Japan’s finance minister urged the Bank of Japan on Friday to align policy with the deeply indebted government’s efforts to fight deflation, maintaining pressure for possible monetary easing or even government bond purchases.
BOJ Governor Masaaki Shirakawa did not rule out any policy options but reiterated the current level of bond buying — a step some policymakers have called for to tame bond yield gains — was appropriate for now.
Prime Minister Yukio Hatoyama echoed his finance chief, Naoto Kan, in calling for BOJ cooperation, telling parliament that the government will work with the central bank to overcome falls in prices. Data showed Japan’s narrowest measure of consumer inflation fell at a record pace in December.
The euro fell to its lowest point in six months against the dollar today as investors continue to shun the currency amidst growing concerns with the status of Greece’s overwhelming debt. Despite a vote of confidence from French Finance Minister Christine Lagarde, the euro fell to 1.3913 USD from Thursday’s close of 1.3966.
This morning, the US Q4 GDP figures came in at a better than expected 5.7%, the fastest growth since 2003.While this is seemingly good news for the US economy as it marks the 2nd straight quarter of growth providing further evidence that we moved forward from recession.
However, we’re not out of the woods just yet.There are still global concerns weighing heavily upon the markets, such as the Greek debt problem in the Euro Zone, as well as China’s restrictions on lending.
This morning’s currency action is rather neutral, as it can’t be described as either risk-taking or risk-aversion.
Here’s how world currencies are trading this morning:
Aussie (AUD):Gains in the Aussie have slowed down as the global slowdown, particularly in China, is expected to slow growth in Australia.This morning is a mixed bag for the Aussie, as it’s higher vs. the Japanese yen and British pound, but down vs. the US dollar and Euro.
Kiwi (NZD): The Kiwi is trading higher across the board and is showing the highest percent gain vs. the yen this morning, up 1%.They just reported a budget deficit for the first time in 9 years, as tax receipts have slowed and government spending picked up last year.
Loonie (CAD):Canadian GDP came in this morning at .4%, a smidge higher than expectations.Canada is showing slow but steady growth, which is a positive for the economy.The Loonie has been weakening against the US dollar as global risk appetite has abated and oil prices are down almost $6 this year.
Euro (EUR):The Euro is trading higher against the yen and the pound, but down against the rest this morning.Consumer prices rose 1% showing that inflation is starting to pick up in the region.Also to note is that fears over the Greek debt crisis are weakening as region considers all of its options.
Pound (GBP):The pound is down this morning against all but the yen, experiencing a technical pull back from its recent strength.Housing prices were up the most in 5 months and consumer confidence is improving.BOE policy-maker Andrew Sentance cautioned that the recovery can continue, “especially if interest rates remain low.”
Dollar (USD):The dollar is showing strength today after the GDP figures that were reported this morning.The fastest growth since 2003 is stoking thoughts that inflation may be closer than the Fed thinks.
Yen (JPY):The Japanese yen is down across the board today as the CPI index showed that deflation is still very prevalent in the Japanese economy.Finance Minister Kan called for the Bank of Japan to take a powerful approach to combat falling prices and a strengthen yen.
The stock markets closed down in Asia, but are currently higher in Europe and the US.Gold is down slightly and oil is up this morning.
So today is a bit of a mixed bag.Keep an eye on the correlations to watch for break-downs or irregularities to see if there are reversals or reversion to mean.Today seems like it will be a range-bound day going into the weekend.
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The US economy grew 5.7 percent in the fourth quarter last year as measured by the Gross Domestic Product (GDP). This is the fastest quarterly growth in six years.
“Business are now feeling confident enough to deploy a larger portion of the recent strong corporate earnings rebound into new investment spending,” Brian Bethune, chief financial economist at IHS Global Insight in Lexington, Massachusetts, said before the report was released. “This is a key development to support a strong, non-inflationary recovery.”
This morning, it looks like risk appetite has returned to the forex market after yesterday’s FOMC meeting has been fully digested.The only thing “unexpected” from the meeting was that the decision was not unanimous, as KC Fed Chief Thomas Hoenig dissented and raised concerns about possible inflation. While this view will most probably be discounted for “an extended period” to use Fed parlance, it is interesting to see someone break from the pack.
Also, additional problems from the Euro zone have increased downward pressure on the common currency, as Portugal has now joined the mix and is showing up on the watch lists as their fiscal budget is drawing attention from the ratings agencies.In light of these problems, the market is still in a risk-taking mood.
The other big news came from last night’s Presidential State of the Union Address, where the President issued a renewed commitment to fixing the employment problem here in the US and pledging to help put Americans back to work which overall is positive for economic growth.Whether or not the follow through occurs is another story, but for now, the markets are satisfied.
Here’s a look at the currencies:
Aussie (AUD):Benefitting in early trade from risk appetite, the Aussie traded as high as 90.45 vs. the US dollar.In addition, commodity prices are higher as well.There is much debate over whether or not another rate hike will be in order at the next policy meeting as inflation concerns abound.Watch out for a mid-morning reversal if equity markets sell-off.
Kiwi (NZD):Yesterday, the New Zealand Central Bank left interest rates unchanged at 2.5% as inflation is likely to stay in its target range.However, the bank is expected to move on rates sometime before mid-year.Also up this morning, but off of its highs.
Loonie (CAD):With oil prices holding above $74 (for now), the Loonie is showing decent gains this morning against the risk averse currencies.The Loonie is showing some strength today vs. the US dollar, as it bounced back against technical resistance at 1.065.
Euro (EUR):The Euro is down this morning after having broken support at 1.40 vs. the US dollar.While EC economic sentiment was up this morning vs. an expected decline, the news that the first of the PIIGS countries, Portugal, may be following Greece’s lead down the road to fiscal uncertainty.S&P is saying that Portugal’s current budget leaves the country economically “frail”.Remember that when trading often times support becomes resistance so keep that 1.40 level in mind.
Pound (GBP):The Pound is strong again this morning, extending yesterday’s gains.The prevailing thought is that interest rate hikes may be on the table for the foreseeable future.
US Dollar (USD):The dollar is down today against the commodity currencies as risk appetite has returned.US durable goods orders came in lower than expected, and initial jobless claims came in slightly more than expected.This lends credence to the FOMC stance that rates should remain low for “an extended period”, much to KC Fed Chief Hoenig’s chagrin.
Yen (JPY):The yen is down against all but the Euro currencies, as the bottom rung on the risk-taking ladder.The uptick in risk appetite as a result of the State of the Union Address last night has helped propel Asian stock markets higher last night and the yen lower.
In world markets, the Asian stock markets closed higher than 1.5% from the previous day but stocks in Europe are mostly lower with news out of the Euro Zone.US stock markets are down, and gold and oil are higher, to 1093 and 74.12 respectively.
What’s important to take away from all of this news is that no single instrument trades in a “bubble” and that news from around the globe can affect any market.By having and maintaining an understanding of global events, investors and traders can better position themselves.
To learn more about how these markets are ALL inter-related, be sure to check out our extremely affordable currency trading courses!
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Investors remained unsure of the direction for the US dollar in the wake of President Barak Obama’s State of the Union Address last night. By mid-morning trading in Europe, the euro gained slightly to 1.4025 dollars from 1.4019 dollars late in New York on Wednesday while the yen lost ground, falling to 90.38 yen from 89.94 yen late yesterday.
The number of people filing for unemployment benefits for the first time fell by 8,000 to 470,000 for the week ending January 23rd according to the latest information from the US Labor Department. The total number of Americans receiving unemployment benefits as of the week ending January 16th fell by 57,000 to 4.6 million.
Yesterday, a statement from the Federal Reserve claimed that “the deterioration in the labor market is abating”. The Fed noted that businesses are laying off fewer workers and in some cases, are even starting to hire additional staff, prompting the Fed to renew its pledge to keep interest rates low to ensure retail lending rates remain affordable.
“We do expect the labor market to continue to improve going forward,” Dean Maki, chief U.S. economist at Barclays Capital Inc. “The trend in claims has been on a consistent downtrend and we do expect that to continue.”
Orders for durable goods – products with a lifespan of three or more years – rose more than predicted in December providing further evidence that growth is slowly returning to the US economy. Part of the increase can be attributed to companies rebuilding their inventories and returning to planned capital projects that were put on hold during the recession.
“Businesses are becoming more confident about the outlook and starting to invest in their expansion,” noted Zach Pandl, an economist at Nomura International Securities Inc. in New York. “If capital spending starts, a pickup in hiring is not far behind.”
A myriad of reasons has been supporting the dollar. Firstly, the dissent from Kansas City Fed President Hoenig yesterday after the FOMC rate announcement was a big boost for the buck. Secondly, the Fed reinforcing their intentions to cease buying MBS beyond Mar. will make US assets more appealing on the international scene and finally, Greek bonds plummeting has investors concerned if Europe is capable of containing the countries budget deficit woes. This morning the market is trading on the Obama positives in his speech last night. He proposes to extend middle class tax cut, which was due to expire at the end of the year. World bourses like this as do growth currencies. He aims to increase tax incentives for businesses to invest in new plants and equipment (small business are still finding it difficult to get credit) and finally, stepping up re-financing for homeowners other wise foreclosures again will be an eyesore. It was Obama’s’ comments on the Volcker rule what Capital Markets wanted to hear about. It looks to be implemented providing a ‘negative form of risk’. ‘We cannot allow financial institutions, including those that take your deposits, to take risks that threaten the whole economy’.
The US$ is mixed in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies in another ‘volatile’ trading range.
Yesterday’s US new home sales disappointed (+342k vs. +370k, -7.6%, m/m), providing proof that the extension of government tax credit’s has yet to support demand. Homebuyer traffic seems to have lost its way after the Sept. peak. This was by and large through distortions caused by uncertainty over homebuyer incentives. A variable that analysts believe cannot be sustainable. The data is somewhat misleading. Digging deeper, the current level of unsold new homes are at the lowest point in over 37-years. Month’s supply moved up to 8.1, and that’s despite a drop in inventory levels, because of sales softening in the month. Going forward, the market believes that homebuilder’s activity will rise as a market in demand will want these new supplies. It’s expected that bank’s shadow inventories (mostly foreclosures) will remain off the market for most of the first half of this year, thus requiring builders to add supply. This is expected to push starts and new home sales higher. Eventually they will want to offload these inventories, which are growing exponentially, because they will eventually be facing higher capital requirements and require liquidation for funds. Demographically, the Midwest accounted for most of the losses as sales plunged -41%. The South experienced a modest decline, while the Northeast and West posted gains on the month. Surprisingly, both the median and mean price rose last month, advancing +5.2% and +7.6% respectively.
The USD$ is currently higher against the EUR -0.13% and JPY -0.43% and lower against GBP +0.68% and CHF +0.11%. The commodity currencies are stronger this morning, CAD +0.71% and AUD +0.98%. With global equity indices and commodity prices floundering managed to push the loonie to print a new 5-week low yesterday. After experience a -3% drop last week vs. its largest trading partner, mostly on the back of a vocalized Governor Carney expressing his concerns of a strong domestic currency’s role on future growth, had futures traders paring their bets on when interest rates hikes would occur. Similar to the Fed’s policy, rates will remain low for an extended period of time. The currency has lost -1.4% over the past month, the fourth-worst performance among the 16 most-traded USD counterparts. The market seems to be caught long the CAD and is eager to pare some of these positions. Depending on equities and commodities, any CAD rally will have investors looking to sell some of their long positions. Currently, analysts believe the CAD is still overvalued and are targeting 1.0750 near term. The loonie received a boost from Obama’s tax pledges to middle income families last night. He also stated that the economy is well under the road too recovery. Growth currencies have all rallied. Is it sustainable?
The AUD managed to complete a u-turn in the O/N session and rallied from its one-month low, especially against the JPY, as Asian bourses rallied for the first time in over a week, thus boosting demand for higher yielding assets. In his first State of the Union, Obama has called on Congress to extend tax incentives to spur growth in the world’s largest economy. Obviously, this will benefit commodity currencies. Earlier this week, the IMF declared that the Australian economy is expected to outpace other advanced economies and expand +2.5% this year and +3% next year. Analysts believe with such a robust and stellar economy there is no reason to keep rates as low as they are. Stronger fundamentals has AUD traders increasing their bets to a +76% chance that the RBA will hike another +25bp on Feb. 2nd. It’s expected to be their fourth consecutive hike (0.9024). The markets have had a change of heart and want to be a better buyer on dips.
Crude is little changed in the O/N session ($74.33 up +66c). Crude oil and gas both fell to five-week lows yesterday, after the weekly EIA report showed that gas inventories rose to a 22-month high. The black-stuff tumbled just under 3% and is technically set to threaten the $70 level in the medium term. Demand destruction remains healthy. Gas inventories climbed +1.99m barrels to +229.4m last week vs. an expected increase of +900k, another consecutive bearish print. In contrast, crude supplies dropped -3.89m to +326.7m vs. an expected rise of only +1.5m barrels. Technically, the crude print was the only bullish component of the report and that was mostly due to the closure of the Houston Ship Channel because of foggy conditions. Refineries ran at 78.5%of capacity, little changed from the previous reading of 78.4%. Market sentiment remains negative with trading momentum pointing to lower levels. Year-to-date, the black-stuff has managed to drop -12% from its 15-month high of just under $84 recorded in the first few days of the New Year. With China taking dead aim in trying to ‘cool its economy’ by hiking bill rates and increasing reserve requirements for banks coupled with a bullish greenback has dissuade investors seeking the commodity as an alternative investment. These reasons are only adding fuel to the ‘bear strategy’ for commodities. The market continues to see sellers on upticks in the short term.
Witnessing the selling of bullion to cover losses in the equity markets is likely to increase over the coming weeks. Global bourses are finding it difficult to maintain any significant gains. From this week’s lows, the metal has found it difficult to rebound as traders speculate that a stronger dollar could curb further the appeal of the precious metal as an alternative investment. The market is expected to remain contained until we make a bona-fide attempt at penetrating resistance levels ($1,080). There is no doubt about it, the commodity trades ‘heavy’ as ‘one direction lemming buying’ has the market caught long product after last years 24% rally. Any liquidation of the metal with momentum will have nervous investors seeking an early exit. With the EUR remaining vulnerable and the dollar the ‘go-to’ currency, expect to see selling on upticks for the time being ($1,092).
The Nikkei closed at 10,416 up +162. The DAX index in Europe was at 5,707 up +63; the FTSE (UK) currently is 5,263 up +63. The early call for the open of key US indices is higher. The US 10-year note backed up 4bp yesterday (3.66%) and are little changed in the O/N session. Initially, treasuries rose as Greek bonds plummeted, driving investors temporarily to the safety of US government debt despite the abundance of product to be auctioned off this week. Traders attempted in vein to cheapen the curve accordingly to absorb product as any pull backs we accounted for by foreign demand. However, after the Fed’s announcement bonds erased earlier gains when policy makers said they will cease buying MBS in Mar. as planned and wind down other liquidity programs. Today is this week’s final auction ($32b of 7’s). Will we see the same appetite for US product?
The annual meeting of economists, industry leaders, and politicians got under way in Davos, Switzerland earlier this week. Front and center on the opening day panel was Nouriel Roubini, Professor of Economics at the Stern School of Business, New York University. It was at this very conference last year, that Roubini was vindicated for his earlier warnings that housing prices in the US were forming an asset bubble that would ultimately collapse, plunging the global economy into crisis.
As we all know now of course, Roubini was mostly correct in his predictions, but at the time, the party was still in full-swing and nobody wanted to hear Roubini’s “theories”. His work was marginalized by many as simply the rantings of a “perma-bear” – even the New York Times got in on the act by dubbing Nouriel “Dr. Doom”!
Compared to last year, the mood was certainly more upbeat but caution still remains the theme of the summit. One hopeful sign came from Roubini himself who said he now believes it is “unlikely” that the economy will face a recession double-dip; this represents a much sunnier outlook than the good doctor had earlier in the year, but alas, there are still plenty of dark clouds on the horizon and let’s start with a look at the potential for growth this year.
Global Growth Outlook
Overall, summit participants believe growth will continue throughout 2010, but the level of growth will vary wildly by jurisdiction. Expansion will almost certainly be greater in the emerging economies where China is expected lead the way with growth exceeding 10 percent.
Western nations on the other hand, can only look to the emerging nations with envy as growth in the West is expected to be considerably more modest in nature. The Organization for Economic Cooperation and Development (OECD) pegs growth this year for the US to be about 2.5 percent, just slightly more than 1 percent in the UK, and only 0.9 percent for the Eurozone countries as a whole. Worse still, this weak growth is being described as “jobless” as it will not expand the economy sufficiently to create the new jobs so desperately needed in these regions.
Future of the European Union
When speaking of the troubles facing the Eurozone, Roubini – sounding much like Milton Friedman before him – made it clear that he too feels the Eurozone is doomed as a political entity. Roubini points to the series of near-bankruptcies from the more troubled nations including Greece and Spain, as the catalyst that could lead to a splintering of the Eurozone itself and the end of the euro currency.
The Professor argues that the smaller countries within the Eurozone are at a competitive disadvantage to the larger powerhouses such as France and Germany – this is the exact opposite of what the move to single currency was supposed to produce. But – according to Roubini – there was never any doubt that the needs of the smaller countries would always remain secondary to the larger countries and by forcing all countries to use a single currency, the weaker partners have even been denied the ability to deliberately devalue their currency in order to “export their way” out of recession.
“Down the line – not this year or two years from now – we could have a breakup of the monetary union,” Roubini said in an interview from Davos. “The Eurozone could drift essentially with a bifurcation, with a strong center and a weaker periphery and eventually some currencies might exit the monetary union.”
Rush to Regulation
The other major theme emerging from the first day of discussion at Davos – and this should not come as a surprise – revolved around the question of increased regulation within the financial industry. Roubini came out strongly on the side of increased regulations describing recent proposals by the Obama administration as being in the “right direction”. Roubini explained the need for massive reform to ensure that the banking industry doesn’t simply “return to business as usual” thereby reverting to the same flawed practices that he believes led to the recession in the first place.
