Forex Blog

February 21, 2012

Greece Narrowly Avoids Default

Filed under: OANDA News, Uncategorized — Tags: , , , , , , , , , , , , , — admin @ 2:03 pm

By Daniel James Hayden IV

Greece and finance ministers from the other 16 euro zone countries agreed to terms for Greece to receive a 130 billion euro ($172 billion) aid package that they hope will help Greece to avoid a default on its burdensome debt.

Although the latest deal between Greece and the finance ministers is being hailed by some as a success, the deal still faces many obstacles before and even after it is implemented.

The aid package must first be approved by the parliaments of several European countries before it becomes official. There’s no guarantee that the aid package will make it through the parliaments of countries like Germany, Finland and the Netherlands that have become increasingly frustrated with the Greeks.

Opposition to Greek aid has been growing in many of these countries, as their citizens feel that they are being forced to pay for problems that Greece brought upon itself. It hasn’t helped matters that the more financial aid Greece receives, the more concessions it asks for from its creditors.

Although many of the participants in the negotiations between Greece and the euro zone finance ministers said the deal was the successful outcome of cooperation between the two sides, the deal showed that Greece will continue to seek more concessions from creditors, while at the same time asking them for more money.

Private sector bond holders will now have to take losses of 53.5 percent of their bonds’ nominal value. That’s worse than the previous amount of 50 percent that they had agreed to in earlier talks.

It’s not yet clear how many bondholders will actually accept the deal but Greek politicians are talking about passing a law that would force bondholders to take the loss even if they don’t agree to the deal. Although this could help Greece avoid a large scale default, credit rating agencies have warned before that forcing losses upon bondholders could be seen as a partial default.

The private sector wasn’t alone in having to sweeten the deal for Greece. Greece’s euro zone creditor countries are also being asked to grant Greece further concessions, such as lowering the interest rates on the previous bailout package. The euro zone’s central banks and the European Central Bank (ECB) are also being asked to give up profits on Greek debt that they were entitled too.

Although Greece was able to get a lot out of the latest deal with its creditors, the creditors also put more restrictions on aid to Greece. The finance ministers have grown wary of Greece repeatedly failing to keep promises that it made in previous bailout negotiations.

Before they are willing to hand over any more aid to Greece, the finance ministers insisted that Greece will have to agree to unprecedented external over site of its finances and would have to implement the previously agreed to structural reforms and spending cuts. They also said that Greece must pass a controversial law that gives legal priority to paying its creditors before paying for government services.

This would mean that if Greece got into deeper financial trouble, it would be forced to pay European banks before paying the salaries of government workers like teachers and police.

Although the finance ministers were trying to prevent Greece from breaking any future promises, they might have doomed Greece to default by demanding to be given priority over the Greek people. Earlier rounds of austerity measures have been widely unpopular in Greece, leading to several nationwide strikes and violent protests.

The Greek people haven’t seen any improvement to their daily lives because of the austerity measures, which have hurt Greece’s economy more than helped it. The combination of spending cuts and tax increases have pushed Greece deeper into a recession that has lasted for years and shows no sign of ending soon.

The government parties that have backed the the latest bailout package are losing the support of the Greek people, while the parties that oppose the package are seeing their popularity rise. It’s quite possible that the next Greek government that is elected in the coming elections will alter the terms of the deal or even roll back many of the agreed upon austerity measures.

February 9, 2012

Euro Gains on Greek Deal

Filed under: OANDA News, Uncategorized — Tags: , , , , , , , , , , , — admin @ 12:57 pm

By Sam Mattera
Benzinga Guest Writer
Finally! The Greek situation has been put to bed! Or has it?
On Thursday morning, Greek leaders announced that they had finally reached a deal with their private creditors to avoid an outright default. The EUR/USD currency pair instantly rallied on the news, spiking over 0.30% to break strongly above the $1.32 price level.
US equity markets moved into positive territory, trading at modest gains early in the session on Thursday. Equity futures had been…



Read the full article on forexblog.oanda.com.

February 1, 2012

Central Bankers Weaken Their Currencies, Boost Gold

Filed under: OANDA News, Uncategorized — Tags: , , , , , , , , , , , , , — admin @ 12:34 pm

By Sam Mattera
Benzinga Guest Writer

Since the turn of the year, nearly every asset class has been on a tremendous bull run.

Precious metals in particular have benefited, as gold and silver have rallied back from their recent lows. Gone are calls for a “gold bubble”. Gold has risen in price throughout January and now sits near $1745 per ounce. Silver has gained as well, and is currently approaching $34 per ounce.

The precious metals may have been getting a boost from the actions of central bankers, who continue to make the yellow metal a seemingly great alternative currency.

Last week, in the Federal Reserve’s statement, the Federal Open Market Committee promised to extend low rates through 2014, and possibly into 2015. In August the Fed had promised to keep rates low until at least mid-2013. Now, the FOMC has extended that promise for at least an additional year.

In August, that rate pledge drew three dissenting votes from regional Fed presidents. However, as the FOMC’s membership shifts from year-to-year, those members no longer have a say in the FOMC’s decision.

Philadelphia Fed’s Charles Plosser —who dissented in August but now no longer has a vote—spoke on Wednesday and derided the move. He attacked it from a bullish perspective, continuing to state his long-standing opposition: that the economy is improving and low rates will not be appropriate for much longer. In that case, to prevent runaway inflation, the Fed would have to hike rates prior to their promised date.

While keeping rates low may contribute to economic growth in the short term, the move has begun to draw fire from some commentators and money managers.

In his monthly letter, Bill Gross—the world’s largest bond fund manager—attacked the move, stating that it could actually have a negative effect.

Ultimately, if the Fed keeps interest rates low, it could spur inflation as investors pile out of a weakening dollar in favor of precious metals. Under this scenario, investors may anticipate the US dollar index to fall while the price of gold may rally.

Still, as other central bankers continue to ease, the dollar index may not give much ground. The US dollar index is a measure of the dollar’s value against other fiat currencies.

Bank of England officials have mentioned undertaking further quantitative easing, while the European Central Bank continues to step into the European bond market from time to time. The Bank of Japan may attempt to weaken its yen once again, in the face of slumping Japanese manufacturing.

The US dollar index dropped 0.5% during early trading on Wednesday, as the EUR/USD pair moved up over 0.64%.

Central Bankers Weaken Their Currencies, Boost Gold

Filed under: OANDA News, Uncategorized — Tags: , , , , , , , , , , — admin @ 12:34 pm

By Sam Mattera
Benzinga Guest Writer

Since the turn of the year, nearly every asset class has been on a tremendous bull run.

Precious metals in particular have benefited, as gold and silver have rallied back from their recent lows. Gone are calls for a “gold bubble”. Gold has risen in price throughout January and now sits near $1745 per ounce. Silver has gained as well, and is currently approaching $34 per ounce.

The precious metals may have been getting a boost from the actions of central bankers, who continue to make the yellow metal a seemingly great alternative currency.

Last week, in the Federal Reserve’s statement, the Federal Open Market Committee promised to extend low rates through 2014, and possibly into 2015. In August the Fed had promised to keep rates low until at least mid-2013. Now, the FOMC has extended that promise for at least an additional year.

In August, that rate pledge drew three dissenting votes from regional Fed presidents. However, as the FOMC’s membership shifts from year-to-year, those members no longer have a say in the FOMC’s decision.

Philadelphia Fed’s Charles Plosser —who dissented in August but now no longer has a vote—spoke on Wednesday and derided the move. He attacked it from a bullish perspective, continuing to state his long-standing opposition: that the economy is improving and low rates will not be appropriate for much longer. In that case, to prevent runaway inflation, the Fed would have to hike rates prior to their promised date.

While keeping rates low may contribute to economic growth in the short term, the move has begun to draw fire from some commentators and money managers.

In his monthly letter, Bill Gross—the world’s largest bond fund manager—attacked the move, stating that it could actually have a negative effect.

Ultimately, if the Fed keeps interest rates low, it could spur inflation as investors pile out of a weakening dollar in favor of precious metals. Under this scenario, investors may anticipate the US dollar index to fall while the price of gold may rally.

Still, as other central bankers continue to ease, the dollar index may not give much ground. The US dollar index is a measure of the dollar’s value against other fiat currencies.

Bank of England officials have mentioned undertaking further quantitative easing, while the European Central Bank continues to step into the European bond market from time to time. The Bank of Japan may attempt to weaken its yen once again, in the face of slumping Japanese manufacturing.

The US dollar index dropped 0.5% during early trading on Wednesday, as the EUR/USD pair moved up over 0.64%.

January 30, 2012

And Now, Portugal

Filed under: OANDA News, Uncategorized — Tags: , , , , , , , , , — admin @ 11:18 am

By Sam Mattera
Benzinga Guest Writer

On Monday, the yield on the 5-year Portuguese note spiked. The yield hit a record for the post-euro era of 22.69%.

The trade may have been fueled by the turn of events in Greece, as the general perception of the market may be to accept Greece’s default as a given.

Last year, markets appeared frightened by the prospect of a Greek default, but various commentators have begun to talk down the event. Perhaps most interesting was JP Morgan Chase’s CEO Jamie Dimon characterizing the net effect of a Greek default on US financials as being practically nothing.

Greece’s overall debt is a relatively paltry sum when seen from a global perspective. Still, the turn of events in Portugal may have given credence to what market bears have been warning of: a contagion effect.

There had been plans for a deal to allow Greece to take a “voluntary” haircut of 50%.

Yet, some creditors resisted the deal (perhaps hoping to use credit default swaps to profit—these instruments wouldn’t payout in the event of the default being voluntary) and there was talk that Greece would need to increase the haircut further to better get the growth rate of its debt under control.

The EUR/USD currency pair traded lower early on Monday, as did US equity markets, with the Dow Jones opening down nearly 100 points.

Bloomberg reported that some traders had seen the European Central Bank stepping in to purchase Portuguese paper. This would follow previous trends, where the ECB was said to have purchased Italian and Spanish debt when the yields on these instruments rose rapidly.

The ECB has denied in the past that it will undertake the role of actively “monetizing” the debt of troubled Eurozone nations.

With further European meetings set to take place in coming weeks, the EUR/USD could continue to be an active currency pair.

If a Greek bankruptcy does come to pass, it could send the euro trading far lower against the US dollar. As Portugal’s yields rally, market participants may begin to believe in the danger of a contagion effect.

Of course, the ECB could alleviate the market if it undertakes aggressive actions of its own. Additional bond purchases or another LTRO may have a powerful, confidence-boosting effect.

January 23, 2012

EUR/USD Squeezed Above $1.30

Filed under: OANDA News, Uncategorized — Tags: , , , , , , , , , , — admin @ 11:05 am

By Sam Mattera
Benzinga Guest Writer

On Monday morning, the EUR/USD pair continued to rally, breaking above the $1.30 level for the first time in weeks.

The euro moved higher, possibly on the speculation that the Greek crisis was coming closer to a resolution. Talks have been ongoing between Greece and its creditors to come a deal that would definitively restructure Greece’s debt.

Months ago, a plan had been floated that would allow Greece to default “voluntarily.” The plan would see Greece’s creditors take a deal of 50 cents on the euro—cutting Greece’s debts in half.

Yet, even that appeared not to be enough, as new speculation arose that the deal would be a cut of 70%. With Greece’s economy suffering under a combination of strikes and the broader global recession, the ability to shoulder a tremendous amount of debt seems unlikely.

Still, while some of Greece’s creditors have a vested interest in seeing the country succeed, others – such as private hedge funds – do not have direct ties. In fact, a voluntary debt restructuring would be opposed to the interests of many of these creditors, who would find that any credit default swap contracts they may have purchased to hedge their bets would be worthless.

CDS contracts are only triggered in the event of an official default, and accepting the given deal would not trigger the payout. This would result in a loss for these private creditors, rather than getting their money from the payout of the CDS.

The US dollar index continued to trade lower, following a trend that has been ongoing for roughly a week. The dollar index broke below $80, moving closer to $79.70.

January 20, 2012

Inflation Moderating Around The World

Filed under: OANDA News, Uncategorized — Tags: , , , , , , , , , , , , , — admin @ 12:02 pm

By Sam Mattera
Benzinga Guest Writer

On Friday, the Canadian consumer price index printed at less than expected, coming in at negative 0.6% against an anticipated drop of 0.1%. The prior month’s CPI reading was an increase of 0.1%.

Canada’s drop in inflation echoes trends seen around the globe.

Although headline inflation in the US continues to increase at a modest pace, core inflation has held tight for some time and has decreased from relative highs seen in the summer.

Earlier in the week, CPI figures released in the Eurozone indicated that inflation had receded, although it remained sharply above 2%. Likewise, inflation figures in China had recently shown a declining trend.

This leads to an increasing amount of speculation that more easing could be coming. This includes in the US, where it seems more and more likely that the Federal Reserve will implement a third round of quantitative easing.

In China, investors may have become convinced that further easing is a being planned. Chinese stocks have rallied tremendously in the wake of comments made by the People’s Bank of China, which promised that it would work to help keep the economy growing.

Inflation may be declining due to commodity price pressures being relieved. This is in line with what the Federal Reserve’s chairman Bernanke had predicted in early 2011.

The fall in commodity prices may have been due to a shift in the sentiment of investors, who may have become more concerned with the prospect of deflation once again.

As pressures have mounted in the Eurozone, the possibility of a severe financial crisis has emerged. With ratings agencies downgrading multiple countries in the Eurozone, and a default in Greece looking increasingly likely, deflationary pressures could rule the day if major financials begin to break down.

The US dollar index bounced early on Friday, but has been trading lower all week. Should the dollar continue to weaken, higher inflation rates could return.

January 17, 2012

Will China Weaken the Yuan to Boost Its Market?

Filed under: OANDA News, Uncategorized — Tags: , , , , , , , , , , , , — admin @ 1:51 pm

By Sam Mattera
Benzinga Guest Writer

In the second half of 2010, David Tepper achieved a level of notoriety after he had made the correct call on equities for the second half of that year and the beginning of 2011.

Tepper suggested investors get bullish. He made this recommendation on a simple assumption: either the economy improves, in which case equities should rally, or the economy does not improve, in which case the Federal Reserve boosts the market with additional easing measures.

Following Tepper’s call, in November, the Fed unleashed the second round of quantitative easing. QE2 elevated markets higher, as equities traded up for most of the first half of 2011.

Now, are investors seeing much the same situation in China?

On Tuesday, Chinese GDP beat estimates, coming in at 8.9%. This was widely hailed by market pundits as being an ideal reading—slower, so as not to push inflation, yet not so low as to an indicate a “hard landing.”

The Shanghai Composite rallied strongly in the wake of the report, gaining over 4% on the session. The index had been badly beaten down in recent months, as investors may have become concerned with China’s future growth prospects.

Tuesday’s Shanghai rally may have been in reaction to investors anticipating a far lower number. 8.9%, while great for a developed nation, is comparatively poor for China.

The rally may have been motivated more so by easing expectations. With growth slowing, Chinese officials may have no choice but to engage in large-scale easing.

China’s leadership is set to change this year, and the People’s Bank of China has already signaled their willingness to ease, as they have recently cut reserve requirements.

That additional yuan circulating in the economy could mean higher asset prices and a better market in China. It may also mean China’s aggressive expansion continues, which could support commodity prices and related economies like Australia and South Korea.

Yet, are investors set to be disappointed? With Chinese GDP reporting lower, the Asian could economy have more downside from here, even if Chinese officials ramp-up easing policies.

In terms of the USD/CNY, the currency pair could show strength. The pair rallied slightly on Tuesday—yet, as the PBoC directly pegs the value of the yuan, the currency’s movement is limited.

One way for the PBoC to ease would be to change its peg. Although some have predicted that the PBoC would increase the peg—making the yuan stronger to fight inflation—it may be more likely that the PBoC will weaken the yuan by lowering the peg. That would be bearish for the value of the yuan relative to the dollar.

At any rate, China continues to be a major player in the global economy. US equity markets traded higher on Tuesday, perhaps due to the rally seen on the other side of the globe.

January 10, 2012

Has Staying Out of the Eurozone Helped Turkey and Poland’s Economies?

Filed under: OANDA News, Uncategorized — Tags: , , , , , , , , — admin @ 11:33 am

By Annibale Marsili
Benzinga Guest Writer

Within the last few months, from an economic standpoint, it seems that a “two-speed” world is emerging.

On the one hand, there are the eurozone countries, where financial turmoil threatens to trigger a recession and put the future of the eurozone at risk.

On the other hand, there are developing and high-growth countries that have no involvement with the euro. Their economic growth is increasing and staving off, to some degree, the chances of a global downturn.

For example, the JP Morgan Global Purchasing All-Industry Output Index rose in December to $53—a 9-month high. During the recession in 2008, when the financial system collapsed after the Lehman Brothers crisis, this index was below $40.

This index, which covers the manufacturing and services sectors, is based on the results of surveys of over 11,000 purchasing managers in around 30 countries. Together, they account for almost 86% of global GDP. The survey questions ask about real events, not opinions.

The main actor of global economic expansion in December seemed to be the US, with a nine-month peak growth. This was in tandem with positive employment numbers, which included an increase of 325,000 jobs in the private sector.

India and Brazil also showed further economic expansion, as did Russia (although growth in Russia may be slowing). Output also rose in both the global manufacturing and the service sectors. The latter sector is increasing at its fastest pace since March.

The chief burden on the world economy appears to be the eurozone, which is running at a speed close to zero; only Germany is displaying positive growth signals.

Luckily, the UK helped shore up purchasing managers index (“PMI”) numbers with a significant increase in the services sector. There, the PMI rose to $54 in December, up from $52.1 in November. This is a good sign, and shows that the possibility of a UK recession may be far less likely than was thought a few weeks ago.

The UK was not the only economic surprise in Europe. Turkey and Poland also performed much better than expected. Turkey, currently the sixth largest economy in Europe, saw its Q3 2011 GDP rise by 8.2%. And in the first quarter of 2011, Turkey’s GDP growth rate was actually the highest in the world at +11%, ahead of both China and Argentina. Productivity in Turkey has been strong since 2010 (their GDP expanded 9% on the year), when Turkey rebounded from a severe recession in 2009 that saw the country’s GDP decline 14.3% in Q1 2009 and 4.8% in Q4 2009.

Domestic demand is steering growth in Turkey, spurred on by the country’s industrial expansion and expansion of credit. Turkey may have been economically successful for two other reasons:
1. Fiscal discipline.
2. Structural reforms.

The structural reforms that Turkey initiated in 2005, when negotiations for entry into the EU began, have expanded the country’s role in the private sector in the economy and improved efficiency in the financial sector.

The biggest pitfall for the Turkish economy is its huge current account deficit, which at $78.6 billion is the second largest in the world after the US, and is about 10% of the GDP. The account deficit is a result of imports exceeding exports by four to one.

The other country that stands out among the European economies is Poland, an EU member. In 2011 its GDP rose a projected 4%, and the latest economic forecasts estimate 2012 and 2013 growth at 2.5% and 2.8% respectively.

It’s a continuation of a rally that began in 2008. In the middle of the Lehman Brothers crisis and other terrible economics news in 2008, Poland’s GDP was up 5.1%. This carried on into 2009, too, which saw a 1.7% increase. Meanwhile, the rest of Europe was in a recession, with the average GDP contracting 4.1%.

This success may be attributed to brilliant fiscal and monetary policy. A reasonable government budget—with the public deficit at 3% to GDP and public debt estimated to peak at 53.8% of GDP—coupled with strong domestic demand (November saw a 12.6% increase in retail sales) and a weak currency experiencing low inflation (forecasted to be at 2.7% next year), has allowed Poland’s economy to post strong growth numbers.

Help has also come from the Polish Central Bank. It exists independently from the broader banking system because it has no supervisory duties. Financial supervision is instead entrusted to an independent authority, known as the Polish Financial Supervision Authority. Because of this, the Polish Central Bank can be completely focused on monetary stability.

The main weakness in Poland’s economy right now is unemployment, which is at 12.1%. However, there is wide regional diversification in unemployment numbers. In some areas, the unemployment rate is as high as 21%, while in other areas it is below 10%.

It is questionable what benefits the euro could offer Turkey and Poland right now. These countries have experienced strong growth despite a global economic situation that is far from idyllic. Would that growth have happened if those countries had to follow the rigid rules associated with the euro?

For example, about two-thirds of Poles oppose adopting the euro, according to a recent survey. Only 12% said they would be completely in favor of adopting the euro. They fear that the euro will lead to higher prices, less job security, and less savings, and will change the national identity, perhaps not for the better. The weakness of the zloty, the current Polish currency, has fueled growth by increasing exports.

There were also complaints about the Polish government’s decision to contribute $200 billion to the IMF loan that will be used to assist at-risk euro zone members.

“Why should we pay for the excesses of the Italians and the Greeks, who are richer than us?” they ask in Warsaw.

They cannot be clearer. In fact, this is the general sentiment surrounding the euro throughout most of Europe.

For now, Turkey and Poland continue to watch the rest of Europe’s economy from afar—but for how long?

January 5, 2012

Euro-Dollar Pair Craters

Filed under: OANDA News, Uncategorized — Tags: , , , , , , , , , , , , — admin @ 2:56 pm

By Sam Mattera
Benzinga Guest Writer

On Thursday, the EUR/USD traded sharply lower, at one point dropping below the $1.28 mark—a level that had not been seen since September of 2010. This move comes after a better than expected jobs figure might have strengthened the dollar, while negative events in Europe may have weakened the euro.

In Europe, yields on Hungarian paper soared.

A three-year Hungarian bond auction failed when the Hungarian government rejected all bids. The failure of the bond auction prompted Hungarian CDS to rally sharply.

CDS bought on Hungarian paper could give investors protection against a default by the country, although the effectiveness of CDS instruments may have been thrown into doubt by recent events in Greece.

Although Greece was given a 50% haircut on its debt, CDS failed to protect investors from this loss. The Greek haircut was ruled “voluntary” and therefore did not trigger CDS contracts. The International Monetary Fund and European Union had been negotiating a bailout with the country to avoid a default. However, that bailout was thrown into doubt when the IMF and EU broke off the talks. The Hungarian parliament had been considering some changes to its central bank—changes that the IMF and EU opposed.

Meanwhile, in France, another bond auction struggled.

France missed its maximum target on a debt auction. Although not a complete failure, the market may have interpreted the event negatively. The yield on the Italian 10-year rose back above 7%.

Those factors may have been working to push the value of the euro down, while positive data in the US may have been pulling the dollar in the other direction.

ADP payrolls came in much better than expected, reporting in at almost double the expectations on the Street. ADP payrolls came in at 325,000 versus an estimated 175,000.

Initial jobless claims came in slightly better than expected, reporting at 372,000 against an estimated 375,000.
Given the boost in jobs, the American economy may be showing signs of further recovery.

If conditions in the Eurozone continue to weaken, while the US economy continues to improve, the currency pair could continue to trade lower.

Still, it may be hard for the US economy to thrive when Europe is weakening. US equity markets dropped on Thursday, as traders may have been pricing in a possible contagion effect.

Older Posts »

Powered by Efacilitators Hosting