Forex Blog

January 23, 2012

EUR/USD Squeezed Above $1.30

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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

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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?

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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?

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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

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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.

December 20, 2011

LTRO Expectations Weaken Dollar, Send Risk Higher

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By Sam Mattera
Benzinga Guest Writer

On Tuesday, the US dollar index declined roughly 1% as nearly all risk assets rallied. The Dow Jones Industrial Average gained over 250 points in early trading, while gold and oil moved sharply higher.

The move may have been motivated by traders’ expectations, as the European Central Bank is set to unveil details of its 3-year bank funding operation (LTRO) on Wednesday.

The plan gives additional capital to European banks, which may result in a reduction of sovereign borrowing costs. With the capital provided by the LTRO, the banks could opt to purchase the debt of distressed Eurozone sovereigns, driving down yields and bringing some relief to the Eurozone crisis.

Many market commentators have criticized the plan as amounting to little more than a shell game. Bill Gross of PIMCO tweeted on Monday that it amounted to nothing more than Europe shifting funds from one hand to the other.

Even the President of the ECB—Mario Draghi—downplayed expectations for the operation when he addressed European lawmakers on Monday.

The fear is that European banks could not participate with the plan. The banks are not obligated to purchase the debt, and in fact, if they do not act together, individual banks purchasing the debt on their own could quickly open themselves up to market speculation about their solvency.

Even if the plan does work, challenges remain. Ultimately, it does little to solve the root of the problem—too much debt—and only gives the sovereigns a bit more time to get their houses in order.

Market participants have seen this tactic used repeatedly for the majority of the year, as the Eurozone has seemingly kicked the can down an endless road.

For its part, the euro gained against the US dollar, as fears that the currency could dissolve may have receded.

December 15, 2011

Eurozone Worries Crushing Japanese Confidence

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By Sam Mattera
Benzinga Guest Writer

On Thursday, in a survey released by the Bank of Japan, confidence among Japanese manufacturers fell more than anticipated.

Analysts had forecast a reading of negative 2, while the actual figure was negative 4. The reading may be seen as fairly significant, as Japan’s economy remains dependent upon its manufacturing and exporting sector.

Japan’s Nikkei dropped over 1.60% in Thursday’s trading, as Japanese investors may have become concerned over the future prospects of Japan’s economy.

Investors in the US appeared to brush Japan’s struggles aside early Thursday morning, as futures rallied into the open. Surprising positive data coming in from Europe and a seemingly improving jobs picture in the US may have set a positive mood among US equity investors on Thursday.

In the Japanese survey, businesses cited uncertainty due to the Eurozone situation, a strong yen, and supply chain issues due to flooding in Thailand.
The first two issues that the businesses have may be largely interrelated – Japan’s yen may have strengthened because of issues in the Eurozone.

A strong yen may cut into the confidence of Japanese exporters, as it would make the price of Japanese goods more expensive to foreign consumers, and therefore may hurt demand.

The Bank of Japan has intervened a few times this year in an effort to drive down the value of the yen.

Following the tsunami disaster in March, the Japanese yen rose sharply. Insurance companies may have been forced to dump assets to raise cash, leading to a sharp increase.

Back then, central banks around the world worked in tandem to drive down the value of the yen. Yet, the yen rapidly bounced back in the following months as the situation in Europe deteriorated.

Then, the Bank of Japan intervened again—this time unilaterally—in October. Other central banks, perhaps worried about the value of their own currencies, did not offer support.

If Eurozone issues continue to worsen, the yen may stay strong. However, if the Eurozone situation improves, funds may shift out of the yen back to the euro, weakening the yen and improving the environment for Japan’s manufacturers.

December 12, 2011

ECB Not Printing Could Be Best Option for Eurozone

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By Paul Quintaro
Benzinga Staff Writer

US equity markets traded lower on Monday morning, as the US dollar index rallied roughly 1%. Commodities across the board showed weakness—gold dropped below $1670.

The US dollar index is a measure of the dollar against a basket of other currencies. Perhaps contributing the most to the index’s gain was the dollar’s move against the euro.

The EUR/USD pair dropped over 1.10% on Monday morning, as investors may have become concerned over the fate of the currency given ongoing stresses in Europe. Speculation is high that one of the major ratings agencies will take action in regards to the sovereign credit ratings of Eurozone nations.

France’s Prime Minister Nicolas Sarkozy may have pre-empted a downgrade on France, stating on Monday that while a downgrade would be a setback, it would not be “insurmountable.”

Monday’s action in the EUR/USD pair, while demonstrating the market’s disbelief in the euro situation, may actually act as a positive influence.

After all, the problem in the Eurozone is one of debt: countries have largely spent beyond their means and are now finding it difficult to raise money in the bond market so as to continue their rate of expenditure.

If the euro becomes weaker, it makes the debts of these troubled nations less burdensome.

It may also boost exports. Germany’s economy is the strongest in the Eurozone and is largely dependent upon exports. If the euro weakens, Germany’s exports may become more attractive to foreign consumers as the German-made goods appear cheaper.

A weaker euro does not merely help Germany, however. Other troubled Eurozone nations—like Italy—also do a fair bit of exporting. Greece, meanwhile, is largely dependent upon tourism, and a weaker currency makes the country more attractive to tourists who get more “bang for their buck.”

Thus, while many market participants have called for the ECB to print in an effort to stem the crisis, ultimately not printing may be a more effective solution.

Those calling for the ECB to print may be viewing the situation through the wrong perspective: that of the United States. In the US, the Federal Reserve’s recent policies of quantitative easing have led to weakness in the dollar.

But that relationship may not carry over in Europe. It might seem like a paradox, but printing euros could actually make the crisis worse by strengthening the currency.

Of course, if interest rates continue to rise for indebted Eurozone nations, it may not matter. Even with a weaker currency, the PIIGS may find it difficult to continue to finance their governments while having to borrow at such a tremendous interest rate.

Thus, the ECB and Eurozone politicians will continue to walk a tightrope going forward. They must keep interest rates down while also depressing the value of the euro. Printing money may not be the solution.

December 9, 2011

How Much Longer Can Europe Kick the Can Down the Road?

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By Paul Quintaro
Benzinga Staff Writer

The European Summit—which had been anticipated all week—concluded early Friday.

Given expectations, the results seemed to be underwhelming. Yet, US equity futures were trading up Friday morning, perhaps evidence of the fact that investors had bought into the deal enough so as to calm concerns.

On Monday, France’s Nicolas Sarkozy and Germany’s Angela Merkel drafted proposals that would form the basis of the summit. Merkel and Sarkozy (dubbed ‘Merkozy’ in the press) were to set to unveil measures that would limit spending in profligate countries in the Eurozone and set strict limits to punish violators.

Although the summit may have been seen to be an effort to save the euro currency, all 27 members of the European Union (EU) participated, including the 10 who do not officially use the euro.

Given the events of the summit, further agreements over the fate of the euro may be decided solely by the members actually using the currency.

During the summit, the UK’s Prime Minister David Cameron clashed with “Merkozy,” asking for concessions that the European diplomats were unable to agree to.

Those expecting Friday’s summit to produce a new treaty for the Eurozone may have been disappointed. Rather, what came out of the summit is the same as what has come out of previous European summits—more promises and plans for the future.

Now, European officials will attempt to negotiate bilateral agreements between countries to alter the rules of their union. Although comments were made stating that Europe would do its best to continue to function as a unit of 27 member states, given the UK’s resistance, a “two-track” Europe may emerge from the crisis.

One thing helping to split the Eurozone may have been a proposed financial transactions tax. Given that the UK is home to the City of London, the resistance to any taxes on financial transactions would presumably be tremendous.

The EUR/USD pair traded lower on Friday, dropping below $1.332 price level.

As the summit failed to produce anything definitive, traders may be expecting the European Central Bank to step in with more bond purchase programs.

Yet, yesterday, the ECB appeared to squash that theory, when the ECB’s Mario Draghi made comments in a press conference following the ECB’s rate decision.

Draghi stated that current EU treaties prevented the ECB from monetizing debt (purchasing bonds of indebted countries to pay for their governments’ spending). Thus, expectations of further bond purchases may be unrealistic.

While Friday’s summit failed to produce anything truly definitive, the euro lives on. Yet, the question dominating the minds of investors may remain: how much longer can Europe kick the can down the road?

December 6, 2011

Service Sector Suffering Due to Dollar Weakness

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By Paul Quintaro

The ISM Non-Manufacturing Composite for the month of November printed at 52.0 Monday, down from the prior reading of 52.9 and well below expectations of 53.8. The reading is a broad-based assessment of the state of the service sector in the US.

Of its subcategories, the reading for employment came in below 50—indicating a contraction. This contrasts with last week’s employment data, which indicated that the unemployment rate in the US had fallen below 9%.

Of course, this data may fit in with the recent growth in manufacturing seen in the US, perhaps on account of currency fluctuations.

As the US dollar has weakened against other currencies, exports in the US may have benefited while individuals’ consumption may have taken a hit. A weaker dollar means less purchasing power for US consumers, and therefore the money they have to spend on services may be restricted.

For its part, manufacturing has been seen to be enjoying somewhat of resurgence, as US car manufacturers have demonstrated new life in recent improving sales figures.

The dollar index traded down earlier Monday, dropping roughly 0.5%. The primary cause of the shift in the index may have been a strengthening of the euro against the dollar, as the EUR/USD pair moved up nearly 0.60%.
Forex traders may have had their concerns alleviated about a possible euro collapse.

In recent months, more and more concern has built up over the fate of the euro. In a joint press conference on Monday, Germany and France’s leaders—Angela Merkel and Nicolas Sarkozy—came together to state that they had come to an agreement on a new treaty for the European Union.

That new agreement would not include Eurobonds, but would include measures to ensure that member states kept their budgets in check. It could also make changes that would allow the European Central Bank to purchase the bonds of indebted member states.
Of course, in a somewhat ironic fashion, a stronger euro may prove to be fatal for the Eurozone.

A strengthening euro means that the debt burden of member states is made heavier. As the member states are struggling under their current debt burdens, a stronger euro would only make their situation worse, as well-known economist Nouriel Roubini noted last week.

Still, if the ECB is now going to purchase bonds, it may drive the euro lower. With more euros in circulation, the value of the euro may be made weaker.
Other central bankers could resist euro depreciation. The Swiss National Bank and Bank of Japan have already taken steps earlier in the year to drive down the value of their currencies, as investors may have shifted their holdings to shield themselves from a loss.

It will be interesting to see where the euro trades from here. Should a new agreement be formed, two conflicting forces—weakening due to bond purchases, but also strengthening due to relief about the potential of a collapse—could whipsaw the euro. If a new agreement cannot be formed, and the situation continues to deteriorate, the euro could continue to trade lower.

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