Forex Blog

February 2, 2012

China to Play the Eurozone’s White Knight?

Filed under: OANDA News — Tags: , , , , , , , — admin @ 2:27 pm

Since the early days of the Eurozone debt crisis, insiders have identified China and its $3.2 trillion in foreign reserves as a potential contributor to a Eurozone bailout fund. Today, Premier Wen Jiabao gave markets reason to believe this may yet be the case when Wen suggested that China is considering the options for how it may contribute to keeping the Eurozone together.

The original European Financial Stability Fund (EFSF) is scheduled to be superseded by the European Stability Mechanism (ESM) later this year.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

China Desires a Stable Euro and Eurozone

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

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

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

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February 1, 2012

Eurozone Debt Crisis Infographic

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 8:40 am

The recent downgrade to sovereign credit ratings for several of the Eurozone countries is just the latest challenge to befall the 17-member group of countries sharing the Euro. A total of nine countries were included in the downgrade and while none of the changes were overly surprising, the reclassification casts doubt on the likelihood that some of the weaker countries can remain viable.

With the reclassification, Germany, Finland, and the Netherlands are the only countries to retain triple-A rated status. When expanding to all of Europe, only two more countries – the UK and Switzerland – can claim top status, and the UK’s hold on triple-A is tenuous.

The following graphic compares the debt for most of the European economies together with their current credit rating. The 10-year bond yield is represented by the anchor dragging behind each economy – the bigger the anchor, the greater the drag on the economy.

At a Glance: European Debt and Credit Ratings

Sovereign income, debt, and credit by region

Created by OANDA

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January 20, 2012

Inflation Moderating Around The World

Filed under: OANDA News, Uncategorized — Tags: , , , , , , , , , , , , , — admin @ 12:02 pm

By Sam Mattera
Benzinga Guest Writer

On Friday, the Canadian consumer price index printed at less than expected, coming in at negative 0.6% against an anticipated drop of 0.1%. The prior month’s CPI reading was an increase of 0.1%.

Canada’s drop in inflation echoes trends seen around the globe.

Although headline inflation in the US continues to increase at a modest pace, core inflation has held tight for some time and has decreased from relative highs seen in the summer.

Earlier in the week, CPI figures released in the Eurozone indicated that inflation had receded, although it remained sharply above 2%. Likewise, inflation figures in China had recently shown a declining trend.

This leads to an increasing amount of speculation that more easing could be coming. This includes in the US, where it seems more and more likely that the Federal Reserve will implement a third round of quantitative easing.

In China, investors may have become convinced that further easing is a being planned. Chinese stocks have rallied tremendously in the wake of comments made by the People’s Bank of China, which promised that it would work to help keep the economy growing.

Inflation may be declining due to commodity price pressures being relieved. This is in line with what the Federal Reserve’s chairman Bernanke had predicted in early 2011.

The fall in commodity prices may have been due to a shift in the sentiment of investors, who may have become more concerned with the prospect of deflation once again.

As pressures have mounted in the Eurozone, the possibility of a severe financial crisis has emerged. With ratings agencies downgrading multiple countries in the Eurozone, and a default in Greece looking increasingly likely, deflationary pressures could rule the day if major financials begin to break down.

The US dollar index bounced early on Friday, but has been trading lower all week. Should the dollar continue to weaken, higher inflation rates could return.

January 18, 2012

World Bank Lowers Global Growth Projections

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Warning of an increased likelihood for a worsening of the Eurozone debt crisis, the World Bank today announced it was scaling back its earlier growth predictions for the largest economies. In its report, the World Bank said Europe was probably already in recession and should the crisis deteriorate further, global economic forecasts would be significantly lower.

The World Bank predicted world economic growth of 2.5 percent in 2012 and 3.1 percent in 2013, well below the 3.6 percent growth for each year projected in June.

“We think it is now important to think through not only slower growth but sharp deteriorations, as a prudent measure,” said Hans Timmer, director of development prospects at the bank.

Source: Reuters

January 17, 2012

Falling Consumer Prices Lifts Euro Rate Cut Speculation

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A greater-than-expected decline in consumer prices in the Eurozone for the month of December has given rise to an increase in speculation for further interest rate cuts. Inflation in the 17 countries sharing the euro was 2.7 percent in December on an annual basis, revised down from an earlier estimate of 2.8 percent for the month, the European Union’s statistics office Eurostat said.

“The pressure is abating although the risks from energy are still there,” said Fabio Fois, an economist at Barclay’s Capital. “We think the ECB could bring rates as low as 0.5 percent in March,” he said.

Source: Reuters

January 16, 2012

Debt Downgrade Jeopardizes Eurozone Recovery

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Friday’s sovereign credit rating downgrade by Standard & Poor’s brings a new sense of urgency to the European debt crisis. The move also shines a spotlight on the region’s abysmal adherence to the Eurozone’s fiscal management rules as leaders prepare for yet another European summit on the debt crisis slated for January 30th.

Greek officials will actually get a head start on the summit as they are schedule to meet on January 18th following a series of unsuccessful discussions last week to reach an agreement with the country’s largest creditors. Last fall it appeared that a deal had been arranged that would see Greece’s largest creditors receive 50 percent of the face value on Greek debt. This arrangement was expected to reduce Greece’s deficit to 120 percent of GDP by the end of the next decade, but the deal now appears to be in question. Talks between the banks and the Greek government are scheduled to resume on January 18th.

Failure to come to terms on the debt discount places the release of the next tranche of emergency funding to Greece at risk. Greece has more than 14 billion euros ($17.8 billion) in debt due to mature over the next two months and if unable to meet the obligation, Greece would have no option but to enter into a full and uncontrolled default. Few expect it to come to this, however, as a calamitous default of this nature would spread debt contagion throughout much of the Eurozone at a rate beyond the region’s capacity to maintain.

Europe’s Largest Economies Suffer Credit Downgrade

In actual fact, few were surprised when Standard & Poor’s slashed credit ratings for a total of nine Eurozone countries late last Friday. Of the region’s top five economies, France and Austria both lost their coveted triple-A ratings leaving only Germany at the top tier. Italy and Spain were further downgraded to below investment grade status.

Citing deteriorating economic prospects and the anemic attempts so far to meet austerity targets and reduce deficits, S&P also placed the countries on a “negative” credit outlook leaving the door open to additional downgrades.

Following the official notice of the demotion, European officials rushed to minimize the impact of the historic downgrade. German Chancellor Angela Merkel said she believed the credit action would prove to be positive as it would urge member states to agree to a “financial compact” to help salvage the union and the euro.

Markets were less optimistic and the first full day of trading following the downgrade was mixed. European stocks were up slightly near the end of the day, while markets were off by the mid-way point in the North American trading day. Still, the real test is expected to come tomorrow when Spain will attempt to raise about 6 billion euros ($7.6 billion) in short and mid-term bonds, with another 4 billion euros ($7.6 billion) in long bonds.

“The rating downgrade is definitely going to create headwind for the Spanish bond auction,” Christian Lenk, analyst at DZ Bank, told the Financial Times Deutschland. He said he didn’t believe that the country could “repeat last Thursday’s auction result,” in which it was able to sell twice as many bonds as envisaged at lower interest rates than before.

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Compass Directions Monday, 16 January 2012

Filed under: Forex News — Tags: , , , , , , , , , , , , — admin @ 7:11 am

Standard and Poor’s has cut France’s AAA credit rating and the credit rating of eight other eurozone nations. S&P’s Managing Director of European Sovereign ratings has said that European leaders are divided and are falling behind in their response to the debt crisis. Austria also lost its AAA rating while Italy, Portugal, Spain and Cyprus had their ratings cut by two notches. The cut in credit ratings may reduce the ability of the bailout fund to raise capital to finance aid and exacerbate the region’s troubles. The EUR fell to its lowest levels since August 2010 at 1.2624 today and, not surprisingly, is the worst performing currency so far this year. The common currency is still well above its average of 1.2050 since its inception and clearly has much more room to fall. Pimco’s Bill Gross hasn’t helped with the sentiment in Europe by saying that a default in Greece is imminent.

The elephant in the room, China, may also cause dismay in the markets this week as GDP may rise at its slowest pace since the second quarter of 2009 amid increasing signs that that the world’s second largest economy is slowing with exports rising the least in two years and inflation easing to a 15 month low. Furthermore, the International Monetary Fund is due to release its revised global projections this week which are expected to show zero growth in Europe and a significant reduction in the fund’s most recent estimate of 4% for the global growth in 2012. The Australian dollar opens the week down recovering the 1.03 level in Europe after trading as low as 1.0250 during the Asian session.

Asian equity markets recorded a poor start to the week as the move by S&P to strip France of its top credit rating weighed on investor sentiment. The Nikkei fell 1.43% to 8,378 while the Hang Seng lost 1% to close at 19,012. However, the underlying trend in US corporate earnings remains good as the US Citigroup Economic Surprise Index, a measure of how much reports exceed or miss economists experts rose to a 10 month high this month. Today, the US is on holiday. Early in Europe, the markets are relatively flat as the markets await the results of the latest bond auction in France where it will look to raise as much as EUR 8.7 billion. Tomorrow, the EFSF will look to raise EUR 1.5 billion.

Commodity prices recovered from the falls experienced last week. WTI crude prices rose by more than 0.7% to $99.40 as Iran said that a blockade of crude supplies through the Strait of Hormuz would cause a shock to the markets that “no country” could handle. This followed warnings from Iran’s OPEC Governor that any embargo of Iranian oil would be a “dangerous political game. Precious metals rose with gold gaining 1% to $1,646 while silver finished 1.4% higher at $29.92. Soft commodities were mostly closed for trading while copper gained 1%.

AUD/USD performed extremely well for the last 4 weeks since finding its support level at 0.9860 on Dec 15. However given Friday’s ratings downgrade of the Eurozone nations, the Aussie may use this as an excuse to retrace back towards 1.0230 in the very short term (50% retracement from 1.1079 to 0.9386).  Immediate resistance is seen at 1.0380 with short term stops above this level.  If this happens and momentum continues we may see 1.0432 as a good opportunity to go short.  Until Tuesday’s key GDP out of China, AUD/USD may range trade between 1.0348 and 1.0230.  In the meantime note the symmetrical triangular formation taking place – breakout trades may be fruitful with tight stop losses.

As noted above EUR/USD has an average rate of 1.2050 since its inception so Euro may still have a few more hundred pips on the downside to go supported by negative fundamentals and that’s not hard to find.  Our view is to sell on rallies with tight stops above the resistance trend line.  For the immediate future R1 and R2 is seen at 1.2680 and 1.2720 respectively.  For the strong hearted, support may be seen at 1.2586 (21 Aug 2010) to form a double-bottom but you may have to bite the bullet with that trade.  With the US market celebrating Martin Luther King Jr’s birthday and as the market awaits for more reasons to sell the Euro we may see the range for the US time zone to be 1.2580 – 1.2680.

GBP/USD has been declining consecutively for the last 4 weeks and one wonders where it will stop, at least for the short term. If last week is anything to go by this could be at 1.5230.  Again with the US session not in play due to the holiday GBP/USD may take a breather today to range trade between 1.5230 – 1.5330.  On an hourly chart Cable seems to claw back well after initial sell off which suggests that players are not giving up on the Pound as yet.  However on the daily chart, it seems more prudent to sell on rallies…just like its neighbour.

USD/JPY looks solid at 76.60 due to intervention threats by Japan and the top side limited by events of the world.  Perhaps opportunity could be gain by going with the flow and trading like a beginner.  Until new information is known and if we must trade this pair, look at support at 76.50-76.60 and resistance at 77.20.  Perhaps like many patient traders staying on the sideline may be a good idea for this pair for the moment and look for break outs on the downside instead (even with the threat of intervention).

January 11, 2012

Fitch Warns of “Cataclysmic” Euro Collapse

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Fitch Ratings said today that the European Central Bank must increase its debt buying to support Italy and prevent a “cataclysmic” collapse of the euro. Speaking at an investors event, David Riley, the head of sovereign ratings for Fitch, said the collapse of Italy would almost assuredly mean the end of the Eurozone.

“It is hard to believe the euro will survive if Italy does not make it through,” Riley said, adding that while many saw Italy as too politically and economically important to be allowed to fail, “one might also argue that it is too big to rescue.”

Source: Reuters

January 10, 2012

Merkel, Lagarde Meet Over Greek Debt Swap

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International Monetary Fund Director Christine Legarde and German Chancellor Angela Merkel are slated to meet in Berlin this evening to discuss the process for completing the next phase of the rescue plan for Greece. The deal was drafted last October and was centered on a payout of 50 percent for Greek bondholders. The deal also included a debt target for Greece intended to reduce Greece’s deficit to 120 percent of total GDP by 2020.

Despite the announcement of the deal, discussions are still underway to determine the exact payout and there is mounting concern that failure to finalize the deal will delay the transfer of funds in time to avoid a wider default. The resulting confusion is also undermining confidence in the Eurozone.

“All non-European investors except a few bargain hunters will keep clear of investing in the euro area,” said Espen Furnes, an Oslo-based fund manager at Storebrand Asset Management, which oversees $72 billion.

Source: Bloomberg

January 5, 2012

Euro-Dollar Pair Craters

Filed under: OANDA News, Uncategorized — Tags: , , , , , , , , , , , , — admin @ 2:56 pm

By Sam Mattera
Benzinga Guest Writer

On Thursday, the EUR/USD traded sharply lower, at one point dropping below the $1.28 mark—a level that had not been seen since September of 2010. This move comes after a better than expected jobs figure might have strengthened the dollar, while negative events in Europe may have weakened the euro.

In Europe, yields on Hungarian paper soared.

A three-year Hungarian bond auction failed when the Hungarian government rejected all bids. The failure of the bond auction prompted Hungarian CDS to rally sharply.

CDS bought on Hungarian paper could give investors protection against a default by the country, although the effectiveness of CDS instruments may have been thrown into doubt by recent events in Greece.

Although Greece was given a 50% haircut on its debt, CDS failed to protect investors from this loss. The Greek haircut was ruled “voluntary” and therefore did not trigger CDS contracts. The International Monetary Fund and European Union had been negotiating a bailout with the country to avoid a default. However, that bailout was thrown into doubt when the IMF and EU broke off the talks. The Hungarian parliament had been considering some changes to its central bank—changes that the IMF and EU opposed.

Meanwhile, in France, another bond auction struggled.

France missed its maximum target on a debt auction. Although not a complete failure, the market may have interpreted the event negatively. The yield on the Italian 10-year rose back above 7%.

Those factors may have been working to push the value of the euro down, while positive data in the US may have been pulling the dollar in the other direction.

ADP payrolls came in much better than expected, reporting in at almost double the expectations on the Street. ADP payrolls came in at 325,000 versus an estimated 175,000.

Initial jobless claims came in slightly better than expected, reporting at 372,000 against an estimated 375,000.
Given the boost in jobs, the American economy may be showing signs of further recovery.

If conditions in the Eurozone continue to weaken, while the US economy continues to improve, the currency pair could continue to trade lower.

Still, it may be hard for the US economy to thrive when Europe is weakening. US equity markets dropped on Thursday, as traders may have been pricing in a possible contagion effect.

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