Forex Blog

May 25, 2010

A Perfect Storm!

Filed under: Forex News — Tags: , , , , , , , , , , — admin @ 1:24 pm

World financial markets are facing a “perfect storm” as a combination of geo-political and financial uncertainty is driving risk-aversion.  The first issue is coming from the Euro zone as Spain seeks to shore up its banking system.  A series of banking mergers aimed at pairing weak banks with stronger ones has caused investors to fear that indeed contagion from the debt crisis has taken place.

Secondly, news out of Asia that N. Korea may have been responsible for the sinking of a S. Korean vessel has heightened political tensions in the region.  Whether or not there will be consequences remains to be seen but N. Korea has been known to make idle threats which are intended to destabilize the status quo.

Lastly, news out China that Secretaries Geithner and Clinton are making headway with the Chinese regarding Yuan revaluation may be picking up has brought further uncertainty to the marketplace as there is no telling what the lasting effect may be IF such actions were taken.

This all adds up to MAJOR risk-aversion in the markets in a continuation of yesterday’s selloffs and flight to safety.  Libor rates (the rates at which banks lend to one another) have increased to levels last seen during the initial banking crisis here in the US from 2008.  Both Asian and European stock markets have sold off to the tune of 2.5-3%, and both gold and oil are trading lower.

In the forex market:

Aussie (AUD):   The Aussie is lower on risk aversion.  While the economy in Australia has been strong, the unwinding of carry trades has punished the Aussie dragging it down to 10-month lows.   Should China effectively attempt to slowdown its over-heating economy, the economic situation in Australia could change dramatically for the worse.

Loonie (CAD):  The Loonie is also lower this morning, taking cues from oil prices which are below $68.  Economists are still predicting a rate hike at next week’s rate policy meeting, though global economic uncertainty may derail that plan.  However, since the Loonie has been beaten up by risk-aversion, this may actually be a good time to sneak in a rate hike that won’t strengthen the currency too much.

Kiwi (NZD): Same deal for the Kiwi; risk aversion dragging it lower.  The RBNZ reported its 2-year inflation outlook that was largely in line with expectations.

Euro (EUR):  First Greece, now Spain.  The moves taking place in Spain’s banking system have put investors on high alert, though it must be noted that Spain has not sought out any assistance as of yet.  File this under the, “where there’s smoke there’s fire” sentiment.  In the meantime, Industrial orders in the Euro zone were higher showing signs that they are benefitting from a weaker Euro.  Stay tuned.
Pound (GBP):  UK GDP figures came in largely in line with expectations, indicating that the UK economy grew .3% in the last quarter on the back of the highest manufacturing gains seen in 4 years.  The Pound is still vulnerable to any fallout from the Euro debt crisis, but BOE policy-maker Posen said that the UK was at a low risk of experiencing the type of economic stagnation that plagued Japan in there “lost decade”.

Dollar (USD):   The Dollar is higher as the rush to the flight to quality is in full effect.  Yesterday, existing home sales came in better than expected, but it was not enough to reverse losses.  Later this morning, we are going to get consumer confidence and the home price index which will show whether or not a consumer-led recovery may be taking place.

Yen (JPY):  The Yen is the best performer this morning as the un-wind of carry trades has increased demand.  In addition, a sell-off in Japanese equities has also increased yen demand as the yen experiences a similar correlation to its stock markets as in the US.  As tensions heat up in the region due to N. Korea, people forget that almost a year ago, N. Korea fired off nuclear test missiles in the direction of Japan.  They are a major destabilizing force in the region and the former policies of trying to appease and placate them may have run its course.  The yen is fast approaching its 2010 high vs. USD, just above 88.

I call what is taking place in the markets right now the “perfect storm” because there is much uncertainty due to events that can’t be quantified.  It is one thing when there is bad economic data for a region or two; however when there are political threats that could potentially cause a war, all bets are off.

And while N. Korea has been known to posture and bluff its position in order to gain, this time it could be different.  No one wants to see military action in the region, but N. Korea is such a wild card that no one knows what to expect.

In addition, world recovery has pretty much been driven by Chinese demand and should they slow down, it could affect the nations which have been experiencing economic recovery.

Oh yeah, don’t forget about potential sovereign debt contagion in Spain, which could potentially be a MUCH larger problem than what was seen with Greece.

Meanwhile, everyone rushes to the safety of the US dollar and Japanese yen and both countries government bonds as it is better to earn almost no interest than to lose out entirely.

Are we having fun yet?

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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May 24, 2010

Is Spain Next?

Filed under: Forex News — Tags: , , , , , , — admin @ 1:40 pm

Over the weekend, the Euro debt crisis took an unexpected turn for the worse as the Spanish central bank took over a savings bank after a planned merger had failed.  While in and of itself this is not a big deal, viewing it through the context of overall EU financial health has made the bounce in the Euro short-lived.  The Euro is lower again to start the week, as last week’s short-covering rally has been reversed and the longer-term trend for the common currency is still down.

There’s not a ton of market-moving news on tap this week, with GDP figures due out from the UK tomorrow and the US on Thursday.  Other than that, there are some smaller events that will provide color to the overall economic picture which will either help re-affirm or correct market sentiment.

Perhaps the biggest news is that US Treasury Secretary Geithner is in China and is advocating that China adopt a more free-floating currency.  Because of the Yuan peg to the US dollar, China has been allowed to experience very rapid growth through artificial means that have allowed their goods to remain cheaper around the globe.  However, with the crisis in Europe looming, US dollar strength could cause Chinese Yuan strength via the Dollar if the Euro continues its slide.  With European austerity measure taking place (Germany included); this could slow world demand which would slow China’s growth as well.

So while there have been some “clues” that perhaps China is ready to make changes to Yuan policy, I’m not certain it will take place if their economy slows due to slower exports as a result of a strong dollar buoyed by risk-aversion and global austerity.

This all adds up to risk-aversion in the market today in a continuation of the major trends, but it’s possible that we could see a reversal as US markets open for the week.

In the forex market:

Aussie (AUD):  The Aussie is lower on risk-aversion as fears out of the EU and a potential slowdown in China are reducing demand for higher-yielding assets.  The Aussie is the worst performer this month, down some 10% vs. the US dollar as risk aversion has dominated the marketplace.

Loonie (CAD):  The Loonie, on the other hand, is showing strength this morning as oil is back in the $70 range, showing signs that we may get a reversal this morning.  The Loonie is not really a carry trade destination as it doesn’t provide the yield differential of the Aussie or Kiwi; however it is affected by commodity prices (particularly oil).  The Canadian rate decision is due out in early June so there still is some speculation that they could be the next to hike.

Kiwi (NZD):  The Kiwi is lower for the same reasons as the Aussie, getting hit a bit harder as it does not have as great a rate differential as the Aussie.  Same risk, less reward.  However, should the markets begin to stabilize, then we could see the Kiwi move faster to the upside.

Euro (EUR):  The Euro is lower as the bank of Spain took over a regional lender causing investors to question whether or not the debt crisis is spreading.  There has been a major property bubble in Spain so many banks are holding bad debt which could come to the surface if Spain needs to access the bailout money to stabilize its banks.  In addition, Germany has adopted its own austerity measures, essentially trying to lead by example.  Considering that the market is looking for any excuse to sell the Euro, expect the longer-term downtrend to continue.  The Euro is lower across the board.

Pound (GBP):  The Pound is lower this morning going into tomorrow’s GDP reading as the UK is walking a fine line between trying to grow its economy without incurring inflation, and cutting its public debt.  The new government announced 6 billion Pounds in spending cuts in hope of sending a “shock-wave” through government departments.  While not an enviable position to be in (although EU members may disagree), the government feels these actions are necessary to avoid its own sovereign debt crisis.

Dollar (USD):   The Dollar has been higher on risk themes, and US existing home sales are due out later this morning.  Consumer confidence figures are due on Tuesday, followed by US GDP on Thursday.  These figures will show whether or not the US economy has been jump-started enough to sustain recovery in light of the EU debt crisis and could send fears of further problems down the road.  Expect the Dollar receive support through flight to safety trades if risk-aversion remains high.

Yen (JPY):  The government in Japan said that the economy is picking up steadily leaving its assessment unchanged for a second month in a policy statement today from its monthly economic report.  However, growth in Japan has been driven by world demand and stimulus measures, so it is not a self-sustained recovery.  Like the Dollar, expect the Yen to trade on risk themes until at least Thursday, when a slew of economic data points are due out.

Will overnight risk be counter-acted by the US markets today?  Stock markets are opening lower, though commodities are trading higher.  Risk in the overnight session can sometimes be overcome by decent news from the US.  Existing home sales could be that number if they come in better than expected.

So while the overall mood of the market has been risk-aversion for some time, any pockets of economic strength could help stabilize the situation and perhaps show signs of recovery.

Until that time, expect continued selling of the Euro which will have an effect over all other markets as historical correlations begin to break down.

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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May 21, 2010

Possible Intervention?

Filed under: Forex News — Tags: , , , , , , , , , , — admin @ 1:37 pm

Talk is heating up around the globe that Central Bank interventions could be forthcoming in order to stabilize the currency markets.  Currently, the Swiss National Bank (SNB) has been active in trying to maintain prices for the Franc vs. the Euro, and now the market is jittery that a meeting today of Euro zone finance ministers could produce a similar result.  In addition, the BOJ has been known to intervene in its currency in the past, and there is speculation that Australia may be set to intervene as well.

This is effectively a form of market manipulation, but can be very profitable for investors who are on the right side of the trade.  In this regard, should interventions occur, investors would want to be long the Euro and Aussie, and short the Yen and Swiss franc.  Intervention is already occurring in Switzerland so this trade may be over, but what is important to know is which way policy makers want the currency in question to go.

In addition, German law-makers in the lower house have approved the Euro rescue package, as it is also in Germany’s self-interest to make sure that the Euro doesn’t collapse.

So what we’re seeing this morning is continued short-covering from yesterday afternoon and speculators starting to dip their toes back in cautiously to riskier assets.  Traders do not want to be caught short over the weekend, especially if coordinated action is taken.

In the forex market:

Aussie (AUD):  The Aussie is higher on short covering after aggressively declining for 5 days in a row.  Speculation of possible intervention has led the market to cover their short trades, so don’t mistake today’s action for risk-taking, though early investors may be starting to test the waters to the long side.

Loonie (CAD):  The Loonie is higher this morning as retail sales figures rose the fastest in nearly 5 years, and CPI figures came in slightly higher than expected, showing signs that economic growth is heating up in Canada.  While a June rate hike is still expected for June, much of it will be predicated upon whether or not the Euro can stabilize and whether risk has been reduced in the market.

Kiwi (NZD):  Consumer confidence rose 3.4% in NZ, showing signs of economic life in the country.  In addition, income tax cuts are expected to encourage workers to stay home which will be positive for domestic economic growth.  The Kiwi is higher on short-covering as well.

Euro (EUR):   The Euro touched one-week highs in the overnight session, as German law-makers approved the Euro rescue plan.  The looming threat of intervention has helped push it higher as traders don’t want to be trapped short over the weekend.  In addition, German GDP figures came in as expected, showing a gain of .2% for Q1 after being flat the previous quarter.

Pound (GBP):  The pound is also higher as it has been beaten up with the Euro over the last few sessions.  Expect the Pound to trade somewhat sideways as investors weigh UK policy vs. the threat of continued Euro problems.

Dollar (USD):   The Dollar is weaker this morning as short-covering is taking place.  Expect the Dollar to continue to trade on risk themes, though note that today is not a risk-taking day as both commodities and US stock futures are lower so far this morning.  Global austerity measures could affect US stock growth as demand wanes world-wide.  Especially with blue-chip and technology companies that have large exposure to the EU.  In addition, financial reform bills passed in Congress are adding fuel to the fire.

Yen (JPY):   The Yen is trading lower on short-covering rallies as well, and overnight, the BOJ left rates unchanged at .1%.  In what I would consider as something of an anomaly, the Yen is trading higher against the Dollar further illustrating that this is not a pure risk-taking day.  While the Yen is still far away from levels that the BOJ would consider in order to intervene, they have been known to act in the past.

Because today is a Friday, the market is taking a respite as fear has ruled this week and the potential for central bank interventions have caused uncertainty.  Right now we are at an inflection point; where markets could go one way or another and which way that will be is anyone’s guess.

So in the meantime, I advise taking cues from the market and take profits if you have them, and wait for next week’s action to initiate new trades.  More than one trader has “blown up” by coming in Monday morning to a bit of nastiness in the form of central bank intervention.  And while it is unlikely that this will happen, the threat is enough to cause caution.

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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May 20, 2010

The Great Unwind!

Filed under: Forex News — Tags: , , , , , , , , , , , — admin @ 1:21 pm

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

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

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

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

In the forex market:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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May 19, 2010

German Political OxyMorons!

Filed under: Forex News — Tags: , , , , , , , , , , — admin @ 1:23 pm

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

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

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

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

In the forex market:

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

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

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

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

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

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

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

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

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

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

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

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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May 18, 2010

What Inflation?

Filed under: Forex News — Tags: , , , , , , , , , , — admin @ 1:59 pm

This week marks the time of the month that the inflationists come out in full-force as a slew of CPI data is forthcoming from around the globe.  Today, data from the EU and the UK show that consumer prices are moving slightly higher, though there are no signs that policy-makers are ready to move on rates in either of those regions any time soon.

In fact, both of these governments are hoping to encourage some inflation to get their economies moving again.  The problem with inflation is that it is a stealth tax on consumers.  Nevertheless governments LOVE inflation as it allow them to repay debt with less valuable currency.

Today in the US, PPI figures came in less than expected and tomorrow brings the US CPI data, followed by Canada’s reading on Friday.   At this point, with all of the global economic uncertainty in the markets, combating inflation is becoming a more distant thought on the minds of policy makers.  Outside of an extraordinarily high reading in either country, I don’t expect it to influence policy one way or the other.  Although the market is anticipating a rate hike in Canada in June so that number could hold some more weight.

So today we are seeing some mild risk appetite, though the Aussie is lower as a result of the minutes from its rate policy meeting, and in the EU, Greece received its first bailout payment of roughly $18 billion.

In the forex market:

Aussie (AUD):  The Aussie is lower as the minutes of its rate policy meeting were released overnight showing that monetary policy is “well placed” after previous hikes according to the RBA.  Right now, the major debate for world economies is weighing the threat of inflation vs. the EU debt crisis.  I suspect central banks may err on the side of caution and stronger economies may put up with inflation until they are convinced that the EU is economically stable.  This greatly reduces the chance of a rate hike at the next meeting in June.  The Aussie is near three-month lows vs. USD.

Loonie (CAD):  The Loonie is higher today on risk appetite as well as the fact that the price of oil has halted its previous decline.  Oil traded higher to just over $72 after a two-week sell-off, but is now at 71.75.  The market still favors a rate hike in Canada, and Friday’s CPI figure will either confirm or refute that view.  The inflation vs. debt crisis is on the mind of central bankers, but Canada has extremely low rates, some 4% less than Australia so they have more room to hike.

Kiwi (NZD):  Producer Input Prices came in higher than expected at 1.3% showing signs that higher costs may suggest that the mid-year rate hike is still on target.  The Kiwi is the biggest gainer this morning.

Euro (EUR):  German economic sentiment figures came in lower than expected as the Greek debt crisis caused consternation in the largest manufacturing country in the EU.  In addition, CPI came in at a .5% increase vs. a .4% expectation showing signs that inflation may be held in check.  Right now, inflation is the last thing on the minds of ECB policy makers as the far greater threat of sovereign default reigns supreme.   The Euro is mostly higher.

Pound (GBP):   The Pound is also slightly higher as CPI figures came in higher than expected at .6% vs. an expectation of .4%.  Again, like the EU, debt service is currently trumping the threat of inflation in the UK, and BOE Governor King downplayed the surge as “temporary” as the UK is about to embark on its own budget cutting measures.

Dollar (USD):   The Dollar is low on risk-taking as well as the fact that US PPI figures showed a decrease of .1% vs. an expectation of an increase of .1%.  In addition, while US housing starts were higher, building permits were much lower than expected showing signs that the housing market may still be on shaky ground.  It appears as though the expiration of the first-time homebuyer credit may be responsible for the pick-up in starts, though the lower building permits show a lack of future construction.

Yen (JPY):   The Yen is lower on risk appetite despite the fact that consumer sentiment rose to its highest levels since 2007.  This comes as a result of the export-led recovery which seems to be taking place.  However, low interest rates still keep the Yen as a safe haven currency and the primary funder of carry trades.  This Friday’s interest rate decision shouldn’t change that.  Thursday brings the GDP figures which are expected to be in line with estimates.

Governments and central banks LOVE inflation because it allows them to repay debts with a less valuable currency.  This is known as “inflating the debt away”.  And with all of the debt floating around out there, you can see why they are trying to encourage it.  However, for consumers, inflation acts as a stealth tax as the cost of everything goes higher.  That’s why here in the US, they give you the reading “ex food and energy” to falsely show what’ going on in the economy.  After all, who cares if milk prices or electricity prices are going higher if the cost of the new iPad is going lower!

Well, this is a simplistic and somewhat skeptical view of central banks and government, but if you really think about it, it makes sense.  So that’s why in the UK they are talking down inflation as “temporary”.

Here in the US, they don’t need to talk down inflation as signs of deflation still persist despite all of the government and US Fed-led attempts to keep prices higher.

What this tells me is that we are still on fragile economic footing and that central bankers have no plans to raise rates anytime soon.  So keep an eye on your currency and a keen eye on prices of things you use daily, as you can no longer count on the government to do that for you!

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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May 14, 2010

Global Slowdown Threatens Markets!

Filed under: Forex News — Tags: , , , , , , , , — admin @ 1:20 pm

In this era of globalization, the reliance on the inter-connectivity of markets has induced what is known as the “butterfly effect”.   That is, when something happens in one area of the world, it has the potential to pervade and send shock waves throughout the rest of the world.  And this is where we are today.

You may be asking yourself, “How can the debt problems of an economically tiny nation thousands of miles away influence your day-to-day decisions?”  Well, Greece is basically a microcosm for the world economic system in that if one part fails, it causes a chain-reaction (contagion) which causes other failures.  Once failures occur, confidence is shaken and fear pervades the marketplace.

Have you seen the price of gold lately?  Gold is a safe-haven asset that is known to store value and hedge against inflation.  Gold is currently in $1240 range and has been in high demand since the Euro debt crisis has picked up steam.

At the forefront of the Euro debt crisis is the structural issues surrounding the viability of the Euro has a single currency.  Many are starting to believe that this experiment has failed.  Earlier this morning, the Euro tested 1.24 vs. USD.

However, luckily for the markets, the US retails sales figures came in better than expected, showing signs that the US consumer couldn’t care less what is happening abroad.  Will a US-led recovery save the global marketplace?  Only time will tell.

In the forex market:

Aussie (AUD):  The Aussie is lower this morning on risk-aversion, but has bounced back from its lows of the morning.  While the economic story in Australia is a good one, the Aussie will continue to be ruled by risk themes in the market and not its fundamentals.

Loonie (CAD):   The Loonie is lower this morning as it has been trading as a proxy for oil prices for some time.  Oil is now trading at a 73 handle, and Euro zone and UK austerity measures are predicting a slowdown which dampen demand for oil.  This could have a negative effect on the Canadian economy, but for now the market is still betting that they will hike rates at the June meeting.

Kiwi (NZD):  The Kiwi is an interesting story this morning as I’m reading the economic data that came out earlier this morning and I can’t figure out why the seemingly disappointing data and risk aversion in the market aren’t affecting the Kiwi in a negative way.  Retail sales figures rose at the slowest pace in almost a year, and housing prices fell which is weakening the case for a mid-year rate hike.  Nevertheless, the Kiwi is higher against all currencies but Dollar and Yen, being only slightly down against the former.  My only guess is that it is getting a bid because of higher gold prices, but that is a tenuous guess at best.

Euro (EUR):  Yes the Euro is lower again this morning, reaching a one-year low of near 1.24 vs. USD.  It has rebounded some, buoyed by the correlative effects of dollar weakness due to US stock futures gains, though the gains off of the lows seem to have been short-lived.

Pound (GBP):  The Pound is lower this morning again as well, as belt-tightening in the UK is predicting a continued accommodative monetary policy as I outlined yesterday.

Dollar (USD):   The Dollar is higher on the flight-to-safety trade and retail sales did come in better than expected (.4% vs. .2% expectation).  However, the market may be skeptical that a US consumer-based rally may not be enough to keep the global economy afloat.

Yen (JPY):  Yen is strong due to risk aversion and the un-wind of carry trades as the AUD/JPY pair is the biggest loser this morning.  Asian stock markets were down big overnight.

Heading into this weekend, there is a lot of fear in the marketplace.  Investors are not comfortable holding risk assets as there is no telling what may happen over the weekend.  The general attitude is better to be safe than sorry.

Now that the talk of a Euro breakup is heating up, this is adding fuel to the fire as that potential event could be catastrophic for the markets.  Equity futures here in the US look pretty ugly, and I’m not certain that there is anything which is going to change that.  The confidence survey due out at 9:55 EST is the stock markets only hope today, and that is a long-shot.

So my advice is to do what the market tells you.  If the market is showing fear and risk-aversion, then you dear reader should as well.

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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May 13, 2010

Expand or Contract?

Filed under: Forex News — Tags: , , , , , , , , , — admin @ 1:40 pm

Many countries and economies around the globe are facing record budget deficits and there is much debate as to whether it is better to expand or contract these deficits.  On the one hand, reducing deficits improves balance sheets and makes debt easier to service, but on the other hand it brings fear of the dreaded “double-dip” recession.

Here in the US, the obvious tactic is to expand balance sheets as deficit reduction would potentially induce deflation, which could cause another run on the banks which are mired in this housing mess.  However, abroad the central bank focus is more on combating inflation, and other banks are nearly as exposed to bad housing bets as are US banks.

While global banks do have their own issues, the general thought is that is that as economies promote fiscal responsibility, monetary policy needs to be more accommodative to attempt to prevent a slide back into double-dip territory.

And that’s what is happening in both the Euro and Pound as deficit reduction plans are starting to come together.  So the market is starting to realize that accommodative policy will be necessary.

Job gains in Australia were better than expected, and initial jobless claims here in the US were slightly worse than expected.  All of this is adding up to mild risk-aversion in the market as the Euro is now trading at a 1.25 handle.

In the forex market:

Aussie (AUD):   Employment gains “Down Under” exceeded expectations prompting speculation that yet another RBA rate hike may be coming soon.  The economy gained 33.7K jobs vs. an expectation of 22.5K.   The threat of a potential China slowdown has been weighing on the Aussie, as has been general risk-aversion which is what is happening this morning.

Loonie (CAD):  The Loonie is hanging in there but is lower as oil prices are off this morning.  Speculation is still high that a rate hike may be coming in June, if the global market can dodge major risk events until then.

Kiwi (NZD):  The Kiwi is also being weighed down by risk aversion even though a report showed that manufacturing activity expanded at the fastest pace in 5 years.  Retail sales figures are due out tomorrow and are expected to show the fastest gains in nearly 9 months.

Euro (EUR):   Yep, the Euro is lower again today, as the market is starting to catch on to the fact that austerity measures around the region may require more accommodative monetary policy to make up for the reduction in supply and demand.  And while there is concern over the size of the bailout, let’s not forget that it’s not like all of this money is required at once, but rather it was established to help the countries in trouble get better borrowing rates and provide an emergency backstop.  Investors are concerned that austerity measures won’t work… but only time will tell.  For the record, the unemployment rate in Greece is only slightly higher than here in the US.

Pound (GBP):   The new coalition government formed is wasting no time putting forth plans for budget deficit reduction with the blessings of BOE Governor King.  As with the Euro, reductions in fiscal policy may require increases in accommodative monetary policy.  Frankly, a weaker Pound helps UK exports which help bring capital to the region.  They key is going to be reducing without inducing recession.  They have their work cut out for them.

Dollar (USD):   The Dollar is higher on risk aversion as initial jobless claims came in slightly worse than expected.  Fed Chairman Bernanke is due to speak at 2:30 EST so be wary of any market volatility.  Tomorrow we get retail sales figures and confidence numbers which could show a shift in sentiment regarding the US economy.

Yen (JPY):   There is Yen strength this morning on risk aversion and a current account reading shows surpluses widening as demand for Japanese exports has increased.  This bodes well for the economy though concerns about huge deficits still weigh heavily on rates.

There is more than one way to skin a cat, as the saying goes and the global market place is putting that saying to the test.  While the US believes expanding deficits is the way to go in combating its economic woes, countries on the other side of the Atlantic are taking the opposite approach.

While the US is the world’s largest economy and is unique, it goes to show that there are different ways to accomplish the same thing.  At the end of the day, accommodative monetary policy is going to be needed out of the “big 3”—EU, UK, US- so the race to the bottom is back en vogue again.

As I have outlined earlier in the week, a weaker Pound and Euro is not necessarily a bad thing for those countries.  As long as the structural issues are kept intact and there are no defaults, then we can expect to see weakness from the contracting economies.

Meanwhile, the commodity currencies keep chugging along in much better shape economically, yet held hostage to the whims of risk themes.

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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May 12, 2010

Moody’s Downgrades $28b of Greek Securities

Filed under: OANDA News — Tags: , , , , , , , , — admin @ 2:55 pm

Moody’s Investors Service lowered 22 billion euros ($28 billion) of Greek bonds backed by loans to consumers and companies as the country adopts austerity measures to qualify for European aid, leaving the notes under review for further downgrades.

The cuts “were prompted by Moody’s expectations of significant pool performance deterioration due to the stressed economic environment in Greece as well as increased operational risk due to the weakened financial strength of Greek banks,” the New York-based ratings company said today in a statement.

Bloomberg

Europe Economy Grows Faster than Forecast

Filed under: OANDA News — Tags: , , , , , , , — admin @ 1:58 pm

Growth in the largest Eurozone members (Germany, France and Italy) overcame the contraction in Greece. It remains to be seen if this trend can continue for the next quarter or if the countries contracting outweigh the gains of other members.

Gross domestic product in the 16 euro nations rose 0.2 percent from the fourth quarter, when it remained unchanged, the European Union’s statistics office in Luxembourg said today. Economists had forecast growth of 0.1 percent, the median of 31 estimates in a Bloomberg survey showed. Industrial production gained 1.3 percent in March from February, when it rose 0.7 percent, a separate report showed.

The euro-area economy may gather strength after European leaders earlier this week pledged a rescue package worth almost $1 trillion to counter a spreading Greek debt crisis and restore confidence. Concern about governments’ ability to tackle their deficits has pushed down the euro 11 percent against the dollar this year, helping bolster the region’s export-led recovery.

Bloomberg

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