The Organization for Economic Cooperation and Development released a report today calling for central banks to ease monetary policy in light of revised global growth projections. The OECD now expects the U.S. economy to grow 1.1 percent in the third quarter and 0.4 percent in the fourth quarter. This is a dramatic revision to earlier projections of 2.9 percent and 3 percent.
The news is worse for Europe where the three largest economies – Germany, France, and the U.K. – are expected to manage growth of 1.4 percent in the third quarter, but then contract by 0.4 percent in the final three months of the year.
“Policy rates in most OECD economies should be kept on hold,” the OECD Chief Economist Pier Carlo Padoan wrote in the report. If signs of economic weakness emerge, “rates should be lowered where there is scope. Where there is not such scope, other measures could include further central bank interventions in securities markets, even at diminishing returns, and strong commitments to keep interest rates low,” he said.
Early indications are that the Canadian dollar could decline ahead of tomorrow’s Bank of Canada interest rate announcement. Despite recording a 3.9 percent increase in Gross Domestic Product for the first three months of the year, most observers expect Governor Mark Carney to announce that the Bank of Canada will not raise rates beyond the current 1 percent. This could have investors selling the dollar for currencies offering higher yields.
While few expect a rate increase, close attention will be paid to Carney’s statement in the hope that the Governor will provide a signal as to when he expects rates to increase. Most analysts feel that October is the earliest we can expect the Bank to introduce a rate hike as the short-term forecast is for the Canadian economy to slow slightly from the first quarter’s robust pace.
It was not that long ago that market participants were convinced that Canada was about to enter a period of sustained rate increases. Indeed, starting last June the Bank did introduce three successive quarter point rate hikes but the policy was abandoned after the Canadian economy slowed faster than expected.
Despite this, the Organization for Economic Co-operation and Development (OECD) recently urged the Bank of Canada to return to a policy of rate hikes. The OECD believes that Canada’s interest rate is currently too low and as a result, borrowers are taking on debt levels that would otherwise be beyond their means. Should these rates rise significantly later on, the OECD warns that a dramatic rise in the default rate is likely and this could place the Canadian economy at risk.
The Organization for Economic Co-operation and Development (OECD) released a report forecasting global growth of 4.2 percent for the year – significantly lower than last year’s result of 4.9 percent. The OECD blamed the reduction on rising oil and commodity prices as well as the earthquake and tsunami in Japan.
The OECD further cautioned that a sharp rise in prices coupled with a slowdown in growth, could lead to a state of “stagflation“.
The British economy continues to wrangle with very weak growth even as consumers are being hammered by surging prices. The result is an inflation rate double the target “ideal” of two percent annual inflation. And while the last few years have not been a walk in the park, there appears little prospect for immediate relief.
In a speech delivered in mid December, Charles Bean, Deputy Governor for Monetary Policy and member of the Monetary Policy Committee (MPC), noted that the economy is showing signs of improvement, but cautioned that “it may be some while yet before normality is restored”.
That assessment was made four months ago and one would be hard-pressed to see any progress since then. Indeed, for the first quarter of the year, the situation may have actually worsened.
For four straight quarters in 2010, Gross Domestic Product made positive gains yet for the first quarter of this year, GDP actually fell by 0.5 percent. Despite this, the government still expects growth for the full year to be in the range of 1.7 percent – this may prove to be a bit optimistic.
Last week, the International Monetary Fund (IMF) reduced its outlook for the UK from 2 percent growth to 1.7 percent. The Organization for Economic and Development (OECD) cut its position even deeper dropping its earlier 1.7 percent prediction to just 1.5 percent. This makes it unanimous – the 2011 perspective for the British economy is actually bleaker now than at the beginning of the year.
Adding to the quandary is that consumer prices are rising at a much faster rate than overall growth. According to Britain’s Office for National Statistics, consumer prices rose another four percent in March following a 4.4 percent increase in February. The resulting inflation is rapidly outpacing gains in salaries and wages and is seriously undermining consumer buying power.
Consumer Price Index – Annualized Rate
Nov 2010 – 3.2%
Dec 2010 – 3.3%
Jan 2011 – 4.0%
Feb 2011 – 4.4%
Mar 2011 – 4.0%
Will Get Worse Before It Gets Better
Like several other developed economies, England faces a huge deficit made worse by the recession’s double whammy of reduced tax revenues and greater expenses arising from monetary stimulus to support the economy. Truth be told however, Britain has struggled with deficits for many years now and the situation has finally reached the point where it can no longer be ignored. Even with higher revenues expected this year, the budget shortfall for the current year is estimated at £140 billion (US$228.5 billion).
In its last budget, the government outlined plans to introduce significant spending cuts to the tune of £83 billion (US$133.5 billion) over the next four years. This is thought to be sufficient to balance the budget assuming higher government revenue as the economy recovers. This also assumes that the spending cuts will not impact those revenues and this is where things tend to get a bit sticky.
For the past six months, Bank of England Governor Mervyn King has argued against hiking interest rates to deal with the mounting inflation. King defends his position by blaming rising food and energy costs for a “temporary” spike in consumer prices suggesting that “core” inflation is actually quite low. King also suggests that as the impact of government’s spending cuts take effect, overall growth could decline even further.
Consumers should get used to paying more for food, after prices rose to a record, because farmers will take years to expand production enough to meet demand and drive down costs, the International Monetary Fund said.
People in developing countries are becoming richer and eating more meat and dairy, meaning more grain for livestock feed and land for grazing animals, Thomas Helbling, an adviser for the IMF’s research department, and economist Shaun Roache wrote in an article. Rising demand for biofuels and bad weather also tightened supply, they said.
“Rising food prices may be here to stay,” Helbling and Roache wrote in the article published in the agency’s Finance & Development magazine. “The main reasons for rising demand for food reflect structural changes in the global economy that will not be reversed.”
The Organization for Economic Co-operation and Development (OECD) says that even though Spain is turning the corner on the long-lasting recession, it needs to drastically cut spending and overhaul labor markets. The OECD forecast for Spain in 0.9 percent growth is 2011 and 1.8 percent growth in 2012.
According to the OECD, the major factor impairing Spain’s economy is unemployment which remains the worst in the EU and is currently near 20 percent.
Every once in a while, my status as a blogger gives me access to resources that otherwise might not be available to me.One such “perk” of the job is that I get to meet experts in the forex field and have an opportunity to pick their brain.
One such opportunity just came about with Abe Cofnas, one of the original pioneers of retail forex trading and author of three books on the subject.I first had occasion to run across Abe’s work when I started my own journey into forex.At the time I was trading futures and stocks, and came across Abe’s column in Futures magazine.
I was impressed by his straight-forward approach and ability to explain the intricacies of the forex market.I was hooked.So I went out and bought Abe’s book and dove right in and it was instrumental in my development as a forex trader.
In addition to his books, Abe is the president and founder of Learn4x.com and has been teaching students the forex market since 1999.I had a chance to catch up with Abe, and here are the highlights of the interview:
(FTB): You’ve seen a lot of traders come and go in the forex market. What is the one common trait all successful forex traders must have?
(AC): When all is said and done it comes down to psychology-the trader’s mindset. Successful traders may have different technical analysis tools, and fundamental views, but they have a mind-set that permits them to survive. The best of us lose money, and maybe even 40% of the time. The mindset is to recognize the opportunity and not dwell on the loss. Also, of critical importance is recognizing just what is driving the currency prices. There is a lot of noise, and you have to filter out the noise as well. The most successful traders “listen” to the market.
(FTB): In your opinion, why is the forex market the fastest growing financial market to trade and what are the advantages over other markets?
(AC): The key reason is that the world is interconnected as never before and forex allows a person to ride what I call, “the light-beam” of the world economy. By trading currency pairs you participate globally immediately and that is exciting.
Also, an average person no matter what their background can trade and win! I see it all the time, the “best and the brightest” often can’t trade better than Mr. Joe Six-pack!
(FTB): How has the industry changed since you began as one of the pioneers in forex trading?
(AC): There is greater awareness of forex. Today forex is considered a legitimate alternative investment and trading medium. The industry was the “wild west” years ago. Spreads were 5 pips and more and today, retail trading offers institutional spreads. The industry has acquired legitimacy and the players are required to be more capitalized.
(FTB): Which is more important, fundamental or technical analysis?
(AC): There is a common notion that it’s a battle between fundamental thinking and technical analysis. I don’t think that is true. Let’s define the terms. Technical analysis is deriving insight into the price action by ONLY looking at charts. Fundamental analysis is detecting the forces that move the prices. So price action is both fundamental and technical. You need to know what moved the price and not just that it moved a certain distance with momentum. The movement of the EURUSD in the next 5 minutes may be a reaction to the words of a central banker, or the release of a budget policy. If the trader doesn’t see what is going on outside the chart, there is exposure to misinterpretation.
(FTB): What is the biggest mistake novice traders make time and time again?
(AC): One word: Anticipation. “Newbies” or novice traders think they can anticipate the price direction. So they assume the currency pair will move to “their” script. The more experienced trader reacts and confirms what the price is doing, and THEN decides to join a direction instead of anticipating one.
(FTB): What advice would you give to new traders looking to enter the forex market?
(AC): Get into the action as soon as possible with real capital. I have found the best traders in the world in virtual trading-until they go live and face the psychodynamics of real trading. Set aside some risk capital and join the action. Put on trades, learn from errors, etc.
(FTB): Do you have a favored style of trading that you use?
(AC): I do have many different styles that fit different goals. But to answer the question, I like what I call “sniper” trading. I focus on entry conditions, and get into the action and ride the predominant wave. A good entry can result in a short grab of 5-10 pips or even more. But you have to catch the momentum and then-get out of the way and protect your profit. I have pioneered Price Break charting and Renko charting for detecting trend variations and what I call the “micro-detection of sentiment”. We can go down to the pip level of granularity in detecting if it’s time to get out!
(FTB): What is the “secret” to making profits in the forex market?
(AC): Hmmm…. ”Pip Accumulation”. What I mean by that is that one can spend an entire day waiting for a big move opportunity or scan about 12 currency pairs for 5 good moves per pair for short term gains. It’s easier to get 50 pips with several trades than with one.
(FTB): What was the best trade call you ever made?
(AC): Long the Aussie at .63 in March 09 and it went to .94 in November 09. I didn’t hold it that long but it was a beautiful move I caught several times in and out on the way.
(FTB): How has becoming a best-selling author impacted your trading?
(AC): My books: The Forex Trading Course (Wiley), The Forex Options Trading Course (Wiley), and my new book Sentiment Indicators (Bloomberg Press) were probably the best source of improving my trading than any other. The reason is that it forced me to be clear in my thinking about how to trade. I learned that if you can teach and tell someone exactly how to do something, the process of doing so forces you to detect your own weaknesses. It was a therapeutic experience.
I’d like to thank Abe Cofnas for speaking with me and providing insights for our readers.He has graciously agreed to entertain questions from our viewers.If you’d like to ask Abe a question, you can email them to me here.
To read today’s blog article on the forex market, click here.
For the last three months of 2009, the economy for the eurozone registered no growth at all over the previous quarter. Year-over-year, the combined economies of the countries using the Euro currency, fell 2.2 percent compared to earlier predictions of a 2.1 percent decline.
“Economic activity gathered steam in most of the major OECD economies in the last quarter of 2009, with the notable exception of the euro area,” reported the chief economist of the Organisation for Economic Co-operation and Development (OECD), Pier Carlo Padoan.
Japan’s lower house passed a record trillion-dollar (92.3 trillion yen) budget today that includes issuing 44.3 trillion yen in new bonds. The budget included measures to pay for new child-care allowances and free public high school education promised during the election of the new government that took power last September. The budget must now be approved by the upper house.
Prime Minister Yukio Hatoyama has pledged to cut “wasteful” spending and direct more money to individual households. At the same time, the Organization for Economic Cooperation and Development has warned that Japan’s public debt will rise to 200 percent of the country’s Gross Domestic Product by 2011.
Investors are turning their attention to the Swiss Franc and are using US dollars to fund the purchases in a new round of carry trades. Switzerland was second only to Australia in dealing with the fall-out of the global recession, and its economy is now forecast to shrink less than half as much as the euro region this year – 1.9 percent compared with 4 percent according to the Organization for Economic Cooperation and Development.
“There’s very substantial underlying demand for Swissie, generated by one of the developed world’s largest current- account surpluses,” said Paul Meggyesi, a currency strategist in London at JPMorgan Chase & Co., which turned bullish on the franc Nov. 24. “I fail to see the economic emergency which will motivate the SNB to continue to offset that pressure with very substantial foreign-exchange purchases.”