Forex Blog

January 17, 2012

Compass Directions Tuesday, 17 January 2012

Filed under: Forex News — Tags: , , , , , , , , , , , — admin @ 6:58 am

After downgrading nine European nations including France on January 13, Standard and Poor’s announced that it will also cut the rating of the European Financial Stability Facility from AAA to AA+. The news offset a relatively successful French bond auction which saw yields fall on one year notes fall from 0.454% at a January 9 auction to 0.406%. It appears that most investors had already priced in a cut in ratings for France and the reaction of investors in the first trading session after the release of the mass downgrades was rather muted. Germany is now the only eurozone nation with a stable AAA rating. The EUR has failed to moved much from 18 month lows and opens the Asia morning trading at 1.2660.

The focus this week for European leaders will be to address the mounting criticism of their handling of the debt crisis by delivering new fiscal rules and work out a solution for Greece as the rescue plan for that nation flounders. The discussions surrounding Greece and the reduction of the debt burden re-main a strong focus and will be an important tests in the eyes of international investors. Pimco’s Bill Gross has already stated that a Greek default is very likely. There was speculation last night that the ECB acted to buy Italian and Spanish bonds. In other currencies, the GBP is trading at…while the Australian dollar continues to hold up well at 1.0300.

With the Martin Luther King holiday in the United States, investors were focussed largely on Europe and it was somewhat of a surprise to see a very muted reaction to the S&P downgrade of a number of eurozone nations including France. Although US markets were closed, S&P futures did record a modest rise as the market awaits results from Wells Fargo, Citigroup and Microsoft this week. In Europe, after initial weakness, the bourses there have closed higher with the DAX gaining 1.25% to 6,220 while the FTSE rose 0.37% to 5,657. Carnival, the world’s largest cruise ship operator, fell 14%, after one of its ships struck rocks and capsized off the coast of Italy.

Commodities futures were largely closed fro trade due to the US holiday. WTI crude rose 1% to above $99.60 as the war of words escalated over the Irani-an situation. Precious metals are higher with gold gaining 0.8% to $1,644 while silver is trading just below $30 up 1.43%. Soft commodities were largely closed for trade while copper gained 1.07%. Today, we have the release of the high impact Chinese GDP data amongst a series of other releases including retail sales and industrial production. Overnight, we have UK and European CPI, a speech by BOE Governor King and the Canadian Rate Statement. The Chinese data will have a strong impact on the markets this week if they show a marked slowdown in the world’s second biggest economy as we expect.

GOLD moved higher in offshore trade as sentiment picked up, especially in the Euro region with bond yields falling in France after a successful bond auction. The USD steadied which assisted a rise in precious metals prices but all in all it was a quiet night with the US off on holidays. Gold finished offshore trade stronger by 0.80% at $1,643. A very quiet night for precious metals last night as most of the big moves come out of the US and the liquidity just wasn’t their as we had a US holiday. Prices remained well bid throughout the session and are definitely looking prone to further gains. Support down at $1,625 was never in doubt and this level remains short-term support and below here key support is now located at $1,600/05. So depending on the timeframe depend son where stops should be placed. Longer-term holders should consider stops under $1,580 for now. A move looks set to test $1,662 and if we get through here then we should continue to grind back towards $1,700. China data key today so any weakness after this data should be an opportunity to get long.

AUD/USD was one of the best performing currencies during the last 24 hours as the better than expected Australian Home Loans data started the ball rolling and with a lack of liquidity around the markets due to the US long weekend the price managed to get back above 1.0300 and posting a 1.0335 top during the US afternoon.  This bounce hasn’t surprised us and yet again we are seeing it as another opportunity to re-enter a short term sell position. The price has already moved back to 1.0306 to close out the US session with the ratings agency S&P taking any positive spin out of the markets with a downgrade to the EFSF Bailout Fund from AAA to AA+.  There is a lack of Australian data, however, with the Chinese GDP release today expect some movement for the AUD. The AUD looks to be on the knifes edge of something and this could be the tipping point. An    improvement in Chineawill see the bulls take AUD above the pivot 1.0370 whilst a lower number will give the bears what they have been waiting for, more Doom and Gloom with parity around the corner.

January 12, 2012

Will the US embrace EURs new found confidence?

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 4:19 am

The EUR’s low (1.2663) print of yesterday is but a distant memory in this monotonous trading range. Especially after this mornings successfully strong Spanish bond and Italian bill auction. Until know, the market had been fueled by French rating rumor troubles over the past couple of trading sessions. All denied of course, however, the half hearted participation rate has made for a number of dull trading days. This weeks focus really starts today with the highly anticipated Spanish and Italian issues. The market gets to see how interested investors are in investing in theses two economies with so much to lose. Will Premier Monti and Prime Minister Rajoy get the recognition for their austerity efforts?

Thus far, the yield on the Italian 10-year bond has remained near the psychological +7% level that prompted Greece, Ireland and Portugal to seek bailouts. In contrast, Spanish debt has fared better with the 10-year issue hovering close to the +5% watermark. Despite a worse than expected outcome for Spain’s 2011 fiscal deficit and ongoing concerns over banks’ bad debts, Spanish yields have improved on stronger sentiment across the region. This has been proven this morning with Spain delivering a strong auction.

Spanish treasury successfully auctioned +EUR9.98b of government bonds, double the amount it had planned. The average yield in the auction came in below secondary market levels, a sign of strong demand. This has also helped to push German Bunds down to healthier levels, encouraging the exiting of some risk averse positions. Not to be left out in the cold, Italy sold 1-year bills at +2.735%, vs. +5.952% on December 12. In total, Italy successfully sold +EUR12b T-bills, meeting its target, and at the same time seeing its borrowing costs plunge in the country’s first debt sale of the year and in the process helping sentiment give a lift to the single currency. On the data front, Italy is also helping the EUR to test this weeks highs. This morning’s Industrial Production release was slightly higher (+0.3% vs. -0.5% seasonally adjusted) than expected in November, and this despite the euro-zone third largest economy having already entered a recession. Its not surprising that the rise was led by the energy sector.

Market focus now turns towards the ECB. Policy makers are not expected to announce new measures or easing beyond what was launched last month. Some of the changes to collateral requirements are not yet in effect, its probably prudent for Draghi and company to at least assess the impact of the next three-year LTRO (long term refinancing operation) before adding new measures. Will North America embrace EUR’s new found confidence?

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January 5, 2012

US Private Hiring Continued to Expand in December

Filed under: OANDA News — Tags: , , , , , , , — admin @ 7:32 am

Private-sector hiring surged in December as employers added 325,000 new workers while claims for jobless benefits fell, raising hope that recent labor market improvement would continue in 2012. The ADP National Employment Report’s December job tally surprised economists who had expected a 178,000 gain. It was also well above the 204,000 private jobs added in November.

“The number is stunning,” said Wayne Kaufman, chief market analyst at John Thomas Financial in New York. “This is another data point that shows our economy is healing. It fits in well with improvements we’ve seen in consumer sentiment, and obviously that’s because there are more people getting paychecks, which is making everyone happier.”

Source: Reuters

January 4, 2012

Forex Market Outlook 1/4/12

Filed under: Forex News — Tags: , , , , , , , , , , , , , , — admin @ 7:27 am

Well we knew it couldn’t be that easy and yesterday’s move to the upside for risk appetite has been quelled slightly this morning.  In other words, we are pulling back from the highs as the market has taken its foot off of the gas—for now.   This is not surprising as there will likely be volatility as the market digests new information and decides which way it wants to go to start the year.  There is seemingly to me a bias to the upside, so that gains can be booked early as the year unfolds.

There are two basic economic stories that we are following this year: the Euro debt crisis and global growth.  Global growth can be measured by the scheduled economic releases we receive on a daily basis, but the Euro debt crisis is going to be more prolonged and will be more market-driven so will be much harder to gauge.

That is what we are seeing this morning after a German bond auction came in with slightly lower demand than average, and the EFSF plans to auction off bonds tomorrow to help support the bailouts.  In the meantime, consumer spending in France declined as higher unemployment created uncertainty.  The Euro zone CPI estimate was lowered from 3% to 2.8%, which may give the ECB some room to potentially cut interest rates again.

And this is going to be the issue all year long.  Essentially the ECB and the various bailout funds are in a race against time to get debt refunded before interest rates move too high to make the debt service impossible.  This is why the markets were so disappointed last year with the lack of solutions coming out of the EU as while nearly everyone enjoyed the benefits of the union, no one wants to help out when the chips are down.

If the Euro zone leaders came out with a “bazooka-like” program like the one here in the US when we had our banking crisis, then the bond vigilantes would be too scared to force higher yields.  But the lack of conviction in the EU has allowed the market to control where rates are going and this is potentially disastrous for the debt-laden countries.

So the debt crisis will likely be the elephant in the room for some time until something comes to a head, which may not be great for global economic hegemony.  There is an overwhelming feeling that the Euro zone will slide into recession at some point this year and the impact on the overall global economy is unknown.

In the short-run, the economic data continues to come in better than expected which is positive but highly uncertain if this is a trend reversal or merely just a blip.  One of the catalysts for this improvement has been easy monetary policy from Central banks around the globe, most notably from the US Fed.

Yesterday, the minutes from the most recent FOMC meeting were released and the push for further “transparency” was made.  We learned two basic things from the release yesterday, the first being that the Fed is now going to release its forecast for the Fed funds rate which is basically going to take some the impact away from the actual FOMC rate decision by essentially telling us exactly what they are thinking.  It will be interesting to see if that pre-announcement induces the same sort of volatility that the actual announcement does.  The second thing we learned is that some members of the committee are still favoring further monetary easing if appropriate, which given recent history could mean throwing additional money at the slightest perceived economic downturn.

Later this morning US factory orders are expected to rise 1.9% to four-month highs.  This is definitely possible after yesterday’s ISM manufacturing numbers came in better than expected.  So the data is improving and Friday’s NFP number may also surprise to the upside, though I discussed the fallibility of the January figure in yesterday’s article.

A familiar pattern is starting to emerge, with risk appetite starting out early in the year and then the hope that the markets can hold on to gains as the year unfolds.  There will be many turns and bumps along the road this year for certain, so it is important to stay on top of the market moving news that can affect global economic sentiment.

January 3, 2012

Forex Market Outlook 1/3/12

Filed under: Forex News — Tags: , , , , , , , , , — admin @ 6:08 am

Buy Buy Buy!  At least that’s how the New Year is starting out, as the markets are decidedly risk-taking mode after the shortened holiday trading sessions.  Global financial markets are set to open higher, led by stocks and commodities.  The fact that markets couldn’t rally higher to end the year may bode well for the start of 2012, but will it continue throughout the year?

The short answer is not likely, but I will say that economic conditions appear to be improving albeit slowly and there is still great global risk emanating from the Euro debt crisis.  There is also bound to be further political unrest around the globe, and already it has started with Iran who had new economic sanctions imposed upon them by the US over the weekend.  This has caused them to increase their threats of shutting down the Straits of Hormuz, which is a major conduit for global oil supplies.  This has caused oil prices to shoot up here in the US and it is now trading close to $101.50.  Should this situation continue to escalate, we could see much higher oil prices which could have a major affect on inflation.

However the markets are reacting more favorably to positive economic data that has been released so far this morning and looking forward to data here in the US late this morning.

Here’s what we have so far.  Chinese Non-Manufacturing PMI data came in much better than expected, posting a gain of 56 vs. last month’s 49.7.  Recall that anything over ‘50’ means expansion, below means contraction so this was seen as a big plus for the Chinese economy.  This has helped push the Aussie and the Kiwi higher to 3-week highs and the Aussie also was buoyed by its own manufacturing data that also showed expansion vs. last month’s contraction.

This kicked off risk appetite that then followed through to the European session as Germany reported a much better than expected employment report.  Unemployment fell by 22K vs. an expectation of 10K and the unemployment rate fell to 6.8% from 6.9%.  This is also a positive as the Euro zone needs Germany to continue to thrive in light of the other issues surrounding the region.  The debt crisis is going to continue to be the major headwind in the market and I would not be surprised if the Euro zone looked different by the end of the year.  Whether or not Greece will leave the economic union will be a major question that will likely need to be answered some time soon.

But for now the markets are content to push higher and meeting between Sarkozy and Merkel next week may provide more clarity on what the expectations are for members going forward.

In the UK, PMI figures came in better than expected at 49.6 vs. an expectation of 47.3, but they were not able to eclipse the magic ‘50’ number to show expansion.  This was however seen as a major positive and both the Pound and UK stocks have traded higher.

Later this morning we are expecting the US ISM manufacturing figures, which are expected to show expansion in the 53-range.  The market has high hopes for the US economy as the data appears on the surface to be improving so we may find ourselves in a situation where the market now expects the data to beat the expectation.

This Friday will also bring the Non-Farm Payrolls (NFP) report which will show how many jobs the US economy has added.  Right now the expectation is for 150K, but my guess is that the market may be expecting closer to 200K as we near the end of the week.

One of the “problems” however with the data we are seeing now has a lot to do with holidays and the change of the fiscal year.  This can cause outliers and exaggerated figures, which may not be indicative of the “real” health of the economy.  For example, sometimes seasonal hiring and reclassifications can show distorted NFP figures in January so some economists don’t put much emphasis on them.  That’s not to say that the markets won’t though as we almost always get major volatility from Friday’s release.

There is also a thought that the better than expected manufacturing numbers we are seeing could be a function of companies replenishing inventories as they get rid of last year’s merchandise to make room for the new.  With the better than expected shopping figures from the holiday’s last month, I will be keeping an eye on retail sales figures to start the year to see if the consumer is suffering from exhaustion.

So essentially not much has changed from the end of last year, though with the start of this New Year there is seemingly a sense of optimism that things can get better.  Last year was interesting to note that US stocks finished the year flat, yet the Japanese yen was the best performing currency. The latter would normally suggest risk aversion so it’s a credit to US stocks that they were able to hold levels.  In other words, stocks could have been much higher without the Euro debt crisis keeping risk at a premium.

There is much to be excited about for 2012 and today’s action is a god start.  But let’s not get ahead of ourselves just yet, as this could be a long year.

December 23, 2011

Forex Market Outlook 12/23/11

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

Happy Holidays to all as the markets are preparing for a break from the action so volume is likely to be weak today.  Japanese markets are actually closed today, with US markets closed on Monday.  There is still some news that has hit the wire abroad, and we are waiting on some data here in the US.

Markets today are generally drifting higher, though without conviction.  It is likely that today will hold the range regardless of the data released as investors look forward to trying to push this “mini Santa Claus rally” higher next week.  And next week represents the last four trading days of the year so we could see a push higher if we can avoid any major economic disasters.  The fact that politicians are done for the holidays removes one such potential fly in the ointment.

Stocks are higher to start the morning in both Europe and in the US, and oil looks pegged just under $100, with gold holding above $1600.

Overnight in Europe, French PPI data came in higher than expected, though French GDP came in slightly lower than expected.  Europe is currently having the inflation/deflation debate and no one is quite sure what they are experiencing.  Talk from the ECB today revealed that policy makers believe that quantitative easing (QE) should not be a dirty word, especially if Europe starts to see deflation.

Yet oil is higher, money seems to be flowing and I think it is going to be hard to avoid inflation.  I saw a report today that stated that historically, gas prices move $.93 higher on average from the December holidays to the following year’s peak.  This sounds completely negative to me, which means there is less money to be spent on other areas of the economy.  2012 could be a massive economic roller-coaster ride.

In the UK, there really is no debate about inflation—they have it—yet they are still concerned about weakening economic data.  Well the BOE finally got some in the form of a lower index of services figure released earlier this morning.  The monthly figure showed a decline of .7% vs. an expectation of a decline of .1%.  This is significant because services make up some 70% of the UK economy.  So the Pound is slightly lower this morning, but again, currencies are trading in a tight range this morning so not a big deal at this point.

The US dollar has been slightly lower as the correlative effects of higher stocks and mild risk appetite is keeping markets above water so far this morning, but that could change with the release of data here in the US.  We are waiting on personal income and Spending figures, durable goods orders, and new home sales.

North of the border in Canada, GDP figures are expected to post a .1% monthly gain which is lower than last month’s .2%, bringing the YoY number down to 2.7%.  This seems like a low hurdle to clear so we could see a surprise to the upside.

** Just in** US durable goods orders were up 3.8% vs. an expectation of 2%, but the ex transportation figures came in slightly lower than expected at .3% vs. .4%.  However personal spending and personal income figures came in worse than expected, both showing gains of .1%.   Incomes were expected to have risen .4% and spending was expected to have risen .3%.

This is a net negative and stock futures have given back some early gains but are still positive.  I would not be surprised to see markets close unchanged today.

In Canada, monthly GDP came in unchanged vs. an expectation of a gain of .1%.  The YoY number of 2.7% hit the nail on the head.  Perhaps the bar was a little higher than I had previously suspected.

Nevertheless, these figures have had little impact on the forex market, which are likely to remain in a tight range.  I will not be trading today as today is a churn and burn kind of day.

Happy Holidays to all and I’ll be back next Tuesday!

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

USD/CAD (Loonie) Approaching Resistance!

Filed under: Forex News — Tags: , , , , , , , , , , — admin @ 8:04 am

Lost in the shuffle of the risk themes in the forex market due to the Euro debt crisis, the Canadian dollar has been weakening despite some fairly positive economic news.  While the US dollar has been strengthening vs. the Euro, the data in the US has been largely positive which bodes well for US demand.

This could help Canada immensely, as the US is the largest importer of Canadian goods.  But one of the unique features of the Loonie is that it maintains a tight correlation with the price of oil, as the US is the largest importer of Canadian oil.  So as the price of oil has been retreating due to global risk aversion, an improving US economy could lift demand for black gold.

If the risk trade increases into the end of the year, then global stocks and commodities would move higher with the US dollar weakening.

I’m looking to sell USD/CAD as it moves closer to 1.04, with a stop just above the recent highs at 1.0425.

December 15, 2011

Forex Market Outlook 12/15/11

Filed under: Forex News — Tags: , , , , , , , , , , , , , — admin @ 6:59 am

The markets rebounded yesterday from early losses after the European session closed yet still closed lower as a reminder of the risk in the marketplace.  As European nations scramble to get their budgets under control, there is a essentially a “race against time” taking place as credit downgrades are looming and bond vigilantes are selling causing rates to rise.  The longer it takes to restore market confidence (if that is even possible at this point), the worse it is going to become.

But Germany continues to balk at the idea of Euro bonds or any solution that requires more of them.  Yet they continue to thrive despite the overall economic malaise Europe is facing, as evidenced by this morning’s better than expected PMI figures, with manufacturing coming in at 48.1 vs. an expected 47.5 and services coming in at 52.7 vs. an expected 50.

Meanwhile there are daily rumors about banks needing bailouts, countries on the rink of default, and governments struggling to meet fiscal objectives.  As the Euro declines, it is only going to get better for German manufacturing, perhaps at the expense of the indebted nations.  Also reported this morning was in-line CPI data, though as I mentioned earlier the ECB is less concerned with inflation at this point as Draghi has been loosening monetary policy.

Speaking of monetary policy, the SNB left Swiss rates steady at 0% and did not take the opportunity to move the target exchange of the franc higher vs. Euro.  They are taking a decidedly “wait and see” approach despite the deflation they are seeing and lower than expected industrial production figures, which decline 1.4% vs. an expected .9% decline.  The SNB is trying to maintain currency weakness with verbal actions and not concrete ones so they may be tested again if the Euro debt crisis worsens.

In the UK retail sales figures were a mixed bag as monthly retail sales figures came in lower than expected at a decline of .7% vs. a decline of .4%, yet the YoY number came in higher than expected at .5% vs. an expected .3%.   The 1-year inflation expectation came in slightly lower than expected at 4.1% vs. 4.2% though this is still way outside of the BOE target of 2% and the narrative is that government austerity will cause prices to fall despite the easy money policies of the BOE.

In Japan, the Tankan manufacturing survey came in near 2009 lows as the fear of global recession has turned the Japanese outlook negative.  This caused Japanese stocks to trade lower, providing an inverse correlative effect of strengthening the Yen.  Yet Chinese PMI figures came in better than expected, giving a lift to both the Aussie and the Kiwi.

So the markets have rebounded heading into the US open as economic data hitting the tape all appears to be positive.  Initial jobless claims figures came in at 366K which is the best number I can remember in some time.  PPI data came in slightly higher than expected at .3% vs. an expected .2% though this is still fairly low in the grand scheme of things.  The Empire manufacturing reading came in nearly 3x better than expected posting a 9.6 vs. an expected reading of 3.  Later this morning industrial production figures and the Philly Fed reading will round out the news.

So the data is mostly positive and US stock futures have risen as a result, with the Dollar weakening vs. all others.  What has been interesting of late is the price of gold, which is now trading at a 5-month low under $1600.  This may be indicative of the market view that deflation may be a bigger problem going forward then anyone is expecting.

While this may be true to a certain extent, my belief is that CPI data is flawed and favors the banks over the individual.  What I mean by that is that what we actually have is “biflation”, a condition whereby you have rising prices for things that are necessities like food and energy, and asset price deflation where prices for things like houses decline.  The overall aggregate of these number cancels one another out and shows low inflation or possibly deflationary figures, yet people struggle to get by as stuff just costs more.

I don’t need a government report to tell me what my monthly food and energy bills are and my own eyes tell me those costs are higher.  Yet the Fed isn’t about to budge on interest rates because the alternative is more disastrous without the ability for politicians here to solve problems.

The US economy is performing well despite all of the domestic and international headwinds keeping risk levels at elevated levels, but we could do so much better if governments can get their fiscal houses in order.

Remember, the forex market is a relational market so you are attempting to buy the currencies of those that are performing well by selling the currency of those that aren’t.  That is what makes this market the most intriguing and important market in the world, as it gives you global exposure to the best growth stories and allows you to invest in governments that are functioning and have the best policies.

December 12, 2011

Forex Market Outlook 12/12/11

Filed under: Forex News — Tags: , , , , , , , , , , , , , — admin @ 6:56 am

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!

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