Forex Blog

January 26, 2012

Recession Fears Could Delay UK Deficit Reduction Plans

Filed under: OANDA News — Tags: , , , , , , , — admin @ 1:39 pm

On Wednesday, the Office for National Statistics (ONS) revealed that the UK economy contracted by 0.2 percent for the final quarter of 2011. Economists had predicted a slight increase of 0.1 percent for the last three months of the year.

Despite the feeble ending to the year, the latest ONS data shows overall growth for 2011 was a mediocre, but still positive, 0.9 percent. Still, this level of expansion is well below the Bank of England’s 2 percent growth target and there is a real concern that the economy will continue to shrink during the first half of 2012.

This could hardly come at a worse time for the British government. Like many of its G8 counterparts, the UK is faced with the dilemma of promoting growth, while at the same time, keeping a lid on spending. In fact, government spending was a central theme in the 2010 election and resulted in a coalition government led by Conservative Prime Minister David Cameron together with the Liberal Democrats.

The new government came to power on a promise to address the country’s out-of-control spending which few would argue was not already well beyond a crisis point. And that is actually saying something as Great Britain has a long history of deficits.
In fairness, some of this debt was accumulated as part of the effort to fight two major wars, but even in peace time, Britain typically spends more than it earns.

During the 1970s and 1980s, high levels of inflation forced the government to rely on borrowing to maintain spending programs. In the span of those two decades alone, total debt rose from £33.1 billion ($51.6 billion) in 1970 to £197.4 billion ($308.0 billion) by 1988.

Since then, Britain has actually increased its reliance on deficit financing. By 1997 total public debt was £352 billion ($549 billion), but by the end of 2009, debt had once again more than doubled and has now broken through the £1 trillion ($1.6 trillion) barrier.

Britain’s 2011 deficit is expected to be in the range of £150 billion ($234 billion), making it only marginally better than the previous year’s deficit of £170 billion ($234 billion) despite a full year of government spending cuts. The country’s debt to GDP ratio is still nearly 80 percent and with weaker growth expected in the coming year, this statistic could worsen.

Both the Bank of England and the International Monetary Fund (IMF) recently downgraded earlier growth projections for 2012. The IMF slashed its prediction by a full percentage point and now expects the British economy to expand by only 0.6 percent this year.

Eurozone Crisis and Austerity Measures

With its close proximity and trade ties with Europe, Britain is heavily exposed to the uncertainty arising from the Eurozone debt crisis. In late November, the Organization for Economic Development and Cooperation (OECD) released a stark statement warning that the UK will almost certainly face another recession in the first half of 2012 because of the turmoil in the Eurozone. Britain has already recorded one quarter of negative growth – should the first quarter of 2012 also be negative, the OECD’s prophecy will come true.

While there is little the government can do with respect to solving the Eurozone issue, it will be interesting to see if the government moderates its drive to eliminate the deficit in deference to the slowing economy. Reducing the deficit is necessary, but it is impossible to dramatically slash spending without impacting growth. With growth already on the decline, it may be advisable for the government to moderate its spending reduction plans at least until the economy gathers strength.

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January 10, 2012

Forex Market Outlook 1/10/12

Filed under: Forex News — Tags: , , , , , , , , , , , , , — admin @ 6:47 am

Traders will have a hard time trying to find a down market today with the exception of JPY and USD as the market has taken a decidedly pro-risk tone this morning, which is a welcome relief to some.  Both global stocks and commodities are trading much higher to start the US session.  There are a few different factors driving this sentiment and it is this confluence that is driving markets higher.

So what’s going on this morning?  For starters, the market is regaining confidence in the Euro zone and the ability of its leaders to tackle the debt crisis.  2012 is likely going to be a different year for EU leaders who appear to be out in front of the crisis unlike last year when they dragged their feet and let the politics play out in public forums which erased any credibility they had maintained up to that point.  Yesterday’s meeting between Sarkozy and Merkel was viewed as positive and the news that they may accelerate payments to the bailout fund is welcome.

Today Merkel is meeting with Lagarde of the IMF and there is renewed hope that they will further the mission of tackling the debt crisis.  So far they are winning the PR battle and have kept the bond vigilantes away for now, though there is a lot of bond issuances due out over the course of the next month so they are not out of the woods just yet.  But yields are coming down for EU debt, though Italy’s 10-year is still above 7% which is problematic.  Another good piece of news is that Fitch stated they would not downgrade France so long as the debt crisis doesn’t worsen.

However, news about the current Greek debt crisis has been met with mixed reviews.  It now looks like bondholders may have to take a haircut of greater than 50% which could bring some noise to the markets as investors balk and would prefer default in order to be paid out on their CDS. This will be the story to watch going forward, as well as if this has any impact on future investment in other sovereign debt issues.

News out of the Euro zone showed that French Industrial Production figures came in better than expected showing positive gains vs. expected declines across the board.

In the UK, home prices fell less than expected and the market is looking forward to Thursday’s rate decision where the BOE is still expected to make no change.

Today is a slow day for economic data but one of the big drivers of the markets will be US corporate stock earnings.  Last night earnings season kicked often with Alcoa (AA) posting better than expected results and a host of other equities look to beat expectations despite slowing profit growth.  The correlative effect of higher stock prices still holds some weight and is a major driver of risk sentiment.

Another driver of risk sentiment is oil prices, rightly or wrongly.  I have always contended that higher oil prices should be bad for risk sentiment and not contributing to risk appetite but I am just one voice out of many.   Oil has been higher this morning to $103, mainly because of Iran’s sabre-rattling, which is threatening the supply of oil to the global market.

Overnight, China reported a much better than expected trade surplus as reduced imports pushed the balance higher as exports remained steady.  The trade surplus of nearly 16B was almost twice what was expected so China needs to step up their importing if they don’t want to continue to draw ire over their currency peg.

There is no news of any significance due out in the US today but there is some Fed speak later today that could have a market impact, though unlikely.  In today’s Twitter age, the Fed folks have really learned not to speak out of school and their remarks are carefully vetted ahead of time.  So they will stick to the party line and will go un-noticed.

If things continue on this trajectory, then we could see further risk appetite if corporate earnings continue to be positive.  The private sector appears to be in good shape at this point but government health is likely to be the topic going forward.  2012 is an election year so expect the powers that be to try to pull out all of the stops to juice the numbers to make it seem like they have been doing a good job.

Despite our ability to persevere, I can tell you that things could be a whole lot better.  Don’t fall for the counter-factual argument that things could be worse, because the opposite also holds true, that things could be better.  If business gains confidence from the government, not from the economic results, then we could be on the path to recovery.

December 30, 2011

Back To Where We Started: Euro (EUR)

Filed under: Forex News — Tags: , , , , , , , , , , — admin @ 7:39 am

Well for all of the recent fear emanating form the Euro zone because of the debt crisis and the recent sell-off that has occurred, the Euro is right back to where we started 2011.  As Yogi Berra would say, “deja vu all over again!”

But seriously, despite the wild ride that has occurred we are right back to where we have started.  But, we have had the benefit of another year to deal with the problems and allow the crisis to begin to work itself out.  This means that we are likely to see this type of activity going forward as the short-term funding problems of the indebted nations will carry volatility forward for some time to come.

So have we reached the bottom for the Euro?  Unlikely but we could be in a scenario where a ratcheting down of the EUR/USD pair takes place, with the possibility of testing 1.20 in bad times and the possibility of re-visiting 1.40 if the global economy starts to improve.

But as the saying goes, its going to get worse before it gets better so my feeling is that we will see 1.20 before we see 1.40.

What 2012 holds for the forex market is anyone’s guess but I can guarnatee there will be plenty of opportunities!

Happy New Year to all!

December 19, 2011

Forex Market Outlook 12/19/11

Filed under: Forex News — Tags: , , , , , , , , , , , — admin @ 7:26 am

The big news of the weekend is the death of N. Korea’s crazy leader Kim Jong Il, which has provided a minor bit of uncertainty in the Pac Rim as it is expected that his son will succeed him.  The goes to show that uncertainty is sometimes worse from a market perspective than the removal of a bad situation.  I would though have thought that markets would have rejoiced and rallied, but uncertainty rules.

However the markets have bounced back from early selling in Asia and look to open higher here in the US, with both stocks and commodities trading higher.  There is still a lot of risk emanating from the Euro zone, and the potential for credit downgrades is looming.

In Spain, bad loans were up as the Spanish banking system attempts to withstand the fallout from the housing bust there and maintain stability despite unemployment that is over 20%, the highest in Europe.  This comes after word form ECB chief Draghi maintained that the ECB would not step up their bond purchases, electing to adhere to the Central bank’s mandate rather than favoring practicality.

Later today, Euro leaders will conduct a conference call where they attempt to hammer out the details of the fiscal pact they agreed to at their last meeting.  This unlikely to be the final word on the matter and Euro leaders have contributed to the economic demist they are seeing by dragging their feet and not responding to the crisis more swiftly.

Meanwhile they have been swift in asking others for money, particularly the IMF.  EU leaders are calling for an additional $261 billion from the IMF and are asking the UK for $50 billion.  Good luck with that.  The Euro has been vacillating around the 1.30 level vs. USD, which is surprisingly strong given the state of affairs in Europe.

This is a holiday-shortened week so volume may decline as we approach the weekend.  News this week from the EU includes German PPI and economic sentiment figures tomorrow, though there is not much else from a data perspective.  This is not to say that there won’t be any news, but I will more likely be of an unexpected nature.

There is more news due out from the UK, including the release of the rate policy meeting minutes on Wednesday and GDP figures on Thursday.  This could be supportive of the Pound if the BOE decides to take a wait and see approach or if GDP comes in better than expected.  The data in the UK has been relatively strong in my opinion, though the markets are a discounting mechanism so surprises could happen to the upside.

In Japan, the rate policy meeting on Thursday is expected to produce no change as the Yen has virtually stopped trading vs. USD.  There has not been a lot of volatility in this pair, which is just fine by the BOJ.  But, there could be some Yen movement if problems emerge from N. Korea.

From the commodity currency bloc, the release of the RBA meeting minutes in Australia tomorrow, followed by Canadian CPI data on Wednesday and GDP figures on Friday, and rounded out by GDP figures in New Zealand could have an effect on the risk trade.  Gold is sitting at $1600 with oil just above $94.

Lastly here in the US, the news releases are heavier toward the end of the week highlighted by the release of GDP figures on Thursday and some ancillary releases packed in.  Markets are hoping to escape for the holidays with little fanfare and many are looking forward to putting this year behind us.

While the data here in the US has largely been positive, it is hard to buck the feelings of malaise that overhang the markets and the economy in general. There is absolutely no confidence that things are going to improve, and people are just waiting for the next shoe to drop.  This is no way to run an economy as fear trumps sanity and then things don’t improve.  Combine this with EU leaders essentially holding the world hostage through their non-actions, and we find the global economy floundering.

Will this continue into next year?  Unfortunately, I think so.

December 16, 2011

Week in FX Europe Dec 11-16

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 10:31 am

Last week’s Euro summit is not sitting well with the market. From the first trading session this week, investors were given the green light to push this currency down to an 11-month low. Rating Agencies continue applying pressure in the background, threatening to downgrade one or all of the Euro-zone members. The absence of the ECB as the “lender of last resort” is hurting risk appetite. Because we are in December, it’s difficult for many participants to strap on massive risk positions in a low-liquidity and volatile environment. This month and year may be winding down, but the heat on the Euro-zone is certainly becoming more intense. Investors are trading up against some key support levels for the currency, levels that when breached could see another decent run to the downside.

Below are some other highlights of the week:


EUROPE

  • EUR: Moody’s reiterates that it would review the ratings of all European sovereigns in Q1, joining S&P in noting rising vulnerability without taking the formal step of placing the ratings on review.
  • Moody’s: Placed eight Spanish banks on review for possible downgrade, citing domestic economic weakness and an ailing commercial real estate market. These reasons are only ever going to become more dominant with the threat of the Euro-zone dipping into recession come the New Year.
  • EUR: It was not a surprise to see that the EU summit and ECB meeting last week has left the euro very vulnerable.
  • ECB: They delivered a set of measures aimed at improving banking sector liquidity, and made progress on moving towards a more perfect “fiscal union”. It is suggested that the measures will stop short of ensuring market access for the larger peripheral sovereigns at sustainable rates.
  • ECB: They also rejected the notion that fiscal agreement would pave the way for more aggressive bond purchases. This week’s absence has been duly noted, allowing bond yields to push higher without any obvious aggressive ECB response.
  • ITL: On Monday Italy successfully auctioned 1-year bills, with a +5.95% yield and 1.92 bid-to-cover ratio.
  • EU: German ZEW survey surprised positively (-53.8 vs. -55.2), but remains at very depressed levels.
  • EU: The EFSF saw strong demand at its 3-month bill auction, and Spain successfully sold 12 and 18-month bills. Market should not be concerned because of the shortness of maturity.
  • UK: Inflation slowed to +4.8%, y/y, in November from +5.0%, and in line with expectations. Core-inflation moderated to +3.2%, y/y, from +3.4% and a touch below the consensus forecast for +3.3%. With monthly gains in core prices remaining firm will pose a risk to further easing by the BoE. However, given weak growth the market is leaning towards an expansion of QE in February.
  • SEK: Inflation printed +2.8%, y/y, a tad above expectations of +2.7%, but moderating from +2.9% in October. Core-inflation remained stable at +1.1%, y/y, again a tad above the consensus for +1.0%. With core-inflation printing below the Riksbank forecast for two consecutive months supportive market expectation of a cut at the next meeting.
  • SGD: Their employment outlook weakened sharply for Q1 2012. Net employment expectations fell to +16% from +31% in Q4. However, this is still consistent with an increase in employment, albeit at a slower pace, and is in line the government’s outlook for only 1-3% GDP growth in 2012.
  • EU: In mid-week, Germany sold +4.18b 2-year notes and paid the lowest yield (+0.25%) for 2-year product since the inception of the EUR. The bid-to-cover was 1.4 versus a four auction average of 1.1. The Italians on the other hand, in contrast, paid a Euro era record yield of +6.47% to sell +EUR3b five-year debt, adding to concerns that an EU summit last week had made little progress in tackling the region’s debt crisis. The country has done little to ally fears over its ability to continue to raise funds at sustainable levels. It’s estimated that they need +EUR220b’s worth of bonds next year.
  • EU: The Euro-zone factory output data disappointed, falling on the month (-0.1%) and registering its weakest annual gain in nearly two-years. Production rose +1.3%, y/y, the weakest increase in two-years and well below street estimates of +2.1%. Weakness in the Euros manufacturing base reinforces the regions concerns on the health of their economy.
  • UK: Labor market data came in slightly better than expected. While the ILO unemployment rate is stable at +8.3% in October, the jobless claims increased by +3k only. These numbers point to somewhat better job market conditions and a more resilient economy than other indicators would suggest. However, capital markets expect an expansion of the QE program in February.
  • EU: Spain sold +€6b of 5’s and 10-year debt, well-above the +€3.5b indicative maximum on offer. This was the second oversubscribed auction of Spanish paper this week.
  • EUR: Euro area PMI surveys surprised to the upside, despite expectations for a further drop. The manufacturing PMI rose to 46.9 from 46.4, the first increase in eight-months. Services PMI increased to 48.3 from 47.5. However, with the financial distress and resulting tight credit conditions should limit any further rebounds. Analysts continue to suggest further easing from the ECB will be necessary.
  • EU: Euro-zone inflation came in an unrevised +3.0%, y/y, last month. Core-inflation was stable at +1.6%. In its monthly bulletin, the ECB again highlighted substantial downside risks to the economic outlook. Projections now show inflation dropping below +2% next year and to +1.5% in 2013. This is certainly inline with more rate cuts.
  • GBP: UK retail sales ex- fuel fell -0.7%, m/m, in November, worse than the -0.4% forecasted. Coupled with positive revisions to previous months, the annual growth rate is +0.5%, y/y, above the consensus for +0.3%.
  • CHF: The SNB left EUR/CHF floor at 1.20. Their statement was a carbon copy to the September statement. Inflation forecasts were revised lower. The 2012 inflation forecast was left unchanged at -0.3% while the 2013 inflation forecast was marginally revised by -0.1% to -0.4%. Hilderbrand projects GDP Growth to be at +0.5%, y/y, next year. They are attributing the negative growth risks to “their country’s close relations with the euro area; Switzerland’s economic prospects are highly dependent on how the crisis develops”.
  • IMF Lagarde: Crisis escalating and requires assistance from countries outside the EU.
  • HUF: The currency is underperforming on the news that the IMF mission chief cut short a visit to Hungary due to disagreements on central bank law and on pension funds.

December 12, 2011

Euro Summit Failure Underscores Need for Sovereign Default

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 3:26 pm

The euro fell to $1.310 by 2:30 pm in New York on Monday and continues to be assailed on two fronts. Investors clearly remain unmoved by the outcome of the weekend summit meeting and this has money leaving the euro in favor of safer destinations. In addition, the European Central Bank’s back-to-back interest rate cuts have also eroded support for the euro.

Summit Meeting Underwhelms Eurozone Watchers

Once again, a lot of talk came out of Brussels as the 17-members states scheduled yet another meeting to discuss the sovereign debt crisis. And once again, the rhetoric fell tragically short of establishing a firm course of action.

In the end, the Eurozone brain trust failed to provide a compelling argument to convince investors that a credible plan was in the works to prevent the crisis from spreading to the larger economies including Spain and Italy. One has to wonder how many more opportunities can be squandered before the Eurozone finds itself past the point of no return.

The main outcome of the weekend meeting was the establishment of another fund, this time to be administered by the International Monetary Fund. Eurozone central banks will provide 200 billion euros to the IMF which is also expected to make available another 300 billion euros.

This new fund will be in addition to the existing European Financial Stability Fund. The EFSF currently contains about 500 billion euros but much of it is already committed to existing bailout plans. This leaves the EFSF woefully underfunded to save the larger economies now teetering towards insolvency.

The fact that eurozone officials continue to print money in anticipation of another round of bailouts makes it clear that the problem is still being perceived as a liquidity issue. The reality, however, it that the lack of liquidity
is the result of a debt problem and a corresponding lack of confidence. Investors are unwilling to buy Greek debt at a rate Greece can afford; and until confidence is restored, Greece and a handful of other countries following Greece’s path will continue to rely on bailouts to cover their deficits.

The only way to break this dependency is to invoke a reset. These countries must be forced into a controlled default that involves a writing-down of sovereign debt. The cash now being set aside would be better served to minimize the impact a write-down would have on debt holders including the banks forced to accept a reduced payout.

To simply hand billions of euros over to these countries may deal with the symptoms, but does nothing to address the ailment.

Risk Aversion absorbing US Debt Supply

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 11:39 am

Even with $78b of US product (notes, bonds and inflation-linked debt) coming down the pipeline this week, treasuries remain in demand. The heavy issuance’s in the remainder of the year (+$177b of varying duration-bills, notes and bonds) normally would make it easier for dealers to take advantage of both supply and price, however, developments in Europe has investors wading towards the sidelines and requiring more product for surety reasons.

It was not a market surprise that the mention of a rating agency had US yields under pressure today. Bond prices rose after Moody’s said it will review ratings for all EU countries, citing a failure to produce “decisive” measures to end the region’s debt crisis at “the” summit last week. The US 2/30’s yield curve flattened -7bp to +282bp as Italian (+43bp to +6.79%-highest since Dec 1) and Spanish (+32bp to +6.07%-also highest since Dec 1) sovereign bonds led price declines among higher-yielding European sovereign debt. Even Germany managed to dip their oar into the ECB debate by questioning the duration of the central banks role. The Bundesbank president stated that the “onus is on governments rather than the ECB to resolve the crisis with financial backing”.

With the lack of decisiveness out of Europe has led to treasuries remaining better bid on pull backs. The continuing uncertainty will keep safe-haven Treasuries from selling off much even as the market absorbs the supply. Fitch has echoed a lot of what Moody’s warned about earlier, citing that the latest EU agreement is “not big enough to stem the region’s debt crisis”. They are predicting a “significant economic downturn” in the short term.

Today, US treasury auctioned off +$32b in three-year notes. The note sale booked the highest bid-to-cover ration (3.62 vs. 3.29) in 18-years. Indirect buyers took down +39.1% of the sale, on par with +40% average over the past four-auctions. Direct buyers picked up +7% of the offering, below the +12.4% recent average. With volumes drying up near year-end and participation at December auctions normally lighter, market attention will now shift towards tomorrow’s +$21b 10-year offering and Wednesdays +$13b long bond.

Tomorrow, we also get the FOMC rate announcement, before that it’s US retail sales. Will an underperforming sales surprise print open up the QE3 debate again?

The Nikkei closed at 8,653 up +117. The DAX index in Europe was at 5,785 down -201; the FTSE (UK) closed at 5,427 down -101. US indices remained in negative territory with the Dow currently trading at 11,970 down -213.

    December 9, 2011

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

    Filed under: OANDA News, Uncategorized — Tags: , , , , , , , , , , — admin @ 11:50 am

    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 4, 2011

    Trading Week Outlook: Dec. 5 – Dec. 9

    Filed under: Forex News — Tags: , , , , , , , , , , , , , , — admin @ 8:07 am

    Dec. 3, 2011 (Allthingsforex.com) – With the European Central Bank interest rate announcement and the EU Summit on the horizon, the trading week ahead could prove crucial for the future fate of the euro and the debt crisis-stricken euro-area.

    In preparation for the new trading week, here is the outlook for the Top 10 spotlight economic events that will move the markets around the globe.

    1.    USD- U.S. ISM Non-Manufacturing Index, a leading indicator of economic conditions in the services industries: agriculture, mining, construction, transportation, communications, wholesale trade and retail trade, Mon., Dec. 5, 10:00 am, ET.

    In light of the stronger-than-expected manufacturing index, the U.S. services industry activity is also forecast to expand for another month with an index reading of 54.0 in November from 52.9 in October.

    2.    AUD- Reserve Bank of Australia Interest Rate Announcement, Mon., Dec. 5, 10:30 pm, ET.

    The latest economic data from “down under” proved that the Australian “miracle economy” is not immune from the global slowdown, which coupled with easing inflationary pressures has raised the odds of another 25bps rate cut by the Reserve Bank of Australia to 4.25% from the current 4.50% level. A rate cut combined with risk aversion could become the formula for Australian dollar weakness.

    3.    CHF- Swiss CPI- Consumer Price Index, the main measure of inflation preferred by the Swiss National Bank, Tues., Dec. 6, 3:15 am, ET.

    Deflation has once again become a threat as the Swiss inflation gauge unexpectedly dropped below zero in October. With forecasts pointing to another decline at -0.3% y/y in November and the government “examining feasibility” on measures to deal with the strong currency, the Swiss National Bank might be forced into stepping up its efforts to weaken the franc. Although the next move by the central bank is still a bit of a “mystery”, the odds that we could witness a historic decision by the SNB to raise the EUR/CHF floor from 1.20 up to 1.25, or even to 1.30, are rising exponentially.

    4.    EUR- Euro-zone GDP- Gross Domestic Product, the main measure of economic activity and growth, Tues., Dec. 6, 5:00 am, ET.

    The revised reading of the Q3 GDP is expected to confirm that the Euro-zone economy is losing steam, growing by only 0.2% q/q in the third quarter, same as the 0.2% q/q reading in the second quarter of 2011, and less than the 0.8% q/q increase in Q1 2011.

    5.    CAD- Bank of Canada Interest Rate Announcement, Tues., Dec. 6, 9:00 am, ET.

    Acknowledging that the global economy has “slowed markedly” with “significantly less favorable external environment affecting Canada”, the Bank of Canada is not expected to make any changes to its existing accommodative monetary policy and would be likely to keep the benchmark interest rate at the current 1.0% level.

    6.    AUD- Australia GDP- Gross Domestic Product, the main measure of economic activity and growth, Tues., Dec. 6, 7:30 pm, ET.

    Despite of the anticipated rate cut by the Reserve Bank of Australia, the Q3 GDP might lend some support to the Aussie with forecasts pointing to a stronger 2.3% y/y growth in the third quarter of 2011, compared with 1.4% y/y in Q2 2010. On the other hand, quarter-on-quarter growth is forecast to be unchanged at 1.2% q/q in Q3, same as the 1.2% q/q growth in the second quarter.

    7.    NZD- Reserve Bank of New Zealand Interest Rate Announcement, Wed., Dec. 7, 3:00 pm, ET.

    Becoming the most surprisingly hawkish of all major central banks, it would be interesting to find out if the Reserve Bank of New Zealand might change its position as a result of the global slowdown. The bank is expected to keep rates at the current 2.50% level for another month, but the Kiwi dollar could get a boost from any hints that the bank is still not steering away from a future rate hike.

    8.    GBP- Bank of England Interest Rate Announcement, Thurs., Dec. 8, 7:00 am, ET.

    With the largest U.K. trading partner, the Euro-zone, slowing and the EU debt crisis far from over, the odds are rising that the Bank of England’s policy makers could be prompted to increase the size of the Asset Purchase Program beyond the current 275 billon pounds; however, they might decide to wait until 2012 to do so. In the meantime, the likely outcome of the MPC meeting would be to keep the benchmark rate at its record low 0.5% level and to leave the door open to additional quantitative easing if conditions deteriorate. As a result, the GBP should continue to be confined in its current $1.50’s range, unless the EU debt crisis take a turn for the worst and massive risk aversion sends the sterling into the $1.40’s against the U.S. dollar.

    9.    EUR- European Central Bank Interest Rate Announcement, Thurs., Dec. 8, 7:45 am, ET.

    As many economists lower their Euro-zone growth forecasts and the ECB President warns about the potential for a “mild recession” on the horizon, it shouldn’t be a surprise to see the European Central Bank producing another 25bps rate cut at the upcoming meeting in an effort to avoid a double dip. Navigating through a sea of uncertainty, while at the same time trying to fend off political pressure to become the “lender of last resort”, the ECB might end up giving up the resistance and turning the printing presses on if the EU debt crisis escalates with borrowing costs rising to unsustainable levels. It is hard to see such scenario as a EUR positive…

    10.    EUR- EU Summit of leaders of the 27 countries in the European Union, Fri., Dec. 9, all day event.

    The outcomes of the EU summits in the last couple of years have a common thread- they all tend to remind us of Naked Eyes’ hit from 1983, as the markets around the world expect to see comprehensive solutions to contain the euro-area sovereign debt crisis but all they get are “promises, promises”. Will it be the same this time? Despite of the previous summit’s glimpse of hope that EU leaders have finally realized the seriousness of the situation after about 2 years since the beginning of the crisis, there are many murky details in the recently proposed strategies, some of them named “yesterday’s solutions” by Financial Times. The list of unanswered questions includes: how will EFSF be leveraged; can politicians effectively persuade the ECB to stand as a “lender of last resort”, or will that role be given to the IMF, or a newly-created European Monetary Fund; will EU members be willing to “sacrifice sovereignty in exchange for providing the economic and monetary union with a structural credibility”? Ahead of the last summit, “better late than never” optimism helped the euro register its biggest rally since March, 2009. Although another “hope rally” in the days leading to this summit would be sure to give the single currency a boost, the pressures on the euro could quickly mount if EU leaders fail to deliver the concrete and bold measures needed to win the debt crisis battle.

    November 28, 2011

    Forex Market Outlook 11/28/11

    Filed under: Forex News — Tags: , , , , , , — admin @ 6:51 am

    The markets are off to a quick start this morning after last week’s worst-performing stock market since the Great Depression.  Global stocks are soaring this morning, as are commodity prices, particularly oil.  The Dollar is lower with risk currencies (including the Euro) moving higher.

    There are two obvious factors at work this morning, but there is also a renewed hope that EU leaders will be increasing efforts to stem the debt crisis.  There is a 2-day EU Finance Ministers’ conference starting tomorrow and the debt crisis is obviously going to be the main topic of conversation.

    As to what has moved the markets this morning, the first was a rumor that the IMF was prepared to make a huge loan (around 600 billion euro) to Italy in order for them to deal with rising debt costs.  This “bazooka” type action has since been denied by the IMF and is not likely to materialize.  What is more likely is that EU leaders are going to feel intense pressure to quit their bickering and solve the crisis.  The markets have spoken through last week’s sell-off so if they can’t get something accomplished in short order, it’s likely bye-bye Euro.

    The other factor moving markets higher this morning is the reports of a large increase of retail sales from “Black Friday” here in the US, largely known as the biggest shopping day of the year.  I watched in amazement the reports of people pepper-spraying one another to buy stuff so for an economy that relies some 70% on consumer spending, I supposed this type of behavior is a good thing.

    Today is “Cyber Monday” which is supposed to encourage on-line shopping for the holiday season so a good number from today’s activity could show that the US consumer is not dead just yet.  However with 9% unemployment, there are many who won’t be doing any shopping and this is a larger concern.

    On Friday we will get the Non-Farm Payrolls (NFP) report which will show how many jobs have been added to the economy last month.  The expectation is for a gain of 120K jobs and for the unemployment rate to remain steady at 9%.  It is doubtful that seasonal hiring will show up in this report.

    With such stubbornly high unemployment, it is no surprise that many are now saying that they expect QE3 to be unleashed on the markets as inflation expectations are supposed lower.  But with $100 oil and the seasonal demand that comes with colder weather, in my opinion inflation is already upon us and it is disingenuous at best to suggest otherwise,

    But we will likely hear just that on Wednesday when the Fed releases its Beige Book Economic Survey.  So expect to hear the same tune from the Fed as little has changed for as we know by the failure of the debt super-committee, Washington DC is content to do nothing for the people they purportedly represent.

    This lack of confidence is glaring and tomorrow’s Consumer confidence figures being reported both here in the US and in the EU will be telling.  For the majority of what plagues us stems from a crisis of confidence.  There is very little leadership today that leads people to believe that solutions are attainable so activity continues to spiral lower as fear persists.

    Apparently the start of what’s known as the “Santa Clause Rally” may be starting early with this morning’s market activity.  Or perhaps it is a bit of short-covering or profit taking ahead of this weeks news.  Either way, fund managers who need a strong month to show decent performance numbers would love nothing more than to see this market rally into the year end so absent a complete Euro melt-down, we may get just that.

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