Carry Trade | Forex Blog

December 1, 2011

Forex Market Outlook 12/1/11

Filed under: Forex News — Tags: australia, cad, carry trade, china, course, interest, power, practice, rate-decision, top stories, unemployment — admin @ 6:51 am

Well yesterday’s news did not disappoint, with the markets remaining near highs into the close. Today will most likely be an “inside day”, providing neither new highs nor lows. This is to be expected with a move as big as the one we saw yesterday.

But what does this all mean? Truthfully, not much. Essentially yesterday’s coordinated action makes inter-bank lending cheaper. That’s it. It doesn’t solve the problems of the Euro zone, nor does it change the political dynamic in the US. These are the things holding us back and markets could do a lot better if there was more political courage in the world.

But there isn’t. Germany still refuses to acknowledge the tremendous benefit they’ve received through their Euro zone participation and are steadfast in their opposition to helping anyone that doesn’t behave exactly as they do. There are big changes that need to made in Europe obviously, but the entire world economy is basically being held hostage by the European political process.

The economic data continues to come in as a mixed bag. Yesterday’s perfect storm showed that there are times when economies look like they are performing well; today, not so much.

For starters, in Australia retail sales figures came in lower than expected showing a gain of .2% vs. an expected .4%. Building approvals were also lower. China’s PMI manufacturing figures came in at a 2-year low, which may be part of the reason why they reduced reserve requirements yesterday.

In the Euro zone PMI manufacturing figures came in as expected but in the UK they were better than expected, which is why the Pound is tracking higher this morning.

Here in the US, initial jobless claims came in worse than expected, but the expectation was for improvement from the pretty standard 400K that has been the average for some time. Later this morning we will get ISM manufacturing figures which could reverse the mild selling we are seeing this morning.

But for now, the bigger story is the money pump into the financial system that only will serve to buy time for those that are troubled. Until solutions are found, it will be more of the same. There is still great risk in the market and it will take a tremendous effort and leap of faith for the Euro zone to solve their debt crisis.

The beginning of the “Santa Claus Rally” that we are seeing now is a welcome event, but don’t get lulled into believing that things are just peachy. Yesterday’s action occurred because someone, somewhere was in trouble and the threat of global market instability was too great for Central bankers to bear. And it also goes to show the power that these bankers can wield when things aren’t going exactly as planned.

For example, nearly everyone is shocked that the Euro is trading at current levels despite the huge mess they are experiencing. Yet when you compare it to the US dollar and the easy money policies we have, it pales in comparison.

Yesterday was also a reminder that inflation is on the horizon. The only thing keeping us back from hyper-inflation is the fact that the US housing market continues to flounder. Case in point: I was speaking with a friend last night who confided that she was terrified of buying a home despite the fact that she and her husband have good jobs and are financially responsible people.

The uncertainty that hangs over the markets and the lack of confidence surrounding the current environment will continue to hold us back regardless of what the actual data tells us. Therefore I will continue to trade this market in the short-term, taking advantage of moves like the one that occurred yesterday.

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November 16, 2011

Forex Market Outlook 11/16/11

Filed under: Forex News — Tags: a-with-the, carry trade, china, dow, fxedu, heads-as-there, invest, mike conlon, new zealand, rate-decision — admin @ 7:20 am

Buy the dips and sell the rips. That is exactly how one should navigate this forex market as headline risk from the Euro zone is countered by the US need for stock prices to go higher. So the market action of late has been selling in the Euro session and buying in the US.

This has obviously left trend-traders and longer-term investors scratching their heads as there has been great range-bound volatility with no longer-term patterns emerging. In short, take what the market gives you.

What we received overnight out of the UK was more of the same, as the BOE inflation report suggested that further stimulus was needed to ward off the effects of a Euro zone recession and that inflation would be back under 2%– in 2 years time! What will happen in those two long years is anyone’s guess but it should be noted that they reported 5% headline inflation just yesterday.

And also speaking of inflation, the Euro zone reported in-line CPI data with the headline figure at 3% and the core figure of 1.6%, as was expected.

In the US, the headline figure came in lower than expected at 3.5% vs. an expected 3.7% and the core figure was expected at 2.1%. Yet here we are with oil prices back up above $100 (see chart of the day) and all the talk is that we are facing further recession.

Inflation is coming folks despite Central bank efforts to help economic recovery. Stagflation is actually more likely and is exactly what the UK is experiencing right now. The unemployment rate in the UK ticked higher to 8.3% vs. an expected 8.2% as only 5300 jobs were added vs. a pipe-dream hoped for expectation of 21K.

Let’s remember, these data points are backward looking and do not forecast the future, so in the grand scheme of things they are pretty immaterial other than talking points that allow Central bankers to point their policies as not being destructive. One does not need to be a rocket scientist to know that as oil prices go, so goes everything else as the cost to produce and transport are greatly impacted by energy costs.

Perhaps its time to throw another $500 billion at failed solar companies to relieve the pain? But seriously, the problem is the Fed and cheap money policy trying to offset the disaster that is fiscal policy here in the US. Every day the news that the super-committee may fail becomes louder and louder thereby making their failure a foregone conclusion.

Meanwhile, don’t think that I’m going to ignore the European crisis that is now spreading to the banks that own a lot of this bogus sovereign debt. The bond vigilantes are in full-force as I mentioned yesterday and are selling out of this junk causing yields to rise and making financing costs nearly impossible to service.

The failure of the ECB to step in as the buyer of last resort and their daily attempts at meekly purchasing some of the Italian and Spanish debt are pathetic at best. If they want the Euro zone to continue, they need to make a forceful statement that they will step in and buy to provide confidence to otherwise fearful market.

The new governments in both Greece and Italy face political challenges and it will be interesting to see if they can garner enough support to enact the measures that are necessary to save themselves.

In other words, just another ordinary day in the forex market!

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November 2, 2011

Forex Market Outlook 11/2/11

Filed under: Forex News — Tags: carry trade, china, commodities, currency-pairs, dow, fundamental, nzd, pound, world — admin @ 7:12 am

How does one get invited to that ultra-ritzy resort town of Cannes, France? Apparently by upsetting G-20 leaders as you potentially re-neg on a deal that may be the most important economic event of the past year. Yet that’s where Greek PM Papandreou will be as he has been “summoned” to the G-20 meeting to explain what the heck is going on in Greece.

For the record, Greece is not part of the G-20 so his presence is unwelcome to say the least. Both European and G-20 leaders have been blind-sided by the referendum vote in Greece and it has the potential to derail all of the wheeling and dealing that has taken place over the last month as the Euro debt resolution was announced. Picture this—say you owe a lot of money and your creditor agrees to reduce the amount you owe by 50%. What to you do? You take it of course and say ‘thank you’. What you don’t do is say let me get back to you.

Yet that’s exactly what Greece has done, which is essentially a slap in the face to Euro zone leaders and by proxy, the rest of the world. If Greece does not back away from this action or mitigate its impact, then the rest of the world may suffer. Don’t be surprised if this referendum turns into an “opinion poll” which has little consequence. Yet this may go down as one of the biggest idiotic blunders in the history of geo-politics.

Despite this SNAFU, the markets are up-beat to start the day as anticipation of today’s FOMC meeting may give markets hope that there is more free money on the horizon. It is unlikely to produce any change to policy, as the last change dubbed “Operation Twist” hasn’t had enough time to work. But, Bernanke may officially open the door for QE3 if he deems the economic environment to be worsening. So far, the Fed has been way behind the curve and their economic forecasts and estimates have largely missed the mark. This can be problematic when you consider that they use these estimates to make policy.

In the meantime, economic data is trickling in and is mixed. In Germany, PMI manufacturing figures came in better than expected, but the unemployment rate ticked higher to 7% from an expected 6.9%. Italian PMI figures were a lot worse than expected.

Tomorrow the ECB is having its first rate policy meeting with their new chief Draghi at the helm. Will this produce a change of policy? Market expectations are that there will be no change, but if they fear a weakening they could be prompted to cut rates. This is one of those times that a rate cut might make sense, so I’m a bit surprised more people aren’t talking about it. A rate reduction in Australia just took place, so we could begin to see the start of some ratcheting down.

But the most important data to round out the rest of the week is on unemployment figures, with New Zealand reporting later tonight and Canada reporting on Friday. Today marks the first day of the US employment reports with Friday’s Non-Farm Payrolls report being the most important of the bunch.

This morning, the Challenger jobs cuts figures came in better than expected, as did the ADP employment change figures. The ADP report shows private payrolls changes and today’s report of 110K net new jobs was better than the expected 100K.

However, one cannot make a direct correlation between today’s ADP number and Friday’s NFP. Friday’s figure is the official government report and takes into account both government and private payrolls. So it will be interesting to see what that figure is, as it is one of the most significant economic barometers we have. Expectations are for a gain of 95K with unemployment rate to remain stubbornly high at 9.1%.

For now, the markets are content to drift higher and hope for some Fed love later today and are also hopeful that the G-20 summons for the Greek PM will remove the uncertainty surrounding the deal. Should Bernanke fail to produce or should the G-20 fail to change Greece’s intended course of action, then we could slip back into risk aversion mode in a heartbeat.

As a result of these uncertain prospects, I am content to keep the trading to short-term and am not looking for the home-run trade.

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October 13, 2011

Forex Market Outlook 10/13/11

Filed under: Forex News — Tags: cad, carry trade, china, economy, fear, forex trading, fxedu, rsi — admin @ 6:51 am

Yesterday’s release of the FOMC meeting minutes was a complete dud and market hopes that the Fed was close to QE3 went unrealized. Part of that hope came from Bernanke’s speech to the Joint Economic Committee earlier this month, but it seems as though that mention of further easing was intended to keep the markets from falling off a cliff.

Yet they are no closer to QE3 then previously thought, so the “free money trade” will have to wait for another day or for the economy to worsen dramatically, which is not out of the realm of possibility if the EU fails to meet their deadline on the debt crisis resolution. The clock is ticking.

News out of Europe this morning showed that German CPI was slightly higher than expected though not enough of a gain to cause the ECB concern. What was more of a concern though was the ECB’s monthly report for October which was largely negative. Citing “moderate to lower growth”, reduced outlooks, and the like, the ECB essentially confirmed what we already know.

What was more concerting to the market though was a report out of China that showed that their gains in exports declined more than expected, showing a gain of only 17.4% vs. an expected 20.5%. While they will cry that the strengthening Yuan is hurting them, no one else will shed a tear as their trade surplus came in at $14.5B, which contrasted with the US trade deficit of 45.6B makes them look silly. The Senate passed the Bill to impose tariffs on China if they don’t move to revalue their currency, which could ignite a trade war and is likely not going to help the global economy recover. I’ve discussed an alternate solution to tariffs in this morning’s video.

However there was some good news for those with risk appetite, as Australia added 20.4K jobs to their economy vs. an expected 10K, which helped push their unemployment rate down to 5.2% from the expected and previous 5.3%. While the Aussie has pulled back on general risk aversion, the slight decline may reverse throughout the day.

Additionally, the Bank of Japan released the minutes from their rate policy meeting which called for additional monetary easing to attempt to weaken the Yen. Citing problems in Europe to global economic stability, prolonged Yen strength will harm exports though recent economic data in Japan has been better than expected.

Here in the US, initial jobless claims figures came in as expected, with 404K newly unemployed. 400K has been the “norm” which is unfortunate as we are not adding enough jobs to move the needle. Perhaps the passage of the Free Trade Agreements that have been sitting around for over 4 years will help, but structural reform is more likely needed.

Since the President’s “jobs” bill was rejected by the Senate, we are likely going to have to wait for the debt “super committee” to attempt to reduce our deficit and provide confidence to the markets. This is a big task and much like the Euro commission that is charged with finding the resolution to the Euro debt crisis, essentially puts us in a holding pattern until then.

So I’m going to focus on corporate earnings here in the US, which if the majority come in better than expected, could revive risk appetite in the markets. The general mood surrounding the markets seems to positive, though that could be derailed by the Europe failing to resolve by their self-imposed dead-line, or more of the same Washington DC gridlock.

The inverse correlation between the S&P 500 and the US dollar is still pretty high, so the risk trades are still intact and could be driven by stocks rather than perceived global economic risk in the near-term.

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September 28, 2011

Forex Market Outlook 9/28/11

Filed under: Forex News — Tags: australia, cad, carry trade, credit-default, currency, currency market, currency trading, default-at-over, fear, interest-rates-, invest, loonie, president, rate-decision, trader — admin @ 6:52 am

Sometimes it feels like Groundhog Day in the forex market as we focus on the same thing over and over again. So it should come as no surprise that again we are focused on the Euro debt crisis as there is very little other news to sway market sentiment.

Perhaps it will be best if examine the recent events and what they mean for the markets. Yesterday, Greece was able to pass the vote that raised property taxes as was required by the deal that was made back on July 21^st as part of their austerity measures.

But now there is some concern that figures that were used to hammer out that deal have now changed, which means that there could be some opposition to the already-agreed-to plan. What’s more, the votes to ratify the EFSF are just taking place now in each of the individual countries of the Euro zone, to be able to ratify the previous deal.

The vote to ratify the EFSF deal has already been delayed and is just a formality if all of the countries agree to ratify. But why has it taken so long to put it to a vote? This really should be a done deal by now, that is, if they really want to rescue Greece. If you do X, you get Y.

But now there are fears that some countries are balking and the constant delaying has kept markets on edge. I agree with President Obama when he said that Euro inaction is “scaring the markets”. Of course this elicited a pushback response about the fiscal situation in the US, which of course is true, however it doesn’t justify Europe’s behavior throughout this mess.

So the markets are waiting for the “Troika” (ECB, IMF, EC) to come back with their findings in order to potentially move forward. One of the additional impediments is that there will be multiple votes over the course of this process and any on slip-up could put Greece in default. This is one of the reasons why the CDS (Credit Default Swap) market has the odds of a Greek default at over 90%.

So what can the Euro zone do? Well the idea of expanding the EFSF by levering the balance sheet up has been dismissed as “stupid” by a German official as it could incur a credit downgrade. So much for Geithner’s suggestions to help.

Contagion is the obvious issue that plagues the Euro zone right now. If they could let Greece go without causing similar problems in the other countries with debt issues then I think they would in a heart-beat as Greece is actually a pretty small percentage of the region. Which is also why Merkel’s comments about “building a firewall” around Greece the other day were telling as perhaps there may be more of a push to that end.

Surprisingly, the markets have been faring pretty well the last two days, though yesterday’s afternoon sell-off in stocks here in the US and the subsequent follow-through in Asian markets caused some overnight risk aversion. We have clearly been trading on risk themes in the market and the correlations of currencies have been pretty strong of late.

It’s essentially Dollar and Yen strength on risk aversion, everything else strong on risk appetite. The risk appetite we’ve been seeing this week has been pretty strong, though some are dismissing it as a bit of a relief rally. We have seen expanded to declining range-bound activity in the markets, and this makes sense when we consider that it is the same things over and over again that are ruling market sentiment.

This means increased volatility as the markets proceed with caution, knowing that at any given moment, news can break from the Euro zone which could impact market sentiment. Therefore, it is very important to keep yourself informed about the news and its potential impact, as it has the ability to disrupt trades if you’re not paying attention.

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September 19, 2011

Forex Market Outlook 9/19/11

Filed under: Forex News — Tags: a-little-more, a-move-lower, carry trade, china, commodities, finance, killed-the-only, nzd, practice, practice account, usd, will — admin @ 7:04 am

The more things change, the more they stay the same in the Euro zone. This weekend produced further non-action on the part of EU Finance ministers and ECB officials, and the markets are voicing their displeasure by selling off this morning.

This morning, there is further question over whether or not Greece will receive its next tranche of bailout funding and a conference call that was supposed to take place today has been postponed for unknown reasons. This situation has been horribly mismanaged by European banking and finance officials and it remains to be seen if Greece can avoid default.

But with every passing day, the public anger increases and the will to resolve becomes weaker so if this can’t be resolved shortly it may not ever be. This comes ahead of the vote to ratify the new EFSF agreement that was made back in July, though this may change the dynamic of that agreement if Greece defaults. Now there is talk of a possibility of Greece defaulting AND remaining in the Euro zone, though I think that is highly unlikely.

Today is a day devoid of economic data, not that it matters much anyway when the overwhelming theme of the markets is the Euro debt crisis. So it will be difficult to turn the markets around unless we get some sort of comments from the Fed. Later this morning, President Obama will be speaking about the US debt problem, though that speech is more likely to set the stage for the 2012 election that offer any credible solutions to our problems.

On Wednesday, the FOMC meeting is expected to produce some further “help”, if you can call it that, to the markets in the form of “Operation Twist” whereby the Fed buys longer term Treasuries as opposed to the shorter term in an attempt to dive interest rates even lower.

Part of the problem is that what is going on here in the US is not because interest rates are too high, but rather because the economic climate is so bad that the uncertainty is causing business to shy away from the free money. The only place it really goes is to Wall St., who then use it to finance speculating activities that are likely to induce inflation, if they have any impact at all.

And inflation is something that Bernanke would love to see at this point, as it would mean a pick-up in demand. But demand won’t pick up unless people get back to work and unemployment comes down, though that seems unlikely with the current tax, regulation, and healthcare regime.

By demonizing the job creators, the government has effectively killed the only hope they have of seeing an economic turn-around in the US. This morning at the President’s speech we will see how serious they are about fixing the economy. Or will it be more about political preservation?

The news this week is likely to be secondary to Euro debt crisis, but we will get the minutes from both the RBA and BOE rate policy meetings. The BOE minutes are a little more significant as they do no issue a statement when they issue their policy decision. Recent events have left them more dovish than hawkish, though it may not matter much if the problems in the Euro zone get worse.

So the markets are in risk aversion mode this morning, with Dollar and Yen strength and stocks and commodities lower. With Euro trading at 1.3650 vs. USD we could see another move lower to 1.35 in short order. This will have the ancillary effects of pulling both the Aussie and the Loonie closer to parity with USD, though those areas of psychological support may present buying opportunities.

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August 23, 2011

Forex Market Outlook 8/23/11

Filed under: Forex News — Tags: account, carry trade, decision, gbp, interest, invest, kiwi, loonie, lower, trade — admin @ 7:25 am

This morning resembles yesterday’s market action, though market bulls are hoping the outcome is different. Stocks are higher to start the morning and we are once again in mild risk-taking mode, though off of earlier highs.

Yesterday stocks in the US gave up early gains and gold pushed higher yet again to above $1900. The majority of the risk in the marketplace is coming from the EU sovereign debt crisis and the slowing US economy and the US Fed reaction to it.

Dollar weakness has been driving markets higher this morning as Friday’s speech by Bernanke has left the market guessing what policy changes, if any, he’ll make. This is part of the problem with current US economic policy. What started out as Fed retreat for policy-makers to discuss ideas, has been turned into a platform to issue policy. And the market is going to be hanging on every word as though it were gospel, which is bound to induce volatility.

How did we get to this point? The lack of leadership out of Washington DC has caused this economic uncertainty and has left Bernanke out on an island to attempt to deal with the problem alone. And while I do not agree with Dollar destruction as an economic policy, I do understand that he is doing all he can to compensate for the lack of prudent fiscal policy.

So it should not be surprising that the Euro is trading higher vs. USD, despite the European debt crisis. While the politics in the EU has not produced a credible solution for dealing with the debt issues, the ECB has been taking the appropriate actions to attempt of stem the wave of contagion.

This has left confidence in the dumpster in Europe, which is reflected in this morning’s release of the ZEW economic confidence figures which all came in lower than expected. However, there was a bright spot this morning and that came from European PMI figures, which came in better than expected. This shows that economic activity is still moving forward despite all of the economic issues.

PMI figures in China also came in better than expected which demonstrates that perhaps China isn’t contracting as fast as some might believe.

US new home sales figures are due out later this morning but don’t expect much in the way of improving market confidence.

It will be interesting to see if US equities can hold on to today’s early gains unlike yesterday and as we move closer to Friday’s Fed meeting. There is a lot riding on Bernanke’s speech and I’m not certain he can produce anything that is going to cause market confidence to rise.

We are at the point where the politics surrounding another potential round of easing is being hotly debated, as is the effectiveness of the last round, QE2. Another round of easing means that economic conditions are deteriorating faster than they had hoped.

So expect the volatility to continue, until we can get some clarity from the Fed on what the next move may be. Further uncertainty could send the markets into a tailspin, so it is a fine line Bernanke is walking.

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August 18, 2011

Forex Market Outlook 8/18/11

Filed under: Forex News — Tags: australia, carry trade, changing-risk, currency market, dollar, fear, inflation, interest-rates-, markets, mike conlon, testing-the-all, unemployment — admin @ 7:04 am

Well it looks like there is some major selling in the global equities markets today as fears of a global slowdown have induced risk-aversion. Gold is back over $1800 and is re-testing the all-time nominal highs, yet the currency market seems fairly tame by comparison.

Part of the reason seems to be the fear of intervention from the safe haven currencies, namely the Swiss franc and the Japanese yen. As markets have sold-off, money has poured into these currencies, as well as gold and US treasuries. The US dollar is strengthening, but also has the dampening effect of the Fed’s policy that they are going to keep rates at these extraordinarily low levels.

The problems in the Euro zone are not going away and the Merkel-Sarkozy meeting did little to assure markets and a lot to disrupt. The idea they floated of imposing a financial transaction tax will most likely cause money to start seeking alternatives as further taxes and regulation inhibit capital formation and not foster it.

Adding to the global economic slowdown story is the UK, who reported declining retail sales figures of -.2% vs. an expectation of a gain of .1%. As a result, stocks in Europe are down some 3%.

The hope that US economic data would save the day have been thwarted as Initial Jobless Claims once again came back in over 400K for the 18^th time in the last 19 weeks. CPI data did not help either, as the expected declines did not materialize and in fact ticked higher, showing that we are most likely heading for a stagflationary environment.

Headline CPI came in showing a gain of .5% vs. an expectation of .2% which kept the YoY headline figure at 3.6%, the same as last month and above the expected 3.3%. This figure can be somewhat confounding to some as the “normal” expectation is that the fed would consider raising rates to combat higher inflation—but Bernanke just told us last week he’s not budging on rates until mid-2013!

With the threat of higher taxes coming from the government and higher inflation (which essentially is a tax on all), it is not surprising that there is not a lot of consumer confidence at this point. Bernanke has essentially painted himself into a corner and the idea that consumers are going to come back is laughable.

Later this morning, existing home sales and the Philly Fed are due out but I can’t see how these data points, even if better than expected, can reverse market sentiment.

Meanwhile, our great leaders here in the US are all vacationing, and I hope it rains wherever they are. President Obama announced that he would release his new plan to create jobs—right after he gets back from vacation! I’m guessing this vexing problem of unemployment and a floundering economy is not going to affect his golf game. Frankly I’m tired of hearing from all of these buffoons in Washington anyway. So perhaps we would all be better off if they all took a permanent vacation!

Today will be interesting to see if the US stock market can reverse, and if the correlative effects carry over to the currency market. The situation looks bleak from a global perspective, so trade cautiously!

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August 16, 2011

Market Outlook 8/16/11

Filed under: Forex News — Tags: carry trade, china, commodities, course, forex, forex market, level, top stories, unemployment — admin @ 6:36 am

This morning all eyes and ears are on Europe as a meeting between the leaders of France and Germany is taking place where they are expected to produce further measures to help deal with the Euro debt crisis.

The major topic is going to be the expansion of the EFSF and guidelines for debt reduction in the countries plagued by excessive indebtedness as a percentage of GDP. But the market perhaps is looking for something more as calls for a Euro-bond that includes and is backed by all countries would help raise capital to help fund those that are in trouble. This idea seems to be gaining traction in the markets, though it is unclear if the leaders are willing to consider it at this point. Overall, Euro zone debt as percentage of GDP overall is very low so this is economically feasible, though could be political anathema.

One of the reasons is that GDP reports this morning show that German GDP grew less than expected, showing a gain of 2.8% vs. an expectation of 3.2%. Overall Euro zone GDP increased 1.7%, slightly lower than the 1.8% expectation. This has prompted a bit of risk aversion in the markets, with stock indices lower and gold trading higher.

In the UK, CPI data came in hotter than expected, showing inflation of 4.4% vs. an expectation of 4.3%. This comes a day ahead of tomorrow’s release of the rate policy meeting minutes, which some are expecting to show a bias toward easing and not tightening. It must be noted that this meeting took place before the riots, so while the BOE may be hoping that stubborn inflation subsides as economic growth contracts, the idea that further QE may be necessary could show up in this report.

In Australia, the release of the RBA rate policy meeting minutes has not deterred the market from believing that the next move on interest rates will be to lower at the next meeting in October.

The Swiss franc and Japanese yen are both higher this morning on risk aversion, and the market is speculating what further action these safe havens can taken to attempt to weaken their currencies. Both Central banks essentially have little control over the value of their respective currencies despite low interest rates and risk aversion has not quelled enough to change recent trends.

In the US, both housing starts and building permits figures are due out though the bar has been set so low that both figures are largely inconsequential at this point. The economic activity gained through these areas is probably offset by the notion that greater supply could be further detrimental to an already floundering housing market.

Even though the ranges have tightened from last week’s excessive volatility, triple digit moves on the Dow are still taking place. Today the major event will be the press conference after the Franco-Prussian meeting today on the Euro debt crisis and what they have resolved, if anything, to do. So there could be some mid-day volatility after the European markets have closed.

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August 8, 2011

Market Outlook 8/8/11

Filed under: Forex News — Tags: carry trade, commodities, commodity, creditors, currency-pairs, dollar, fear, forex market, gold, jpy, market, toward-the-fomc, trades, until-the-end — admin @ 7:42 am

This morning the markets are responding reasonably well after Friday’s S&P downgrade of the US. The beleaguered ratings agency, who some say was largely responsibly for the banking crisis of 2008 dropped the US from AAA to AA as they forewarned if serious deficit reduction wasn’t agreed to in the debt ceiling debate.

While stocks and oil are much lower to start the day, gold has surged to new nominal all-time highs at $1715. The currency market sees this as “much ado about nothing” as it is trading orderly and looks like just another volatile day.

Because indeed, this much ado about nothing. There is a 0% chance that the US will default on its obligations as the Fed has the ability to turn on the printing press and print money to satisfy our creditors. However, this could be a question of valuation as the Dollar would be worth far less in that situation.

And that is one of the issues that some aren’t taking into consideration, that not only is it important that we are able to repay our debts, but that we are able to do so with something of value. Currency risk and political risk are all factors that need to be considered, and I think this is a great wake-up call for those in Washington DC who wish to continue to do business as usual.

Meanwhile in the Euro zone, the ECB has agreed to step up its purchases of Italian and Spanish debt, essentially trying to keep yields low so that debt can be repaid. While there is still risk in the marketplace, the global slowdown is a far bigger risk than the US potentially defaulting.With no other news on the docket today, all eyes will be looking toward the FOMC meeting tomorrow which is bound to address this new development. Many in the market believe that this will lead to another round of quantitative easing (QE3), though its effectiveness at this juncture is uncertain. Some argue that the temporary kick we got from it was ineffective as the markets right now are back to pre-QE2 levels.

So there is risk aversion in the markets today, with the Dollar strengthening in what some might see as a counter-intuitive move. However this could become a case of sell the rumor, buy the news as this really is nothing more than egg on the face of Washington DC politicians who are conveniently on vacation until the end of the month. Get it together people!

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