Markets rallied on Friday after the release of much better than expected US employment data. The non-farm payrolls data showed an increase of 243,000 in January which was well over the median economist’s forecast of 140,000. Furthermore, the unemployment rate dropped to a three year low at 8.3%. Market analysts, who were extremely bearish at the beginning of the year are now making grand announcements such as ‘the stars are aligning’ to push markets higher. The contrarian in us is now extremely cautious and we expect the USD to make a comeback after losing ground last week as the better than expected data has seen the likelihood of further quantitative easing fall. The EURO has retraced lower during the European trading session to as low as 1.3030 after opening in Asia above 1.3115.

In more sobering news, the situation is coming to a head in Greece with the government there expected to respond to the troika and demands by its international creditors for increasingly severe austerity measures within the next couple of days. It has become apparent that Greece is finding it difficult to come to an agreement with its creditors. The IMF has said that a worsening debt crisis in Europe could cut China’s growth in half. In China, Chinese Lunar New Year sales grew at the slowest pace since the 2009 financial crisis and a full 3% lower than last year at 16%. There are increasing signs of slowing consumer spending in China which does not bode well for the increasing numbers of foreign retailers rushing into the Chinese market. The Australian dollar has eased off highs at 1.0796 on Friday to fall more than a cent to as low as 1.0685 today.

US equity markets rose to their fifth weekly gain last week after the release of the much better than expected US employment data. The Dow Jones is now trading at its highest levels since May 2008 as financial and technology companies gained more than 3%. The S&P 500 closed 1.45% higher at 1,344. Stocks in Asia were largely higher while the continuing Greek tragedy has seen European bourses trading down about 0.5%.

]]> http://forexbl.com/2012/02/06/market-outlook-for-february-6-2012/feed/ http://forexbl.com/2012/02/06/loonie-at-the-mercy-of-ivey/ http://forexbl.com/2012/02/06/loonie-at-the-mercy-of-ivey/#comments Mon, 06 Feb 2012 10:33:29 +0000 admin http://forexbl.com/2012/02/06/loonie-at-the-mercy-of-ivey/ Given the markets lack of focus on fundamentals lately, the loonie by all accounts, for a growth sensitive currency is holding its own outright, but for how long? The Loonie has been riding on the coattails of a strong NFP report (+243k and +8.3%) and ignoring its own softer domestic job output print (+2.3k and +7.6%) that supports BoC Carney dovish tone and economic concerns of late.

The market is assuming that the Canadian economy should increasingly benefit as its largest trading partner down south recovers from the recession. Investors are beginning to believe that any positive US data should keep the pressure on for a lower USD/CAD (0.9971). All this from one day out when the market was wondering if the worlds largest economy was slipping back into recession. One stellar NFP print does not make a trend, but it is a start!

Currently, the dollars price continues to lift off last weeks low print of 0.9928. According to the technicals, the daily charts indicate that the loonie is overbought, but selling outright dollar strength seems to remain the order of the day whilst below the four-week trend line (1.0015), risk is lower to 0.9780.

Depending on what Greek rumor dominates the hour, soft Canadian PMI data this morning could have the currency Bulls scatter a period. Its anticipated that the Ivey PMI could come in a tad softer, maybe decline from 63.5 to even below expectations of 58 in January. A softer reading should be able to kick some of this enthusiastic stuffing out of the energetic Bulls on expectations of a dovish turn from the BoC. This will temporarily lead the CAD to under perform the rest of the risk complex.

]]> http://forexbl.com/2012/02/06/loonie-at-the-mercy-of-ivey/feed/ http://forexbl.com/2012/02/02/china-to-play-the-eurozone%e2%80%99s-white-knight/ http://forexbl.com/2012/02/02/china-to-play-the-eurozone%e2%80%99s-white-knight/#comments Thu, 02 Feb 2012 20:27:56 +0000 admin http://forexbl.com/2012/02/02/china-to-play-the-eurozone%e2%80%99s-white-knight/ Since the early days of the Eurozone debt crisis, insiders have identified China and its $3.2 trillion in foreign reserves as a potential contributor to a Eurozone bailout fund. Today, Premier Wen Jiabao gave markets reason to believe this may yet be the case when Wen suggested that China is considering the options for how it may contribute to keeping the Eurozone together.

The original European Financial Stability Fund (EFSF) is scheduled to be superseded by the European Stability Mechanism (ESM) later this year. The ESM is expected to provide 500 billion euros ($656 billion) to the establishment of a bailout fund. Wen did not confirm whether China would contribute to the ESM directly, but this does seem to be the most logical way China could help support the region.

China Desires a Stable Euro and Eurozone

It is in China’s interest to help stabilize the Eurozone. It is estimated that up to one quarter – or roughly 620 billion euros – of China’s foreign exchange is held in euros. Shielding this investment from further decline is obviously of vital importance to China.

However, China also wants to see prosperity return to the region as quickly as possible to protect its export interests. The wider European Union is China’s largest export market with 282 billion euros worth of goods exported in 2010. Sales for 2011 continued to increase but at a slower pace and there is a growing worry that sales could soon start to decline.

German Chancellor Angela Merkel arrived in China today to kick off a three-day visit aimed largely at reassuring China that European leaders have a handle on the debt crisis.

With the beginning of the Chinese New Year holiday affecting market liquidity, some market moves have been slightly overextended. The US yield curve has steepened +3bps with 2/30’s moving out to +289bps, as longer dated securities lead the fall. Prices have also been pushed lower temporarily by German comments on the possibility of running the ESM and EFSF programs parallel. US 10’s are now trading on top of its first resistance point of +2.06%. The 10/30’s spread traded at +189bps, the widest point in six-weeks.

In this morning’s session, treasuries temporarily found a bid ahead of this week’s FOMC meet starting tomorrow and concluding on Wednesday. Policy makers are to introduce “major transparency” as an innovation process with individual FOMC members providing projections of the Fed Funds rates and each to explain the quantitative factors behind the projections.

Also putting pressure on prices will be the US treasury department coming to market this week to sell a total of +$99b in notes (2’s, 5’s and 7’s). First up will be tomorrows +$35b two-years, another +$35b of five-years are set for Wednesday, and finally, +$29b seven-year notes will take place on Thursday. Dealers expect this weeks issue’s to receive ‘extra’ concession, as China, a non-starter, will be celebrating New Year and providing little support. Now its back to ticker watching ahead of a Euro press conference scheduled for 20:30 GMT.

]]> http://forexbl.com/2012/01/23/us-debt-prices-on-the-back-foot/feed/ http://forexbl.com/2012/01/20/inflation-moderating-around-the-world/ http://forexbl.com/2012/01/20/inflation-moderating-around-the-world/#comments Fri, 20 Jan 2012 18:02:48 +0000 admin http://forexbl.com/2012/01/20/inflation-moderating-around-the-world/ 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.

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.

Risk assets are again rallying on the back of strong Chinese growth data. Chinese economic expansion beat estimates in the 4Q (+8.9%), belying fears on a sharp slow down of growth. It seems that China’s hard landing fears are not imminent due to the Euro-zone crisis thus far being described as a ‘slow bleed,’ unlike the sudden collapse of the US financial crisis. With growth reports continuing to beat market expectations has helped sooth fears that Europe’s debt related problems would slow the Chinese economy. Even regional retail sales and industrial output have been beating expectations.

The EFSF downgrade from AAA to AA+ has had a minimal affect on risk appetite. It helps that the programs funding requirements are largely covered until the middle of the year. The beleaguered Spanish borrowing costs have also been doing their bit for the cause this morning, surprisingly they have helped to push the EUR higher. The Spanish Treasury sold +EUR4.88b of 12 and 18-month bills, just below the maximum target, at an average yield of +2.049% and +2.399% respectively, managing to halve the cost of funding since the December issue. Demand for the 12-month bills was 3.54 times the amount sold, compared with 3.14 times the last time the securities were on offer.

Germany’s Economic expectations has improved significantly, beating all expectations, as stronger US data, falling Euro sovereign periphery yields and the ECB’s liquidity seems to have given a new-lease-of-life to “optimism.” The German ZEW index rose to -21.6 from -53.8 this morning for a second consecutive month after declining nine-months in a row.

All this positive momentum will persuade the market to target for the weak stops just above the 1.28 handle. Some technical analysts are eyeing these levels as an ideal area again to short the market. Even with Greek officials agreeing to reconvene with creditors tomorrow, after discussions last week stalled over the size of investor debt swap losses, negative comments from rating agency’s will not help market psyche. “Greece is insolvent and will default on its debts” according to Fitch, certainly nothing new in thought, however, the fear that the euro area’s most indebted country is unlikely to be able to honor a March bond payment in reality, is not supportive of the single currency longer term.

Other Links:
EUR move exaggerated?

The U.S. trade deficit with China narrowed to $26.9 billion in November, with American exports to the Asian giant rising to $9.9 billion.

Source: < ahref="http://www.reuters.com/article/2012/01/13/us-usa-economy-trade-idUSTRE80C0Y120120113" Target=_blank>Reuters

This has set today up for a risk-taking day, with stocks and commodities higher and the Dollar and Yen lower.  There was a lot of news today that could have derailed the markets today and continued the slow slide lower, but so far the news has been good.

Let’s start with the interest rates decisions, first in the UK.  The BOE this morning left both interest rates and the asset purchase plan unchanged as the market was expecting.  While there is no accompanying statement today, there was just the slightest chance they could have been more accommodative as the UK economy is starting to flounder, and there was absolutely no chance of tightening so the market is seeing the no-change as a positive.  Industrial production figures came in lower than expected.  We will find out in about two weeks time at the release of the meeting minutes how unanimous that vote was.

In the EU, the ECB also left rates unchanged and received the same response as the BOE decision, though now the Euro is starting to sell-off a bit ahead of Draghi’s speech later this morning.  While there was a greater chance of the ECB being more accommodative than the BOE, neither bank budged.  It will be interesting to hear what Draghi has to say today as clearly the Euro debt crisis is weighing heavily on the European economy and most economist think that the EU is facing recession, if they aren’t in one already.

However, Draghi and Europe received some excellent news on the debt crisis though as both Spain and Italy both had successful bond auctions that saw their interest rates cut nearly in half, as demand for this debt was huge.  Spain in fact got off nearly twice as much as they were expecting.  These bond auctions are going to be risk events going forward so every time there is a new one, the markets will be on pins and needles trying to figure out what the yields will be and whether or not they are feasible for the issuing country to service.

But Draghi today will likely address the overall EU economy and how to get banks lending again rather than just setting up carry trades between the ECB and the LTRO.   However, if yields can continue to move in the right direction than that makes the ECB chief’s job that much easier.  The fact that CPI data came in mostly lower than expected will also provide some temporary relief, but the ECB is going to have to be vigilant against deflation.

Overnight, China set the stage for risk appetite as their CPI data came in slightly higher than expected at 4.1% but lower than last year’s 4.2%.  At this level, China does not need to tighten monetary policy so in other words it is game on again.  This benefited the Aussie dollar, and in fact it traded exactly as I thought it might and posted on Monday.

However, risk appetite is starting to abate as the US data is coming in this morning worse than expected.  Advance retail sales figures have come in worse than expected showing a gain of .1% vs. the expectation of .3%, and the initial jobless claims also came in worse than expected showing 399K newly unemployed vs. the expectation of 375K and perilously close to the 400-handle the economy has been trying to shed.

So markets are pulling back from earlier highs though it will be interesting to see if this trend continues for the rest of the day.  My feeling is that if the market is happy with European debt this morning, then it should be positive for the markets overall.  While some of the US data may be showing weakness, overall the numbers have been positive though much of that may be because of the increased demand from the holiday season.

Draghi’s speech today should be supportive of the EU economy and recent stock earnings have been good so far.  Gold has been rallying in the wake of a lower Euro though overall risk appetite has been mixed.  So my hope today is that the markets can shake off this temporary weakness this morning and return to the early morning trend of risk appetite.

]]> http://forexbl.com/2012/01/12/forex-market-outlook-11212/feed/ http://forexbl.com/2012/01/10/has-staying-out-of-the-eurozone-helped-turkey-and-poland%e2%80%99s-economies/ http://forexbl.com/2012/01/10/has-staying-out-of-the-eurozone-helped-turkey-and-poland%e2%80%99s-economies/#comments Tue, 10 Jan 2012 17:33:50 +0000 admin http://forexbl.com/2012/01/10/has-staying-out-of-the-eurozone-helped-turkey-and-poland%e2%80%99s-economies/ 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?