Forex Blog

Well it looks like the market chickens have come home to roost and have finally come around to the fact that the euro is in trouble.  While the obvious problems inherent in its composition have been highlighted through the debt crisis, market optimism for a solution has been doused after last week’s summit.

Risk in the marketplace is likely to persist and those hoping for the “Santa Claus Rally” may be disappointed.  Correlative effects of the euro/dollar/stocks and commodities may make it very difficult for risk assets to advance heading into the end of the year.  European countries are on negative credit watch from the various ratings agencies, and the recent reduction of interest rates by the ECB may make the euro even less desirable.

This morning markets are lower across the board and the US dollar and Japanese yen are strengthening as risk appetite has abated, led by lower stocks and commodity prices.  This is a classic risk aversion scenario as markets are waiting for the next round of good economic news.  So where will this news come from this week?

There is not a lot of market moving news on tap this week with CPI data due out from various countries.  The problem with these data releases though is that we just saw the rate decisions from the Central banks last week so even if CPI and inflation come in higher, no one, I repeat no one is looking to raise interest rates to stem it.

One interesting place to watch inflation though will be in the UK, where inflation is expected to fall from 5% to 4.8%.  This release comes out tomorrow.  Also keep an eye on the UK employment figures on Wednesday, and the BOE inflation projections due out on Thursday.  There has in my opinion been a disconnect between what the data has been showing and what the BOE has been seeing/forecasting.

The Swiss franc has been weakening ahead of Thursday’s rate policy meeting.  There is some speculation in the market that the SNB will move the target rate vs. euro to 1.25 or even 1.30 from the current 1.20, or the possibility of making interest rates negative in an attempt to weaken the franc.

I’m not really sure what economic data from the euro zone can reverse current sentiment about the prospects for the shared currency at this point.  Thursday’s CPI is a non-issue at this point as Draghi just lowered rates and Friday’s central banker’s conference could produce something interesting.  When in comes to the euro, it is more important this week to stay on top of the news that is not scheduled than what is on the docket.  Unfortunately this is harder to do, as one does not know when unexpected news will hit.  Credit downgrades or supplemental information to the debt deal could be that news.  So stay on your toes euro traders!

Perhaps the biggest news for the euro and the markets in general this week will not come from that side of the pond but rather from the US.  Tuesday’s FOMC rate policy meeting could produce fireworks if Bernanke feels the extra need to juice the markets through his statement.  This could imply increased talk of further monetary easing which could be the only catalyst to lift markets short of the Europeans coming up with a credible solution for the debt crisis.  So fund managers may have to wait until next year to book gains as the risk is just too great at this point to try to “window dress” their funds.

Tomorrow’s advance retail sales figures here in the US may be a pleasant surprise after all of the decent holiday sales reports we’ve been seeing, but I have a hard time believing that this level of activity will continue into the new year.  Friday’s CPI report doesn’t matter because Bernanke wants inflation.  Period.  He is not an elected politician so he doesn’t care what people think. His view is that those who can afford to pay more will and the rest will get by on government handouts

Part of the “problem” in the US that no one addresses is that stuff just costs too much.  It’s pretty simple, really.  The reality is that declining prices from these levels should not be seen as deflation but rather dis-inflation.  With oil just shy of $100, real interest rates negative, and food prices near all-time highs, it is not surprising to see that we are in economic trouble.

Yet the Fed will continue to “support” the current economy, but in actuality it is supporting their banker buddies.  Meanwhile, the rest of us will suffer.

So do yourself a favor:  if you are not involved in the forex market, find out how you can get involved.  Take advantage of monetary and fiscal policies around the globe and not be a slave to the uncertain regimes because of geography!