2011 June | Forex Blog

June 27, 2011

US Consumer Spending Slows in May

Filed under: OANDA News — Tags: chief, fact, forex round up, gas-prices, month, purse, the-chief, the-month, the-purse, usd — admin @ 7:14 am

US consumers tightened the purse strings in May in response to weaker employment and rising inflation. Purchases were essentially flat for the month after a 0.3 percent gain in April.

“The quarter is going to be very slow,” said Christopher Low, the chief economist at FTN Financial in New York who correctly forecast household spending. “The biggest explanation for that is gas prices, so obviously the fact that oil has fallen quite a bit in the last couple of weeks is a really good thing. Relief just in time.”

Source: Bloomberg

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One Last Hurdle?

Filed under: Forex News — Tags: aussie, australia, bailout, bailout-as-well, board, correlations, debt, economics, greece, greek, lower-as-the, market, markets, other, week — admin @ 7:07 am

This week will hopefully put an end to this round of the Greek debt crisis on Wednesday, when it is expected that Greece will vote to accept the austerity measures agreed to in principle last week. However, there is still some risk that this is not a done deal until it actually passes, despite the confidence vote last week. If accepted, then they will receive the bailout money early next week.

One of the other forces putting pressure on the markets is the end of QE2 and the accompanying de-leveraging. Risk assets have been moving lower as Dollar strength due to both risk aversion and a natural reversion to mean take place. Debate here in the US over the raising of the debt ceiling is likely to drag out all summer, which could have an impact of interest rates if this becomes a political showdown.

This week will bring UK GDP figures tomorrow which may show a stagflationary environment if they come in lower than expected. Business sentiment has picked up though which means that expectations are improving.

In New Zealand, trade surplus figures came in lower than expected, which combined with a little unwinding of carry trades has pressured the Kiwi lower.

So the market is starting the morning flat to slightly higher, with oil prices lower to $90.50 and gold just above $1500. Personal consumption data is due out later this morning but is likely to show declines.

In the forex market:

Aussie (AUD): The Aussie is mostly lower as the de-leveraging of risk assets is causing some selling. There’s not a lot of news this week out of Australia so expect the Aussie to trade on risk themes.

Kiwi (NZD): The Kiwi is lower across the board after trade surplus figures came in lower than expected, coming in at 605M vs. an expected 1000M on lower exports and higher imports.

Loonie (CAD): The Loonie is lower as oil prices have retreated to $90.50 on the news of the release of the strategic oil reserve (SPR). Wednesday will be the release of CPI data in Canada which is expected to come in at 3.3%, which is a tad high so anything higher may increase rate-hike expectations. GDP figures are due out on Thursday. (Click chart to enlarge)

Euro (EUR): The big news this week for the Euro zone is the Greek vote on austerity but CPI data is due out on Wednesday, followed by the German unemployment report of Thursday. The Euro is mostly higher this morning to start the day.

Pound (GBP): The Pound is mixed this morning as a business barometer index came in better than expected, posting its highest reading in nearly a year. Expectations of rate hikes remain on the table, but tomorrow’s GDP report could show a stagflationary environment if worse than expected. (Click chart to enlarge)

Swissie (CHF): The Swissie is mostly lower as the safe haven play is muted despite the general de-leveraging in the market.

Dollar (USD): The Dollar is showing some strength today despite personal income and spending figures that came in slightly lower than expected. With the removal of the guiding hand of QE2, it will be interesting to see how the correlations in the market behave.

Yen (JPY): The Yen is weaker across the board as Dollar strength has caused a shift in money flows for carry trades.

The general theme in the marketplace is that interest rates need to move higher to combat global inflation according to the BIS (Bank of International Settlements). Should rates begin to rise, there could be a deflationary backlash as the cost of money increases.

Without the artificial hand of the Fed keeping US rates low, our debt problem may become worse if the market demands higher interest. The debt ceiling debate may induce further volatility as the market loses confidence that we can get our act together.

While the debt ceiling will likely be raised, expect high drama as the politics interfere with the economics. Also bear in mind that the Greek debt crisis may be done deal, but isn’t over until it’s over. Fears of contagion to the other PIIGS countries could be a problem if rates continue to rise or if someone else decides they want another bailout 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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BIS Says Interest Rates Must Rise

Filed under: OANDA News — Tags: a-warning-today, asset-bubbles-, countries-most, eur, forex round up, gbp, global, global-monetary, jpy, necessary, resources-and, the-chief, usd, warning-today — admin @ 6:54 am

The Bank for International Settlements (BIS) issued a warning today that unless global interest rates rise asset bubbles could threaten the global economy. In some emerging markets property values are expanding at a torrid pace and are pushing prices to unsustainable levels.

“The prolonged period of very low interest rates entails the risk of creating serious financial distortions, misallocations of resources and delay in the necessary deleveraging in those advanced countries most affected by the crisis,” the BIS said in its annual report.

“Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks,” it said.

Source: BBC News

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How deep is the EURO black hole?

Filed under: OANDA News — Tags: a-bleak-outlook, a-classic-risk, dean's fx, dollar, greek, outlook, usd, yielding — admin @ 4:07 am

A question that should be answered this week. The Greek parliament is due to vote on their socialists government’s austerity measures at this Tuesday-Thursday session. Capital markets expects the legislation to pass. However, Prime Minister Papandreou’s government is not likely to achieve the two-thirds majority that the IMF/EU require.

Any majority should be sufficient for the disbursement of the next tranche of ‘troika’ aid. If, for some reason the legislation is rejected, we can expect capital markets again to plummet into deep uncertainty with significant negative implications for the EUR and risk appetite.

After a successful vote, market focus will shift to the negotiations on a supplementary rescue package for 2013, which the EU has said it aims to conclude by July 3. Analysts expect European data to moderate this week, which is unlikely to provide relief for risk. Even China’s assurance that it will continue to buy Euro-zone debt is helping to keep the EUR downside intact, but rallies are struggling as the Greek austerity vote keeps the ‘fear factor’ alive.

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

The dollars is higher against the EUR -0.01%, GBP -0.02%, CHF -0.49% and JPY -0.42%. The commodity currencies are weaker this morning, CAD -0.01% and AUD -0.44%.

The CAD ended last week posting its biggest weekly drop in two-months as risk-averse investors sought refuge in the most liquid of assets, the greenback. Higher yielding growth assets have come under pressure as investors risk-appetite goes ‘walkabout’ on the back of commodities softening on speculation that global economic growth may falter.

Earlier last week, the loonie seemed well supported by ‘real’ money buying. However, the IEA announcement to ‘flood’ the oil market has allowed the real money interest to temporarily back off.

Big picture, the currency has held in very well over the last five trading sessions despite the release of weaker data down-south. With close to 70% of Canada’s total exports heading south of the border, weak US data releases seemed to be having little effect on the loonie. Now it’s a period of catch up.

With the Fed cutting its growth objective for the remainder of the year has higher yielding growth sensitive currencies trading under pressure. Expect the Canadian dollar to be subjected to the pull of either risk or risk aversion trading strategies. CAD is vulnerable now with US data likely to continue to print weak into mid-July (0.9867).

The AUD dropped through key technical support levels to an eleven-week low after the dollar rallied in the O/N session. The currency remains under pressure on concerns that a Greek austerity plan will not resolve Europe’s sovereign-debt crisis and will continue to dampen appetite for higher yields. Supporting the selling pressure was the RBA’s board minutes for June reaffirming a noncommittal Central Bank.

Governor Stevens and company cited growing concerns in Europe, downside surprises in US data and deterioration in non-mining related industries as giving the board enough reason to remain on hold until further notice. The minutes were also less explicit than RBA Governor Stevens’ speech last week on emphasizing upcoming data like the CPI report. The market is pricing a no hike in August unless inflation and employment surprised on the upside and the situation in Greece clears up sufficiently for a powerful rebound in risk appetite. Global data needs to improve before we can embrace any rate hike policy thinking. Investors remain better sellers on rallies (1.0449).

Crude is lower in the O/N session ($90.24 -0.92c). Oil prices found firmer footing on Friday, a day after tumbling to its lowest price in four-months after the IEA said its members would release crude from their SPR’s. They intend to inject +60m barrels of government-held stocks onto the global market, immediately increasing world supply by +2.5%.

This comes after OPEC failed to raise production quotas earlier this month. ‘Tightness in the oil market threatens to undermine the fragile global economic recovery’. After the announcement, WTI lagged Brent decline as traders speculated that the reserve requirements would have a more direct affect on Brent crude. Year-to-date, unrest in the crude-producing Middle-East and North Africa has sparked hefty price gains.

According to analysts, this move is significant, as it ‘represents a reach by member countries for the remedy of last resort to high oil prices’. The spike in energy prices is being cited ‘as the reason for the economic slowdown and this is a reaction to that’. Analyst’s note, that from its peak this year, crude is off-20%.The technicals see strong support first appearing at around $87.

Gold fell on Friday, completing the biggest two-day drop in two-months, after a pledge by EU officials to stabilize the region’s economy slashed demand for the commodity as a haven. Margin calls in other asset classes required investors to raise fresh capital by selling the yellow metal.

This has been a classic risk aversion trading pattern, with the dollar and gold inversely correlated. The dollar has gained on heightened concerns about slowing global growth spurred a flight to safety, following a bleak outlook by Bernanke. Gold prices are-5% below its early May record high as the +3.2% gain in the dollar is hampering any rallies.

The commodities dependency on the buck and the outlook for US rates is likely to remain intact. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on these deep pullbacks ($1,497 -$3.10c). Technical analyst’s see $1,485 as the first level of real support.

The Nikkei closed at 9,578 down-101. The DAX index in Europe was at 7,114 down-7; the FTSE (UK) currently is 5,697 down-1. The early call for the open of key US indices is higher. The US 10-year eased 6bp on Friday (2.86%) and are little changed in the O/N session.

A flight to quality has the US curve encroaching on this year’s low yield. Fueling the demand for FI was US jobless claims climbing last week and Trichet stating that the sovereign-debt crisis threatens to infect banks. Year-to-date the ten year benchmark has fallen more than 34 basis points on concern that the US economic recovery is weakening and the Euro region is struggling to contain its sovereign-debt crisis.

The market is concerned about holes in parts of the Greek austerity package that could put their own situation in further jeopardy. Rumors that the Greek Prime minister has doubts on his party’s capability of pushing though the austerity measures this week is producing a trading environment with no sellers of product.

This is the sixth consecutive week that 10’s have rallied, breaking through some key resistance levels that open up the possibility of +2.75% to trade. The market has seen a steady grind to lower yields without a significant pullback, investors seem to be waiting for the ‘storm to pass until there is some clarity from Greece’.

Dealers will now try to set themselves up to take down US supply this week (2’s, 5’s and 7’s). In this environment traders should have no problems placing product, but, it will be expensive.

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June 24, 2011

Dallas Fed Bank President Sees Improvement in Second Half

Filed under: OANDA News — Tags: a-faster-rate, a-slow-recovery, a-third-round, acknowledged, dallas, employment, federal-reserve, improve-on-the, jobs, previous-month-, quantitative — admin @ 1:55 pm

In an interview published Friday morning, Federal Reserve Bank of Dallas President Richard Fisher said he believes the economy will grow at a faster rate in the second half of the year. Fisher acknowledged that economic activity will remain soft when compared to typical growth levels, but he expected to see the U.S. economy improve on the previous six months.

Unemployment

The major hurdle according to Fisher remains unemployment and Fisher sees no solution that will speed up the process. “It’s a slow recovery”, said Fisher when describing the job creation rate, “and it’s going to continue to be slow.” It may also occasionally shift into reverse.

Look at May’s poor showing for example. The Non-Farm Payroll for May indicated a miserly 54,000 jobs were created for the month. This weak showing fell considerably short of the 161,000 new jobs predicted prior to the report and underscores just how volatile the employment market remains. Expert predictions are usually pretty close to the actual result but this call was off the mark by nearly three hundred percent!

The outcome was so poor in fact, the unemployment rate actually moved higher in May as the number of new positions created fell woefully short of the jobs that were lost. As a result, the official unemployment edged higher to 9.1 percent from 9.0 percent the previous month.

Interest Rates and Stimulus Spending

On the question of raising interest rates Fisher held firm to the Fed’s message of keeping rates at the current record low for an “extended period”. Fisher also provided little insight into plans for or against further quantitative easing.

“No final decision has been made,” noted Fisher when asked if the Fed would engage on a third round of asset purchases. Earlier this week the FOMC confirmed that it would continue to reinvest earnings on maturating securities already held by the Fed but would not – for now at least – be adding to the inventory through a direct purchase program.

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Forex Week in Review June 19-24

Filed under: OANDA News — Tags: asia, cad, chf, china, country, eur, europe, financial, greece, japan, june, sales, summer — admin @ 11:12 am

This week has been a massive blow to risk trading, with investors being side swiped from all continents. Europe with is Greek austerity concerns, Australasia being hit by a think tank opining on China that authorities are concerned over growth, their ‘own‘ not just global and the Fed giving no signal of any policy changes soon. They did not even hint towards QE3. The market is concerned about holes in parts of the Greek austerity package that could put their own situation in further jeopardy. Next week, Greece’s governing PASOK party will try and ram through its austerity package through parliament while the country goes on a 48-hour strike. The world will be watching.

Below are some of the highlights of the busy week:

EUROPE

Italian industrial orders disappointed for April with a -6.4%, m/m, fall and larger than the -4.0% expected. The softer orders component suggests we could see some further weakening next month.
Moody’s warned that it was placing Italy’s long term rating on review for a potential downgrade pointing to structural challenges to growth and high debt levels.
German ZEW expectations fell sharply to -9, worse than the -3 expected, and dropped into negative territory for the first time in eight-months. Respondents expect the economic situation to deteriorate further.
IMF is diverting investors attention towards Spain, insisting that they must step up efforts to overhaul their Economy, ‘the repair of the economy is incomplete and risks are considerable’.
BoE MPC member Fisher expressed concern about deflation risk than temporary above target inflation and said that more QE remains a possibility.
Swiss M3 growth moderated to +5.6%, y/y, last month from +7.0%, its lowest level in 12-months. The mortgage growth rate also moderated to +4.5%, y/y, in April from +4.6%, supporting the SNB’s dovish tone.
Greek government survived a confidence vote with 155 votes. This does not guarantee complete party discipline in the vote next week on new austerity measures,
UK, the minutes of the June MPC meeting showed a 7-2 vote for rates on hold and a still very dovish BoE. Weale and Dale voted for a rate hike while Posen continued to vote for further QE. The new MPC member Ben Broadbent voted with the majority to keep rates on hold (+0.5%)
Sweden, the manufacturing confidence was unchanged at 11 this month. The survey showed a slowdown in foreign orders, surprisingly, expectations remained fairly optimistic.
Euro-zone manufacturing PMI declined to 52 last month from 54.6, its lowest level in 18-months. The new orders component fell below the 50 threshold level for the first time since July 2009, to 49.6 from 53.3. Exports orders were weak, down to 51.1 from 54.
Greece’s opposition leader vowed to vote against the government’s new fiscal austerity measures next week.
German Ifo headline beat consensus, rising to 114.5 from 114.2 vs. an expected decline to 113.4. Disappointingly, the expectations component fell to 106.3, the lowest level since the summer slowdown last year, although still consistent with very good growth.
IMF/EU teams agreed on Greece’s fiscal plan. The plan is to be voted on next week, followed by negotiations on the 2012 support plan the following weekend.
One MP of Greece’s governing PASOK party has indicated he has not decided yet whether to support the fiscal plan. The EU/ IMF continue to signal they want to see broad, cross-party support for the legislation.
IEA said its members would release crude from its strategic reserves. They intend to inject +60m barrels of government-held stocks in the global market, immediately increasing world supply by +2.5%. The spike in energy prices is being cited ‘as the reason for the economic slowdown and this is a reaction to that’.

Americas

US sales of previously occupied homes fell in May to its lowest level in six-months. Sales decreased -3.8% to a seasonally adjusted annual rate of +4.81m, the weakest showing since November
The Fed continues to look through weakness and is staying the course by keeping rates on hold. The FOMC statement was largely as expected yesterday, giving no signal of any policy changes soon. Policy makers acknowledges that the US economy is in a soft spot, but advised markets to look through the effects of supply shocks emanating from Japan and the demand destruction caused by previously higher commodity prices.
Governor Carney presented the BoC Financial system review this week and concluded that they see overall risks to financial stability has elevated in the last six-months.
US weekly claims came in somewhat higher than expected (+429k vs. +415k). Another weak print points to a soft NFP release in July, and another disappointing Chicago Fed index reading (-0.37 vs. -0.05) is signaling ongoing deterioration in US growth.
US new home sales fell last month, down -2.1% to +319k units, as weakness in prices and a sluggish economy continues to keep consumers on the sidelines.
The details of the durable goods report for May were stronger than expected, +1.9% vs. +1.6%, with capital goods providing the pleasant surprise.
US GDP was revised up only minimally to +1.9% vs. expectations of +2.2%. The bulk of the shortfall was in the estimate of investment in software.

ASIA

NZD’s Performance of Services Index rose to 52.8 in May from 52.6, the highest print in nine-months. Growth in manufacturing slowed to +1.9% for 1st Q from an upwardly revised +3.7% in 4th Q, obviously earthquake affected.
RBA board minutes for June reaffirm a non-committal. Policy makers cited growing concerns in Europe, downside surprises in US data and deterioration in non-mining related industries as giving them enough reason to remain on hold until further notice.
Market now thinks the RBA is unlikely to hike in August unless inflation and employment surprise on the upside, coupled with a powerful rebound in risk appetite.
NZD current account deficit narrowed by NZD-$1.1b to-$1.8b for the 2nd Q, driven by the fall in foreign investment income due to losses from foreign-owned insurance companies after the earthquake.
HSBC flash China PMI fell from 51.1 to 50.1 in June, with new orders and employment edging just below 50, suggesting that the official PMI will fall at least in line with seasonal patterns, if not more.
Singapore CPI inflation was unchanged at +4.5%, y/y, in May, higher than the consensus, who was looking for a moderation to +4.1%.
Taiwan industrial output rose to +7.8%, y/y in May from a upwardly revised +7.2%, well above the consensus forecast of +5.9%.
Chinese Premier Wen Jiabao wrote an open letter about China’s role in the global economy in FT. He asserts that China’s measures to control inflation have succeeded and that inflation will fall in the second half of this year. This puts pressure on the PBoC to succeed.
Korean consumer confidence fell -2 points to 102 in June, implying that domestic demand remains fairly ‘soft’. Market expects the BoK to be gradual in tightening.
Malaysia CPI inflation rose to +3.3%, y/y in May, should be sufficient for Bank Negara Malaysia to hike rates +25bp at its July 7th meeting.

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Euro Tumbles on Greek Austerity Concerns

Filed under: OANDA News — Tags: 1-4306-losing, a-session-high, almost-half, budget, budget-deficit, euro-fell, measures, pass-into — admin @ 7:40 am

The euro fell sharply Friday morning as investors questioned Greece’s ability to pass into law the measures required to reduce the budget deficit in exchange for emergency funding. There is a concern that Greece’s Prime Minister will be unable to convince enough legislators to support the bill.

The euro retreated from a session high of $1.4306 losing almost half a percent to fall to a session low of $1.4190.

Source: Reuters

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Market Rollercoaster!

Filed under: Forex News — Tags: commodities, correlations, forex, fxedu, interest, live, marketplace, money, reduce-the-size, stock, trades — admin @ 7:30 am

Wow, what a wild ride yesterday was in the global market place! We had a bit of everything: gloom and doom, government manipulation, weakening economic data, crisis resolution, fear, anger, and hope. Where else can you get this type of excitement?Here’s a quick recap of what happened over the past few days: Dollar was strengthening after the FOMC said that QE2 would end, taking down global stocks and commodities. The EIA then said that the US would release 30 million barrels of oil from our strategic reserve, driving oil prices lower and sending correlated markets such as stocks lower. Later in the day it was announced that Greece had accepted a 5-year austerity plan and will be receiving money form the EU and IMF as part of a new bailout (though the actual vote is next week), so the markets rebounded only to finish slightly lower.

Frankly, I am outraged by the oil thing but not surprised. While yes I am in favor of lower oil (gasoline) prices, I am not in favor of achieving them by weakening our emergency reserves. What happens if a situation arises where we need that oil? It’s like raiding your emergency savings account to go on vacation. Politics at its worse.

Meanwhile in the Euro zone, it looks like the Greece austerity deal will go through next week, despite the protestations of nearly 75% of Greek citizens polled.

Here in the US, durable goods orders came in better than expected, posting a gain of 1.9% vs. an expectation of 1.5%, which is a welcome better-than-expected data point.

So the markets are starting the day in mild risk taking mode with stocks set to open higher, though oil prices are lower.

In the forex market:

Aussie (AUD): The Aussie is higher across the board after Asian stocks were higher overnight on risk taking after yesterday’s comeback in US stocks.

Kiwi (NZD): The Kiwi is strengthening as risk trades are being re-established after the Greek debt crisis announcement.

Loonie (CAD): The Loonie is mixed as risk appetite and lower oil prices fight to see which aspect will dominate trading today.

Euro (EUR): The Euro is off of its previous highs and has pulled back some as they are not out of the woods yet. While yesterday’s news of the agreement is extremely positive, the vote hasn’t actually taken place yet. German IFO expectations figures came in better than expected. (Click chart to enlarge)

Pound (GBP): The Pound is mostly lower as rate expectations for the UK have been lowered and there is considerable concern about the exposure that UK banks have to the Euro zone.

Swissie (CHF): The franc is stronger across the board today despite the mild risk taking in the markets to start the day. The safe haven aspects of the Swissie may still be desirable until after the Greek austerity plan is officially voted on and accepted. (Click chart to enlarge)

Dollar (USD): The Dollar is weakening on slight risk appetite after US durable goods orders came in better than expected. It will be interesting to see if the Dollar will continue to weaken without the aid of the Fed, or if it can co-exist in higher stock market environment if the correlations break down.

Yen (JPY): The Yen is showing some surprising strength despite the higher Asian stock market returns overnight. While there is still risk in the marketplace that appears to be coming from the EU and UK specifically, cautious buying persists.

Wild market action indeed! Whether you agree with what is going on in the marketplace or not is of no consequence. What is important is that you have a plan to protect yourself from unexpected events that can cause major volatility.

If summer volume decreases, then volatility could definitely pick up. This is exciting for forex traders because volatility equals potential. There are still many different global events that will carry trading well into the next few months, and there is still great risk and opportunity.

However, this doesn’t change this mess that is known as the US economy. It appears as though election cycle politics are in full-effect so it is doubtful that anything meaningful will get done. The debate over the US debt ceiling may come into play as ideology gets left behind in favor of pragmatism, but don’t expect wholesale changes overnight.

The business climate is still an abomination, with the new healthcare bill, regulations, potential for tax increases, and a reluctance to reduce the size of government and debt all factoring in to keep businesses from hiring. The fact that there is actually debate over the fact that the current path we are on is disastrous is both scary and sad.

So invest your money in countries on the right path, and stay away form those destined for doom. The best way I know of to do this is through the forex market!

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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Pick your Poison: EURO or Dollar

Filed under: OANDA News — Tags: cad, chicago, china, commodity, dollar, greece, greek, morning, party, situation, time, yellow, yielding — admin @ 4:33 am

It seems to be a stab in the dark. There are just too many outliers involved for anyone to bet the bank with confidence. The market expects little relief from US durable good orders this morning.

Investors have been shadow boxing with Trichet and his ‘flashing’ red comment (no green light for ECB to hike in July). They are sparring with conspiracy theorists, who believe that the US’s excuse to use the SPR was for the election and not the consumer, and Bernanke ‘anticipating’ inflation, perhaps below the mandate. They are being hit by a think tank opining on China that authorities are concerned over growth, their ‘own‘ not just global. They are being sucker punched by the EU/IMF inspectors sealing the deal on a five-year austerity plan with Greece-who have yet to vote on it and the US debt ceiling talks collapsing.This is a nervous and fickle market, illustrating the extraordinary times that currently exist and not for the faint of heart.

Mixed risk signals are giving the FX market something to think about this morning with global bourses and futures surging ahead, but gold and oil are little changed on the day. A better than expected German ifo survey (114.5) had some dealers possibly thinking of stop loss hunting above 1.4300. They have put that on hold for the time being. We can be sure that the market will try to pare its exposure heading into the weekend, what ever it is.

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

US data releases yesterday certainly did not help the risk-trade. This is the trade that has been pummeled by Greek and global growth fears. Another weak US claim’s print points to a soft NFP release in July, and another disappointing Chicago Fed index reading (-0.37 vs. -0.05) is signaling ongoing deterioration in US growth. A reading of less than -0.7% would indicate a recession!

Claims came in somewhat higher than expected (+429k vs. +415k). The Fed argued earlier this week that the US jobs situation may improve later in the year. However, the short term focus is likely to be concerned about another weak payrolls report and the market seems to bracing itself for a possible July decline. Digging deeper, continuing claims were revised higher the prior week (+420k vs. +414) and remained elevated last week, suggesting that more individuals are obtaining jobless benefits for an extended period.

Not helping the situation was both the extended (+653k vs. +591k) and emergency (+3.293 vs. +3.299m) reversed course and increased after improving for five consecutive weeks. Analyst’s also noted that the spike in extended benefits was the largest in four-months.

Not alleviating anyone’s fears was US new home sales falling last month, down -2.1% to +319k units, as weakness in prices and a sluggish economy continues to keep consumers on the sidelines. Home buying has been muted, supported by high unemployment and individuals opting for previously owned homes because the prices tend to be cheaper. The median price for an existing home was +$166k versus a new home median price of +$222k. Shadow inventories leaking onto the market continues to dissuade new purchases. It’s not all bad, new home inventories continue to fall, piggyback 6.2 months, and at a level that analysts deem ‘healthy’. This time last year supply was 9.2 months.

The dollars is lower against the EUR +0.18%, GBP +0.12%, CHF +0.32% and JPY +0.34%. The commodity currencies are stronger this morning, CAD +0.07% and AUD +0.61%.

For a second consecutive day yesterday, higher yielding growth assets were asking questions as investors risk-appetite temporarily waned with commodities softening on speculation that global economic growth may falter. Yesterday was the first time in a while that the CAD was strongly correlated with negative commodity movements, previously, the loonie seemed well supported by ‘real’ money buying. The IEA announcement has allowed the real money interest interest to temporarily back off.

The AUD has climbed from a one-month low O/N on optimism that Greece will pass the budget cuts next week needed to receive additional aid, boosting demand for higher-yielding assets. Yesterday, the excuse for selling was that Greece would struggle to pass austerity measures to avoid a default. Supporting the selling pressure was the RBA’s board minutes for June reaffirming a noncommittal Central Bank.

Crude is higher in the O/N session ($91.68 +66c). Oil prices tumbled to their lowest price in four-months after the IEA said its members would release crude from strategic reserves yesterday. They intend to inject +60m barrels of government-held stocks in the global market, immediately increasing world supply by +2.5%. This is the third time they have ever taken this action.

This comes after OPEC failed to raise production at this months meeting in Vienna. According to the agency, ‘greater tightness in the oil market threatens to undermine the fragile global economic recovery’. After the announcement WTI lagged Brent decline as traders speculated that the reserve requirements would have a more direct affect on Brent and narrowed the spread to around $17 from this weeks high north of $20.

According to analysts this move is significant, as it ‘represents a reach by member countries for the remedy of last resort to high oil prices’. The spike in energy prices is being cited ‘as the reason for the economic slowdown and this is a reaction to that’. Analyst’s note, that from its peak this year, crude is off-20%.The technicals see strong support first appearing at around $87.

Similar to most commodities yesterday, gold prices fell out of bed, registering its largest one day loss in a month after a surprise increase in US jobless claims hit investor risk appetite and boosted the dollar. Again margin calls in other asset classes required investors to raise fresh capital by selling the yellow metal. Previously the commodity received the sell signal after the Fed offered no hope, just yet, for a more prolonged period of monetary support. Once the commodity broke key technical levels, further pressure appeared, pushing the metal to record a-2% loss on the day.

This has been a classic risk aversion trading pattern, with the dollar and gold inversely correlated. The dollar has gained on heightened concerns about slowing global growth spurred a flight to safety, following a bleak outlook by Bernanke. Gold prices are -3.5% below its early May record high as the +2% gain in the dollar is hampering any rallies.

The commodities dependency on the buck and the outlook for US rates looks likely to remain intact. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on these deep pullbacks ($1,523 +$2.70c).

The Nikkei closed at 9,678 up+82. The DAX index in Europe was at 7,267 up+118; the FTSE (UK) currently is 5,767 up+93. The early call for the open of key US indices is higher. The US 10-year eased 6bp yesterday (2.92%) and backed up 2bp in the O/N session (2.94%).

A flight to quality has the US curve encroaching on this year’s low yield. Fueling the demand for FI was US jobless claims climbing last week and Trichet stating that the sovereign-debt crisis threatens to infect banks. Year-to-date the ten year benchmark has fallen more than 30 basis points on concern that the US economic recovery is weakening and the Euro region is struggling to contain its sovereign-debt crisis.

The market is concerned about holes in parts of the Greek austerity package that could put their own situation in further jeopardy. Rumors that the Greek Prime minister has doubts on his party’s capability of pushing though the austerity measures next week is producing a trading environment with no sellers of product in sight.

The FI market will now be trying to set itself up to take down supply next week (2’s, 5’s and 7’s). In this environment dealers should have no problems placing product. Record monetary stimulus is still needed to support US economic recovery. With the Fed expected to remain on hold for a considerable time is creating a new paradigm of longer term lower interest rates.

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June 23, 2011

Fed Falters!

Filed under: Forex News — Tags: a-much-bigger, a-real-concern, equation, euro, forex, loonie, lower-on-risk, markets, price, removal — admin @ 7:14 am

The big news of the last two days was yesterday’s FOMC where Fed Chairman Bernanke confirmed the end of QE2. I also felt bad for him as he looked like a child who just was informed that there is no Santa Claus as he lowered the Fed’s growth and GDP forecasts, all but admitting that these extraordinary measures haven’t worked.

In a way, I feel bad for him as he is getting NO help on the fiscal side of the equation, and trying to keep the economy afloat with monetary policy alone won’t work. Cue the debate over the debt ceiling, which is due to expire in early August which could put pressure on politicians to finally take action, as doubtful as it may seem. Bernanke will likely be quiet for the rest of the summer, but if things start to deteriorate rapidly, then we could hear rumblings of further easing.

So yesterday markets reversed and risk was taken off of the table, with Dollar strength pushing stocks and commodities lower which has continued into this morning.

In the Euro zone PMI figures came in worse than expected, though this is a minor inconvenience when considering that the vote on austerity in Greece needs to take place. There are certain conditions Greece must adhere to, including the sale of state-owned assets to satisfy their creditors, namely the ECB and the IMF. As I have mentioned before, this is not a done deal.

In addition, ECB honcho Trichet’s comments about the debt crisis are not helping matters.

Stocks and commodities are lower to start the day and later this morning we will get initial jobless claims which are expected to show another 415K newly unemployed, and new home sales which are expected to have declined by 4%. It’s not a pretty picture out there folks and until the fiscal side of the equation begins to repair itself through debt reduction and not expansion, we will continue to sink toward the abyss.

In the forex market:

Aussie (AUD): The Aussie is mostly lower on risk aversion but it hasn’t been as badly sold-off as the Euro as the benefit of the interest rate differential makes it somewhat prohibitive to short as it is still attractive.

Kiwi (NZD): The Kiwi is also lower on risk aversion thought the prospect of being the next major economy to raise interest rates leaves it somewhat desirable to those still seeking yield.

Loonie (CAD): Curiously, the Loonie is mixed to slightly higher despite oil prices that have sold off more than 3 handles. With US GDP figures revised lower, Canada’s economy is bound to be affected so I’m a little surprised that the Loonie is not much lower. (Click chart to enlarge)

Euro (EUR): The anti-Dollar properties of the Euro are dragging it lower in addition to the continued drama of the debt crisis and the possibility of Greece not accepting the austerity measure imposed upon it despite the confidence vote. This could bring about major contagion which as Trichet noted yesterday, could be a major risk event. (Click chart to enlarge)

Pound (GBP): The Pound is selling off as well on Dollar strength though mortgage loan applications have gone up signaling that inflation is a real concern in the UK.

Swissie (CHF): The Swissie is mostly higher on risk themes and earlier trade balance figures came in much better than expected. Even though exports declined, imports declined by an even greater margin allowing a much bigger surplus. This could however also show that the Swiss economy is shrinking rapidly, which would be negative in the long run.

Dollar (USD): The Dollar is stronger across the board as the artificial condition known as QE2 is ending. Initial jobless claims came in worse than expected, though within general expectations. Risk in the markets is causing Dollar strength, not the sentiment that US economy is doing well.

Yen (JPY): The Yen is mostly stronger though not as much as we might think under risk aversion scenarios, as the Dollar is favored.

It’s starting to look ugly out there again, and the removal of Fed easing may bring about a major slowdown. Oil prices are moving much lower, in a sign that indeed Dollar strength affects the price of oil which in turn influences inflation.

Market sell-offs are accelerating, and it appears as though the removal of the Fed crutch before the patient can walk has caused a bigger problem. While under normal circumstances the summer might be a slow time for market activity, I think this time it will be different.

There are many potentially hazardous situations that need to be navigated and I am afraid that politicians are asleep at the wheel. Temporary measures produce temporary results. This is akin to bandaging a wound, but not stitching it up first. Of course there is going to be continued bleeding when you take it off, as the problem hasn’t been fixed!

So beware of the risk in the marketplace, as this could carry on for some time. Protect yourself and your assets through the forex market!

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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