrow, a currency strategist at Standard Bank Plc in London. “This euro rally won’t extend too far if the ECB isn’t as hawkish as the market expects.”

Source: Bloomberg

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Interview with InnerFX: “JPY and CHF will Continue to Strengthen”

Today, I bring you an interview with Liviu Flesar, an independent trader and blogger. His portal is InnerFX, which is billed as a “useful resource for traders from all over the world and a trading blog where novice traders can learn how to trade better.” Below, Mr. Flesar discusses his background and shares his thoughts on the major currencies, setting up trades, and how to reform the rating agency system.

Forex Blog: I’d like to begin by asking you about your background as a trader and as a commentator. How did you get started in forex? At what point did you make the transition from trading currencies to offering analysis to the public? What was your motivation for that decision?

Hello Adam, thank you for inviting me to the interview. Back in the year 2003, some friends were talking about investing in the stock market. I had listened to their conversations, which was quite interesting, even though I had only a little idea about what they meant. Once I got back home, I started to search on the Internet â€" looking for Stock Investing websites to learn more about it. I stumbled across various sites and soon opened my first account on a gambling site. Gambling â€" that’s right. For example, it was possible to try predicting the last decimal of a financial instrument after 10 market ticks. That was crazy and foolish. I blew my account after two weeks, so I decided to take a break and do some more research.

After browsing though forums and trading sites, I discovered the exciting and challenging world of FX Spot Trading. I also signed up with a trading advisory service, expecting to replicate its performance. The advisory service went out of business after almost one year, and I felt like I was alone in a dark place. Retail FX wasn’t too popular 7 years ago and there were only a few FX sites, so it was quite hard to find another reliable advisory service. While searching and trying to learn more, I came to understand that it’s best if I use my own brain to trade, as it is almost impossible to be successful on the long run by following other people.

I started to share my analysis with the public after one year, in 2004. I wasn’t especially motivated to do it. Perhaps I just wanted to start my own project, in a less popular niche. I wanted to give something back- to share some of what I’ve learned. Sharing market commentary on a daily basis was also keeping me focused, and the site became a great tool to improve my own discipline and to keep track of my own expectations: a hobby, a playground, a serious project â€" a little bit of everything.  
Site monetization was of course another reason â€" who would refuse some extra money?!

Forex Blog: Can you explain your approach to trading? Do you prefer fundamental analysis, technical analysis, or a mix of both?

I prefer the technical approach. When it comes to my own trading, I am a market follower. I don’t make predictions, I don’t ask questions, and I don’t seek answers. The FX Market is way too sensitive to all kind of events, both expected and unexpected. I believe that everything is reflected in market prices, so I prefer to concentrate on prices rather than analyzing the impact of every single economic data release. I don’t have enough time or skill to do that. I do care, however, about really significant things, such as quantitative easing, interest rates decisions and differentials, unemployment, bailouts, debt restructuring etc.

Forex Blog: You’ve written quite a bit about the EUR/USD. What do you make of the fact that the Euro is now rising rapidly, in spite of the unresolved sovereign debt crisis? Do you think the Euro will continue appreciating, or is it due for a correction?

EURUSD is one of the best pairs that reflects the dollar’s weakness nowadays. So this rally is not mainly about the EUR strength but rather about dollar’s weakness. Both currencies have their own major problems but recent and upcoming rate hikes by the ECB are making the euro more attractive relative to the US dollar.

Forex Blog: The Japanese Yen continues to behave erratically. After rising to a record high following the triple disaster, it proceeded to fall rapidly on the G7 intervention, only to resume its rise. What do you make of all of this. Under these conditions, is it even worth trying to formulate a fundamental trading strategy, or do you think traders should stick to technical analysis and short-term positions?

Recent history has shown that CB interventions in currency markets are ineffective and they are only causing massive short-term spikes. Although I prefer to stick to short-term predictions, I think that in the long run, both JPY and CHF will maintain their safe-haven status and will continue to strengthen against the US dollar.

Forex Blog: You recently observed that, “Nobody pays attention anymore to what the rating agencies have to say…” Why do you think this is the case? If the ratings agencies are indeed useless, how do you think individual traders gauge the seriousness of countries’ fiscal problems and the likelihood of default?

Most traders should be aware of the role the rating agencies played in the sub-prime crisis, and they were the main enablers of the financial meltdown. Well, it’s clear that fewer people care about what the rating agencies have to say. I certainly hope that traders and investors are more careful now, after the rating agencies missed both the sub-prime crisis and the eurozone debt crisis. Secondly, I don’t think we need the rating agencies to compete with each other to be the first to downgrade everything nowadays, playing the “Captain Obvious” role and telling us how troublesome sovereign debt really is. Most people can do their own research, especially large funds.  

Unfortunately, for all the flaws the “Big 3″ rating agencies have demonstrated, I think it’s a bit hard â€" but definitely not impossible â€" to find a better system. If governments would rate their own securities it would be totally pointless â€" obviously. So we shouldn’t even consider this option.

Changing the business model, making the bond buyer to pay the ratings agency instead of bond issuer probably won’t do any good either. Another option may be the Credit Default Swaps spreads, which represent more reliable data sources and viable alternatives to credit ratings.

Forex Blog: You occasionally offer “setups” to your readers. How are these designed to be used? Do you use these same setups as a basis for your own trades?

As you noted, I share charts, commentary and trade setups on regular basis.  
They are some of my own trades and intentions. As far as I know, most of my readers use their own analysis and strategies to make trading decisions and that’s what I highly recommend to beginners. All traders should do their own research before making any trading decisions. I learned that myself when I was still new to trading. I know that sometimes it is useful to read what other people expect and what strategies they use, especially when you are taking your first steps towards trading. Learning from others’ mistakes is better and more fun than learning from your own.

Forex Blog: InnerFX contains a great economic calendar that is very user-friendly. Given the abundance of economic data that is released every day, how can traders profit from this information? Which economic indicators are on your watch-list this week?

The Economic Calendar is provided by Forex Pros and is quite similar to other calendars you can find. I check it each morning in order to be aware of important economic releases and reports: I just don’t want to jump into trades a few minutes before Interest Rate Decisions or other key events. The most important events on my watch-list this week are the ECB Rate Decision and accompanying Press Conference and, of course, the NFP on Friday.

Forex Blog: Finally, what’s your advice for traders that want to beat the market and turn a profit in these uncertain times?

When it comes to trading, times will always be uncertainty: bubbles, crises, wars, rumors, lies, interventions, market manipulation etc. â€" we won’t get rid of them. My advice for traders is to have realistic goals and trade what they see, not what they think and preferably not what other people say.  
Also, don’t over-complicate trading and research. One who really understands how the market works can make great trades even if he doesn’t use any charts or indicators at all.

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Korean Won Poised for Further Gains

It was in November 2010 that I last blogged about the South Korean Won. As a result of the standoff with North Korea and a recent flareup in the Eurozone sovereign debt crisis, the Won had plummeted. Still, I viewed these as temporary problems and concluded that, “Ultimately, both the EU fiscal crisis and the tensions with North Korea will subside, which should cause the Won to resume its rise.” Since then, the Won has indeed risen by more than 8% against the US dollar. Rather than call for a correction, however, I’m ignoring my best instincts and arguing in favor of a further rise.

In a nutshell, the Korean Won has almost everything going for it at the moment. In the words of one columnist, “South Korea is today the 15th largest global economic power [and] is also the leading global nation in shipbuilding, production of LCD screens and in the distribution of broadband per capita. It is the third leading nation in the production of semi-conductors, the fifth in automobile manufacturing and in scientific research.” GDP is growing at a healthy clip of 4.2%. After recording real GDP growth in excess of 6% in 2010, South Korea’s economy is projected to grow by a further 4.5% in 2011, which means that it has more than made up for the recession that it suffered alongside the rest of the word in 2008-2009.  Exports reached a record level in 2010, propelling Korea’s current account balance well into surplus. “It seems that a target of $1 trillion of trade this year will be achieved, in spite of unfavorable conditions from the massive quake in Japan and the Middle East unrest,” declared Korea’s commerce minister. On balance then, money coming into Korea well exceeds money flowing out.

Moreover, unlike Japan and China â€" both of whose currencies are hovering around record levels â€" the Korean Won remains about 20% below its 2008 pre-credit crisis high. That means that the Won has plenty of scope for further appreciation before its exporters will be squeezed to the same extent as its Asian competitors. If the Bank of Korea (BOK) has its way, it will be a long time before this even happens. The BOK continues to intervene on behalf of the Won on a daily basis, and as a result, its foreign exchange reserves have risen to $300 billion, a record high.

Granted, Korean inflation is also rising, and most recently touched 4.7%, which is at or above the level in neighboring economies. The Bank of Korea has taken steps to counter this, but it is understandably wary about inadvertently stoking speculative interest in the Won. Thus, it has raised its benchmark interest rate only four times since last summer, and the rate is still at a historically low level. According to the Wall Street Journal, “That’s still well below the 4% to 4.5% level where economists estimate the neutral policy rate to be.”

When you consider both that the carry trade is back in vogue and that most other emerging market currencies have recovered most of their credit crisis losses and then some, it’s downright surprising that the Won hasn’t risen more. Perhaps, lamented one commentator, South Korea still lacks cachet among investors and is known more as the political counterbalance to North Korea than as the economic juggernaut that it has become. Even though its economy is larger than that of Australia, the Won doesn’t have nearly as much appeal as the Aussie.

Since it’s the weekend, I’ll keep this post short and sweet! Suffice it to say that the Won still has plenty of scope for further appreciation, and unless the BOK completely avoids hiking rates, I don’t see real downside pressures. At this rate, it will probably be one of the big success stories of 2011.

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Bin Laden Bounce!

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By Mike Conlon | May 2, 2011

Overnight it was revealed that Osama Bin Laden has finally been brought to justice and was killed by US forces. The sense of relief that came over the markets may be short-lived however as there are still many sources of risk in the global economy, each posing a different threat.

Oil sold off immediately on the news and stocks are higher to start the day and while this certainly is an important development, it may not be enough to reverse recent trends. Those trends of course are a weak US dollar and higher commodity prices, especially oil.

This week there are a few rate policy decisions that we need to keep an eye on: Australia on Tuesday and Europe and the UK on Thursday.

In addition, the US Non-Farm Payrolls report is due out on Friday and this leading indicator may show whether or not the economy is on the mend. It is expected that we will add 190K jobs and that the unemployment rate will remain steady at 8.8%.

With the end of QE2 coming next month, it will be interesting to see if the old market adage, “sell in May and go away” has any merit.

In the forex market:

Aussie (AUD): The Aussie is mostly lower despite the risk appetite in the market as home prices came in lower than expected. This comes a day ahead of the RBA rate policy meeting where it is expected that they will leave rates unchanged at 4.75%. The Aussie eclipsed 1.10 vs. USD earlier this morning. (Click chart to enlarge)

Kiwi (NZD): The Kiwi is mixed as well as the US dollar is picking up a little strength this morning as commodity prices are lower to start the day. Employment figures are due out in New Zealand on Wednesday.

Loonie (CAD): The Loonie is mostly lower as oil prices have pulled back from recent highs on the Bin Laden news. However, it must be noted that oil is still trading above $112. Canadian employment figures are due out on Friday.

Euro (EUR): Euro zone PMI figures came in this morning better than expected and Thursday’s rate policy decision will be important as even though there is no change expected, the accompanying statement could provide more clarity into whether or not the ECB will tighten further in the ensuing months. (Click chart to enlarge)

Pound (GBP): The Pound is mixed this morning as home prices stayed steady in the UK, halting previous declines. The BOE rate policy decision on Thursday is also expected to yield no change but unlike the ECB, there will be no policy statement so this decision may have less impact than that of the ECB.

Dollar (USD): It is always good to get news that can give people hope however once the reality of current economic conditions comes back into focus, there could be continued worry. The Non-Farm payrolls report due out on Friday will be an important metric to watch, but stocks and commodities prices may ultimately tell the story.

Yen (JPY): The Yen is weaker across the board as some sense of risk-taking has reduced demand for the safe haven. The Nikkei average made it back to just over 10K for the first time since the natural disaster took place.

While it is definitely a bittersweet moment to know that Osama Bin Laden is no more, it would be a major mistake to think that terrorism has ended. There is still considerable risk in the world today, and the conflict in Libya and various other regions remind us of it daily.

While a slowing economy here in the US is a major problem, commodity price inflation due to loose monetary policy may be a bigger detriment. The US dollar has been the worst-performing currency over the last three months so this is no coincidence.

Whether or not the end of QE2 will bring about further declines is anyone’s guess at this point but one thing is certain: there may be some bumps and bruises to the economy once the training wheels are removed and it will be interesting to see if the economy can function on its own!

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 Home Prices Decline

For the eighth straight month, the price for single-family homes fell in February. The S&P/Case Shiller composite index â€" which measure home prices for twenty cities across America â€" declined by 0.2 percent.

“There is very little, if any, good news about housing. Prices continue to weaken, trends in sales and construction are disappointing,” David Blitzer, chairman of the Index Committee at S&P Indices, said in a statement.

“Recent data on existing-home sales, housing starts, foreclosure activity and employment confirm that we are still in a slow recovery.”

Source: Bloomberg

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The Real Fairytale!

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By Mike Conlon | April 29, 2011

This morning is all about fairytales as the Royal Wedding in the UK has drawn the attention of watchers worldwide and has also closed London for business today as it is a bank holiday. However, the real fairytale may be the news and data we have been seeing here in the US and the policy responses to them.

Yesterday’s declining GDP figures here in the US show that Bernanke’s QE2 policy has been a near-failure and is going to drag the US and then the global economy down again. The Fed’s insistence and denial that they have caused commodity inflation is intellectually dishonest, and now the effects are starting to come home to roost.

As input costs increase, businesses have to squeeze costs to maintain profitability and one of the most efficient ways to do this is to fire workers. Businesses then pass along these costs to the consumer, who can’t afford these new higher costs as the majority of their disposable income goes to pay for increases in the price of food and energy.

The US consumer makes up some 70% of US GDP, so if consumer spending on discretionary items decreases, then demand for good will also decrease, putting further strain on businesses. Thus the deflationary cycle begins again. The weak US dollar is a direct reflection of this sentiment, and how much lower it can go without causing a major global economic crisis is anyone’s guess.

In the Euro zone, most economic data was negative this morning including German retail sales figures, but CPI came in higher than expected and the Dollar is weak so the Euro is trading higher.

Canadian GDP is due out later this morning which is expected to show neither expansion or contraction.

In the forex market:

Aussie (AUD): The Aussie is mostly higher as weak Dollars are driving demand for carry trades and yield-seeking.

Kiwi (NZD): The Kiwi has also rebounded today as trade balance figures due to higher exports came in better than expected.

Loonie (CAD): Canadian GDP figures have just come in and are worse than expected, showing a quarterly decline of .2% vs. an expectation of no-change, pushing the YoY figure down to 2.9% vs. the expectation of 3.1%. Canada’s close economic ties to the US are the possible culprit, as well as higher inflation. (Click chart to enlarge)

Euro (EUR): The Euro is mixed as a weak Dollar is driving it higher as are higher then expected CPI figures, showing a gain of 2.8% which was slightly higher than the expected 2.7%. German retail sales figures though came in negative, and confidence figures have been falling.

Pound (GBP): Today is a bank holiday in the UK in honor of the Royal Wedding. The Pound is slightly lower against all but the Dollar.

Dollar (USD): Another day, another weak dollar. Personal income and spending data came in slightly higher than expected, and later this morning consumer confidence figures are due.

Yen (JPY): The Yen is strengthening as the US dollar is losing some of its safe-haven status and money flows out of USD and into Yen. Despite the problems in the Japanese economy, it is starting to look like a more attractive place to invest than the US. (Click chart to enlarge)

The fairytale we have been living in for the past year is soon coming to an end. Like any good story, it has to end somewhere and whether or not there will be a happy ending is up for debate.

What we do know so far is that QE2 has not been the economic savior we have been looking for, and Bernanke is no white knight looking to come to the rescue. Instead we have been given an unlikely choice of hero thrust into a situation way over his head, with a lack of proper tools and skills to get the job done.

Like all fairytales, we want them to work out in the end. However, the global economy is not fantasyland and the more real we become about the situation, the more dire it looks.

So let’s save the fairytales for Royal Weddings, shall we?

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: April 24-29

It was a trading week with the broad dollar sell-off finding few obstacles in the calendar. The absence of hawkish innovations from the FOMC has been taken by the market as an all-clear to add to bearish USD momentum and carry trades. It seems that its only immediate savior is a renewed Euro-zone crisis. The technicals are again showing that most currency’s are in overbought territory now that many of the short term targets have been printed. Maybe it will be left up to Central Banks to protest, just like the RBNZ did by stating that their currency strength was ‘unfavorable’. Below are some of the highlights of the week:

EUROPE

• Trichet stating that a stronger USD was in the interest of the United States fell on deaf ears this week.
• Greek, Irish and Portuguese spreads continue to widen to Germany. Spain is showing signs of decoupling from the trend. Systemic fears associated with the peripheral funding outlook remain on the backburner.
• UK CBI total factory orders index fell sharply in Apr. to -11 from 5 in Mar. Activity outlook index was mixed with steady business optimism but weaker export confidence. Data is failing to show any evidence of a strong pick-up in the first half.
• UK GDP grew +0.5%, q/q in 1st Q after contracting -0.5% in 4th Q. Construction remained particularly weak, the rebound was driven by strong services performance, up +0.9%.
• EUR Industrial new-orders index rose +0.9% in Feb., following a sharp upward revision to the Jan. print. Net of revision, new orders rose +21.3%, y/y, suggests continued strong growth momentum.
• Swedish consumer and manufacturing confidence indices moderated in Apr. The economic tendency survey fell to 109.8 from 112.3 in Mar. as a result.
• True Finns party were quoted emphasizing the need for compromise in negotiating to participate in the next government, reducing concerns about Finland blocking negotiations for a Portugal EFSF program
• Flash Euro-zone Apr. CPI came in at a +2.8%, y/y. Mar. M3 data showed an acceleration in the y/y rate of increase to +2.3%, which puts the growth rate at its fastest pace in two years. This increases the risk that the ECB will signal a June rate hike at its May meeting.
• Swiss KOF indicator rose to +2.29 from an upwardly revised +2.25.

Americas

• US Sales of New Homes in Mar. increased from an all time low in Feb. (+300k or +11.1% from a revised +270k). However, on an annual monthly basis they are down -21.9% from Mar. 2010. Median prices continue to struggle and are down -2.9%, y/y.
• US Consumer’s current assessment of economic prosperity, fueled by job prospects, edged up +1.6 points this month to 65.4 from Mar.’s unrevised print of 63.4.
• Feb.’s S&P/Case-Shiller House Price Index printed a -3.3%, y/y, decline, deteriorating from a -3.1%, y/y, decline in Jan.
• As expected, Fed kept rates steady. The FOMC statement indicated that the Fed will end its QE2 program as scheduled in June. Policy makes will closely watch inflation, thought the Fed believes the effects from rising oil prices are temporary. They do not seem to be worried about the weakening in the dollar. They argue that by fulfilling its dual mandate, the Fed can cause a stronger recovery which will lead to a stronger dollar.
• US durable goods report was solid on its details. New orders surprised to the upside in Mar. (+2.5%) while Feb.’s report was revised up substantially (+0.7% vs. -0.9%), leading to a positive gain in the first quarter (+2.1%).
• In Canada, a recent poll sees the Liberal party being pushed into third place ahead of next week’s general election by the left wing NDP. An NDP-led minority government is a likely negative for the loonie, as their political mandate and agenda tends to be ‘a little less business friendly, a little less fiscal austere than under a Conservative majority’.
• US economy hit the breaks in the 1st Q, as higher prices, especially gas and food, curtailed consumer spending, limiting seasonally adjusted GDP to print +1.8%.
• US pending home re-sales climbed +5.1% after a revised +0.7% increase the previous month.
• US initial jobless claims increased by +25k to +429k, w/w. The four-week moving average, capable of smoothing out volatility, rose by +9.2k to +408.5k.
• Canada’s economy shrinks in February by -0.2%. Early expectations stood on +0%.
• US consumer sentiment in April rose by +0.2pts, above expectations, coming in at 69.8
• The Fed.’s favorite inflation measure, core-PCE reported as expected +0.1%

ASIA

• Singapore’s CPI-inflation was flat at +5.0%, y/y, in Mar. However, the elevated CPI inflation rate should keep the year-on-year pace of SGD NEER appreciation at around +5.0%-5.5%.
• An FT article flagged critical labor shortages in Australia. They also reported that the Chinese sovereign wealth fund, CIC, will soon receive $100-200bn in new funds from a Chinese government trying to further diversify away from US Treasuries.
• Singapore’s industrial output, seasonally adjusted, rose +22.0%, m/m in Mar.
• Australia’s CPI inflation rose +1.6%, q/q in the 1st Q, pushing the year-on-year rate to +3.3% from +2.7%.Flood related food price spikes and higher oil prices drove the headline. Underlying inflation was also high, rising +0.9%, q/q to +2.3%, y/y in the 1st Q from +2.2%.
• Asian Cbank’s were believed to be intervening moderately to prevent currency strength this week, adding to expectations for more diversification flows out of USD and into other reserve currencies.
• RBNZ made it explicit in its new policy statement that the recent appreciation of the NZD was “unwelcome.”
• Japan’s industrial production data for Mar. revealed much more significant disruption from the earthquake than previously thought. Production plunged -15.3%, m/m, much worse than the -10.6% consensus. On year-on-year basis, it has dropped -12.9%.
• The BOJ left their rate policy unchanged, like the dollar, rate differentials will likely continue to move against the JPY.
• Australia, housing credit rose +0.4%, m/m in Mar. following a +0.5% increase in Feb., taking the y/y rate to +6.6%.
• PBoC again fixed USDCNY to a new low, 6.499, reflecting broad-based dollar weakness rather than CNY strength.

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Korean Won Poised for Further Gains

It was in November 2010 that I last blogged about the South Korean Won. As a result of the standoff with North Korea and a recent flareup in the Eurozone sovereign debt crisis, the Won had plummeted. Still, I viewed these as temporary problems and concluded that, “Ultimately, both the EU fiscal crisis and the tensions with North Korea will subside, which should cause the Won to resume its rise.” Since then, the Won has indeed risen by more than 8% against the US dollar. Rather than call for a correction, however, I’m ignoring my best instincts and arguing in favor of a further rise.

In a nutshell, the Korean Won has almost everything going for it at the moment. In the words of one columnist, “South Korea is today the 15th largest global economic power [and] is also the leading global nation in shipbuilding, production of LCD screens and in the distribution of broadband per capita. It is the third leading nation in the production of semi-conductors, the fifth in automobile manufacturing and in scientific research.” GDP is growing at a healthy clip of 4.2%. After recording real GDP growth in excess of 6% in 2010, South Korea’s economy is projected to grow by a further 4.5% in 2011, which means that it has more than made up for the recession that it suffered alongside the rest of the word in 2008-2009.  Exports reached a record level in 2010, propelling Korea’s current account balance well into surplus. “It seems that a target of $1 trillion of trade this year will be achieved, in spite of unfavorable conditions from the massive quake in Japan and the Middle East unrest,” declared Korea’s commerce minister. On balance then, money coming into Korea well exceeds money flowing out.

Moreover, unlike Japan and China â€" both of whose currencies are hovering around record levels â€" the Korean Won remains about 20% below its 2008 pre-credit crisis high. That means that the Won has plenty of scope for further appreciation before its exporters will be squeezed to the same extent as its Asian competitors. If the Bank of Korea (BOK) has its way, it will be a long time before this even happens. The BOK continues to intervene on behalf of the Won on a daily basis, and as a result, its foreign exchange reserves have risen to $300 billion, a record high.

Granted, Korean inflation is also rising, and most recently touched 4.7%, which is at or above the level in neighboring economies. The Bank of Korea has taken steps to counter this, but it is understandably wary about inadvertently stoking speculative interest in the Won. Thus, it has raised its benchmark interest rate only four times since last summer, and the rate is still at a historically low level. According to the Wall Street Journal, “That’s still well below the 4% to 4.5% level where economists estimate the neutral policy rate to be.”

When you consider both that the carry trade is back in vogue and that most other emerging market currencies have recovered most of their credit crisis losses and then some, it’s downright surprising that the Won hasn’t risen more. Perhaps, lamented one commentator, South Korea still lacks cachet among investors and is known more as the political counterbalance to North Korea than as the economic juggernaut that it has become. Even though its economy is larger than that of Australia, the Won doesn’t have nearly as much appeal as the Aussie.

Since it’s the weekend, I’ll keep this post short and sweet! Suffice it to say that the Won still has plenty of scope for further appreciation, and unless the BOK completely avoids hiking rates, I don’t see real downside pressures. At this rate, it will probably be one of the big success stories of 2011.

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The Real Fairytale!

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By Mike Conlon | April 29, 2011

This morning is all about fairytales as the Royal Wedding in the UK has drawn the attention of watchers worldwide and has also closed London for business today as it is a bank holiday. However, the real fairytale may be the news and data we have been seeing here in the US and the policy responses to them.

Yesterday’s declining GDP figures here in the US show that Bernanke’s QE2 policy has been a near-failure and is going to drag the US and then the global economy down again. The Fed’s insistence and denial that they have caused commodity inflation is intellectually dishonest, and now the effects are starting to come home to roost.

As input costs increase, businesses have to squeeze costs to maintain profitability and one of the most efficient ways to do this is to fire workers. Businesses then pass along these costs to the consumer, who can’t afford these new higher costs as the majority of their disposable income goes to pay for increases in the price of food and energy.

The US consumer makes up some 70% of US GDP, so if consumer spending on discretionary items decreases, then demand for good will also decrease, putting further strain on businesses. Thus the deflationary cycle begins again. The weak US dollar is a direct reflection of this sentiment, and how much lower it can go without causing a major global economic crisis is anyone’s guess.

In the Euro zone, most economic data was negative this morning including German retail sales figures, but CPI came in higher than expected and the Dollar is weak so the Euro is trading higher.

Canadian GDP is due out later this morning which is expected to show neither expansion or contraction.

In the forex market:

Aussie (AUD): The Aussie is mostly higher as weak Dollars are driving demand for carry trades and yield-seeking.

Kiwi (NZD): The Kiwi has also rebounded today as trade balance figures due to higher exports came in better than expected.

Loonie (CAD): Canadian GDP figures have just come in and are worse than expected, showing a quarterly decline of .2% vs. an expectation of no-change, pushing the YoY figure down to 2.9% vs. the expectation of 3.1%. Canada’s close economic ties to the US are the possible culprit, as well as higher inflation. (Click chart to enlarge)

Euro (EUR): The Euro is mixed as a weak Dollar is driving it higher as are higher then expected CPI figures, showing a gain of 2.8% which was slightly higher than the expected 2.7%. German retail sales figures though came in negative, and confidence figures have been falling.

Pound (GBP): Today is a bank holiday in the UK in honor of the Royal Wedding. The Pound is slightly lower against all but the Dollar.

Dollar (USD): Another day, another weak dollar. Personal income and spending data came in slightly higher than expected, and later this morning consumer confidence figures are due.

Yen (JPY): The Yen is strengthening as the US dollar is losing some of its safe-haven status and money flows out of USD and into Yen. Despite the problems in the Japanese economy, it is starting to look like a more attractive place to invest than the US. (Click chart to enlarge)

The fairytale we have been living in for the past year is soon coming to an end. Like any good story, it has to end somewhere and whether or not there will be a happy ending is up for debate.

What we do know so far is that QE2 has not been the economic savior we have been looking for, and Bernanke is no white knight looking to come to the rescue. Instead we have been given an unlikely choice of hero thrust into a situation way over his head, with a lack of proper tools and skills to get the job done.

Like all fairytales, we want them to work out in the end. However, the global economy is not fantasyland and the more real we become about the situation, the more dire it looks.

So let’s save the fairytales for Royal Weddings, shall we?

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Canadian Dollar Weaker on Slowing Economy

The Canadian dollar â€" known as the “loonie” â€" lost ground to the US dollar this morning on news that the Canadian economy expanded by an annualized rate of 2.9 percent in February. This is the lowest increase in a year and contributed to the loonie’s 0.1 percent to 95.13 cents against the US dollar from 95.06 cents yesterday.

“GDP was a little weaker than expected and what that’s really done is push expectations of a rate hike from BOC from July to September,” said Blake Jespersen, director of foreign exchange in Toronto at Bank of Montreal.

Source: Bloomberg

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Dollar will Rally when QE2 Ends

In shifting their focus to interest rates, forex traders have perhaps overlooked one very important monetary policy event: the conclusion of the Fed’s quantitative easing program. By the end of June, the Fed will have added $600 Billion (mostly in US Treasury Securities) to its reserves, and must decide how next to proceed. Naturally, everyone seems to have a different opinion, regarding both the Fed’s next move and the accompanying impact on financial markets.

The second installment of quantitative easing (QE2) was initially greeted with skepticism by everyone except for equities investors (who correctly anticipated the continuation of the stock market rally). In November, I reported that QE2 was unfairly labeled a lose-lose by the forex markets: “If QE2 is successful, then hawks will start moaning about inflation and use it as an excuse to sell the Dollar. If QE2 fails, well, then the US economy could become mired in an interminable recession, and bears will sell the Dollar in favor of emerging market currencies.”

The jury is still out on whether QE2 was a success. On the one hand, US GDP growth continues to gather force, and should come in around 3% for the year. A handful of leading indicators are also ticking up, while unemployment may have peaked. On the other hand, actual and forecast inflation are rising (though it’s not clear how much of that is due to QE2 and how much is due to other factors). Stock and commodities prices have risen, while bond prices have fallen. Other countries have been quick to lambaste QE2 (including most recently, Vladimir Putin) for its perceived role in inflating asset bubbles around the world and fomenting the currency wars.

Personally, I think that the Fed deserves some credit- or at least doesn’t deserve so much blame. If you believe that asset price inflation is being driven by the Fed, it doesn’t really make sense to blame it for consumer and producer price inflation. If you believe that price inflation is the Fed’s fault, however, then you must similarly acknowledge its impact on economic growth. In other words, if you accept the notion that QE2 funds have trickled down into the economy (rather than being used entirely for financial speculation), it’s only fair to give the Fed credit for the positive implications of this and not just the negative ones.

But I digress. The more important questions are: what will the Fed do next, and how will the markets respond. The consensus seems to be that QE2 will not be followed by QE3, but that the Fed will not yet take steps to unwind QE2. Ben Bernanke echoed this sentiment during today’s inaugural press conference: “The next step is to stop reinvesting the maturing securities, a move that ‘does constitute a policy tightening.’ ” This is ultimately a much bigger step, and one that Chairman Bernanke will not yet commit.

As for how the markets will react, opinions really start to diverge. Bill Gross, who manages the world’s biggest bond fund, has been an outspoken critic of QE2 and believes that the Treasury market will collapse when the Fed ends its involvement. His firm, PIMCO, has released a widely-read report that accuses the Fed of distracting investors with “donuts” and compares its monetary policy to a giant Ponzi scheme. However, the report is filled with red herring charts and doesn’t ultimately make any attempt to account for the fact that Treasury rates have fallen dramatically (the opposite of what would otherwise be expected) since the Fed first unveiled QE2.

The report also concedes that, “The cost associated with the end of QEII therefore appears to be mostly factored into forward rates.” This is exactly what Bernanke told reporters today: “It’s [the end of QE2] ‘unlikely’ to have significant effects on financial markets or the economy…because you and the markets already know about it.” In other words, financial armmagedon is less likely when the markets have advanced knowledge and the ability to adjust. If anything, some investors who were initially crowded-out of the bond markets might be tempted to return, cushioning the Fed’s exit.

If bond prices do fall and interest rates rise, that might not be so bad for the US dollar. It might lure back overseas investors, grateful both for higher yields and the end of QE2. Despite the howls, foreign central banks never shunned the dollar.  In addition, the end of QE2 only makes a short-term interest rate that much closer. In short, it’s no surprise that the dollar is projected to “appreciate to $1.35 per euro by the end of the year, according to the median estimate of 47 analysts in a Bloomberg News survey. It will gain to 88 per yen, a separate poll shows.”

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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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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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BOE Not Unanimous!

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By Mike Conlon | June 23, 2010

Minutes released from the Bank of England’s rate policy meeting showed that the vote was not unanimous to keep rates unchanged at .5%, for the first time in nearly 7 months.  Inflation concerns were the cause of the dissenting vote, as CPI figures in the UK have been above targets.  While the BOE expects inflation to subside in the ensuing months, that may not necessarily be the case.

This comes a day after the emergency budget which was announced yesterday, calling for a reduction in spending and an increase in taxes.

In the US, the FOMC rate decision is due out later today, so expect to see some volatility in dollar-related pairs.  It is widely held that there will not be a change in policy, but some market participants are betting that we may see a change in the language regarding policy.  This would give credence to the rising sentiment that the Fed may raise rates later this year.  Personally, I don’t see this happening and I think the Fed will be on hold for the remainder of the year.
Yesterday’s abysmal housing data confirmed that deflationary forces in the housing market may be the start of another leg down.

In the Euro zone, German consumer confidence came in slightly better than expected and PMI figures were largely in line.  However, concerns over Greek debt have perked up again.

Overnight, the Yen was higher as the Nikkei was down taking its cues from yesterday’s sell-off in the US stock market.

This morning will bring US new home sales figures as well as Canadian retail sales figures.  Any major deviations could send the respective currencies lower.

But expect volatility going into the FOMC announcement at 2:15 EST.

In the forex market:

Aussie (AUD):  The Aussie is lower as stocks sold-off in the overnight session but it is gaining back some ground heading into the US session.  Risk aversion has driven the Aussie lower, and there is some concern that Chinese demand for metals and energy is causing a rift in the Australian economy.

Kiwi (NZD):  The Kiwi is higher this morning in anticipation of GDP figures which are due out later tonight.  The expectation of .5% growth will likely be exceeded as demand from China for raw materials has the NZ economy picking up steam.  Should the number best expectations, then the likelihood of a rate increase at July’s policy meeting will increase.

Loonie (CAD):  The Loonie is lower this morning as oil prices are pulling back from the $78 level, and retail sales figures came in worse than expected.  Analysts were expecting a decline of .4% and the figure showed a decline of 2.2%, a big miss.  Canada is to the US what Australia and New Zealand are to China.  If recovery here in the US is floundering, then it may not bode well for the Loonie and the Canadian economy in general.

Euro (EUR):   The Euro is a mixed bag this morning, as it is up against the North American currencies but down against the rest.  The EU is considering a bond levy on countries that don’t adhere to debt-to-GDP guidelines which of course brings the Greek debt crisis back to center stage.  In addition, business confidence was down in France, though consumer confidence was higher in Germany.  Go figure.

Pound (GBP):  The Pound is higher across the board, giving a vote of confidence to both the government for their budget and the BOE.  The lone dissenter in the rate policy meeting is concerned about inflation, as growth targets may exceed expectations.  That’s a “nice” problem to have, considering the economic condition of the US.

Dollar (USD):   The Dollar is mostly lower prior to today’s FOMC meeting.  Yesterday’s poor housing data sent stocks lower, and today’s new home sales aren’t expected to be much better.  This should be enough to keep the Fed unchanged in both language and policy, and the market is starting to catch on to the fact that the smoke and mirrors of government spending may not be enough to stoke the economy.  Go back and take a look at my discussion of biflation from a few days ago.

Yen (JPY):  The Yen is mixed as well, trading higher vs. USD and CAD (both showing weakness) and the Euro (debt concerns) but lower vs. GBP, AUD, and NZD.  So today can neither be classified as risk-taking or risk-aversion, but much of the yen strength was derived from weakness in the Nikkei, which sold off following the US stock market decline.

I think today really shows the difference to how the market reacts to different policy pursuits from around the globe heading into this weekend’s G-20 meeting.  On the one hand, you have the EU and the UK who are committed to reducing deficits and trying not to raise taxes too much to discourage business (in fact the corporate tax rate was lowered in the UK), and the policies taken by the US.

The US is going the other way, expanding deficits and throwing good money after bad at our financial problems which can only result in higher taxes when it comes time to pay the piper.  President Obama was rebuffed by Chancellor Merkel of Germany with regard to how to best combat the global financial crisis, and it appears as though the market agrees with the EU.

Weak housing data here in the US show that the stimulative effects of government spending may have slowed a decline in the economy, but have not fixed the problem.  Now taxpayers (and their children and grandchildren) face an enormous burden for what adds up to temporary conditions.

The change people voted for was for less government spending and indeed we’re seeing changeâ€"even more and more spending!  Hopefully this course can be reversed before it’s too late.  I never thought I’d say this but now is the time we should be taking our economic cues from Europe, and not their prior policies that landed them in this mess.

Those who don’t learn from the past are doomed to repeat it.

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, bank, cad, canada, China, course, crisis, currenc, currencies, currency, currency market, currency trading, data, decision, dollar, dow, economic, economy, EUR, Euro, Europe, fed, forex, forex market, free, fx, fxedu, gbp, home, Il, jpy, Kiwi, live, loonie, lower, Mike Conlon, money, new zealand, nzd, oil, pair, pound, practice, practice account, rate, retail sales, RSI, sentiment, ssi, stock, stocks, time, USD, Yen

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US New Home Sales +300k vs. +424k, last month also revised down to +446k

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