Fear | Forex Blog

November 30, 2011

Forex Market Outlook 11/30/11

Filed under: Forex News — Tags: account, bank, fear, forex, fundamental, fxedu, inflation-with, interest, lower, merely-provides, nzd, oil, trade — admin @ 6:59 am

Wow what a morning! I was about to tell you about all of the mundane things that have happened so far overnight and what to expect later today—and then the markets got hit with the unexpected.

Central banks around the globe including the: Fed, BOE, ECB, BOC, and the BOJ, essentially made a formal, coordinated intervention in the currency markets by reducing existing swap lines by 50 basis points. This move is intended to free up liquidity to help prevent the Euro and global debt crisis form becoming a liquidity crisis (shortage of cash) to help countries service their debt.

This means that more cash is available and immediately the US dollar (as the world’s reserve currency) weakened, to the tune of 200 pips vs. Euro, 200 pips vs. Aussie, 120 pips vs. Pound. This is an incredible move and I’m sorry for those of you that were short risk in this market—especially if you don’t use protective stops!

Yesterday’s target of 1.0250 from the chart of the day on AUD/USD was easily met and in fact left money on the table. But 250 pips in a day is very welcome!

Yesterday’s EU Finance Ministers meeting produced little except that they are trying to drag the IMF into a larger role to cover the EFSF and they have agreed to back Euro zone bonds at 30%, essentially meaning that if default occurs investors would lose “only” 70% of their investment. Gee, thanks! Meanwhile yields continue to rise in the periphery countries, though the German 1-year note now has a negative yield!

Things are moving along in Germany, as their unemployment rate ticked slight lower than expected to 6.9%, though overall unemployment in the Euro zone is at 10.3%, slightly higher than expected.

The other big news of the morning was that China had reduced their lending reserve requirements for the first time in 3 years, essentially making lending easier for the banks. This should act as a catalyst for global demand, and the markets moved higher on the news. Of course this action was trumped by dramatic move we saw later in the morning.

Both stocks and global equities are up big-time on this news, with oil leading the charge at around 101.50. Take a look at my video from earlier this morning prior to the news, it will show you the dramatic difference.

Here in the US, the ADP employment change came in much better than expected, showing that 206K jobs were added vs. an expected 130K. Some may try to extrapolate this figure to a gain in NFP on Friday, but the two are uncorrelated.

Later this morning we will get pending home sales figures which are expected to show a slight gain. Housing figures have been weak very recently and this lagging indicator will likely be irrelevant after the moves we’ve seen already today. And later today we will also get the release of the Fed beige book survey though we have recently heard that QE3 may be on the table, today’s action may put that on hold for a while. Until the money dries up again, that is.

Canada will be reporting GDP figures later this morning which are expected to show a monthly gain of .3%, pushing the YoY to 2,7% from last month’s reading of 2.4%.

I cannot begin to describe the dramatic nature of this coordinated move from earlier this morning. Part of the “problem” with all of this market transparency is that big players can usually get in front of the proposed action and sometimes negate the intended effects. So they have to spring the news when no one expects it.

That’s not to say that I always agree with actions that intervene with free markets, however when global problems are perhaps much bigger than people know, preventing economic Armageddon is appreciated. I don’t claim to know the extent of the problems in Europe or what the potential of a failure might be except to say that it would be bad.

This morning’s action essentially buys more time for those that are in trouble to get their houses in order and fix the problems that ail them. For today’s action solves the pending global liquidity problem, but it does not solve the solvency and debt problems.

The Euro zone and banks with exposure to the Euro debt need to use this opportunity to come up with real solutions otherwise we have just kicked the can down the road a little more. Expect inflation to pick up in a major way in at least commodities prices, with the outcome uncertain.

Volatility is still very high, so be careful with your trading. Always use stop losses, and expect the unexpected!

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November 29, 2011

Forex Market Outlook 11/29/11

Filed under: Forex News — Tags: account, data, euro, fear, interest, interest-rates-, invest, loonie, trades — admin @ 6:57 am

This morning has started out with the same vigor as yesterday’s market posting early gains on the news of a successful Italian bond auction and riding what looks to at least initially be two days of gains in a row. Global stocks and commodities are higher to start the day, with US dollar weakness.

In Italy, 3-year notes had a bid to cover of roughly 1.5x meaning that there was good demand for the debt contrasted with last week’s German auction that was only 65% subscribed. It should be noted that the yield on the Italian debt was close to 8%, which is a Euro-era high and nearly twice what it was as early as 2 months ago.

What does this tell us? Well, a couple of things. For starters, it shows that the markets have some confidence that Italy will not default and that there may be an increased pace of getting the plans in place to combat this crisis. If the market feels that they can pick up some short-term debt at high yields before credible actions begin to reduce those yields, then that’s a pretty good trade.

But it also tells us that Germany may have some funding problems going forward, as the market deems yields too low to justify the “safe haven” of the Bund, which may not actually be that safe when Germany’s exposure to the rest of Euro zone debt is taken into consideration. In other words, why receive 2% in Germany when you can receive 8% in Italy for nearly the same outcome. If Italy goes down, it would likely take Germany down as well so it’s better to be compensated at a higher level.

Today begins a two-day meeting of EU Finance Ministers that is expected to produce an agreement on how to leverage the ESFS and the actions that will be permitted at the ECB. After pressure from the Obama administration, the need to act for Europe is now.

On the data front, economic confidence figures in the Euro zone came in lower than expected, but wasn’t that expected? So overall, the Euro is pulling back from earlier highs and our chart of the day from yesterday is still in tact, with EUR/USD having held that 1.3430 level.

Overnight in Japan, retail trade figures came in better than expected, showing a gain of 1.9% vs. an expected gain of .7% and household spending decreased just .4% which is better than the decrease of 1.5% that was expected. Perhaps that had to do with the jobless rate which came in worse than expected, showing 4.5% vs. an expected 4.2% which incidentally is half of what the US jobless rate is. Friday’s NFP numbers here should confirm the continued bad news of 9% unemployment unless discouraged worker have left the workforce.

In the UK, home prices came in higher than expected showing that inflation may remain stubbornly high despite the protestations of the BOE who claim that prices will magically fall back to their 2% target within the next year from the current 5% they are experiencing. While this expectation is the justification for monetary easing, the hard data suggests otherwise. Mortgage approvals came in higher than expected.

And lastly here in the US, home price figures will be do out later this morning are expected to show modest declines and consumer confidence figures are expected to show gains from last month but are still near historic lows. I suppose the news of the better than expected “Black Friday” sales and yesterdays “Cyber Monday” sales which also came in better than expected (up 18% from last year) belie those figures. Or it could just be boredom.

Fitch ratings agency finally acted on the Super committee’s failure on debt reduction and moved the US outlook to negative, which means that there is now a 50% of a US credit downgrade within 2 years. Yay for politics!

Meanwhile the markets are giving back earlier gains but are likely to rebound if we can get through the remainder of the Euro session without any negative news from the Finance Ministers meeting. So it looks like we’ll continue to trade the range, albeit a larger one.

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EUR/USD Forex Technical Analysis Update

Filed under: Forex News — Tags: account, below-1-4250, coming-into, fear, interest, loonie, previous, support-levels, the-previous, the-weekly, top stories, weekly, yearly — admin @ 2:25 am

The EUR/USD is coming into some significant long term support levels that are showing very clearly on the weekly charts. After failing at the previous highs just below 1.4250, prices have reversed sharply and are quickly approaching the yearly lows at 1.3130. There is very little to suggest that this level will hold, given the [...]

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November 10, 2011

Forex Market Outlook 11/10/11

Filed under: Forex News — Tags: a-small-sense, a-tick-higher-, australia, decision, economy, emerging-as-the, fear, forex market, franc, gold, jpy, mike conlon, morning, safety, trend — admin @ 7:06 am

There is a small sense of relief in the markets today after yesterday’s sell-off due to bond yields rising in Italy to above 7%. Italy was able to get off their bond auction which shows that they still have the ability to fund themselves, though higher yields will make it much harder for them to service their debt which could eventually lead to them having to tap the EFSF.

However, the EFSF is not big enough to bailout Italy should that become necessary so they need to move quickly to attempt to start reigning in deficits through austerity measures in order to set the economy on the path to fiscal health. One of the issues yesterday was that there was some fear that Berlusconi would somehow manage to survive and be able to drag out and remain in power though now this is looking highly unlikely and the word is that he will be out by next week. This begs the question of who will take over and at this point it appears as though Monti is emerging as the potential successor.

The situation in Italy has masked the situation in Greece as political infighting there dragged out the process of who would succeed Papandreou for four days. However this morning we have the answer, as Papademos has been tabbed. It should be noted that he has a tremendous business and banking background having been with the ECB previously.

So there is definitely a push to have more business and banking experienced politicians coming into power to help navigate the Euro situation and the bailouts and debt crisis.

This morning there is a lot more economic data then yesterday, and in the Euro zone it wasn’t particularly bad or good. German CPI data came in slightly higher than expected, and French industrial production figures were lower than expected. In addition, the ECB released its economic forecast for the region and they lowered forecasts to reflect the slowing economy as a result of the debt crisis.

In the UK, the BOE left interest rates and its asset purchase program unchanged, at .5% and 275 billion respectively. While they were not expected to move after last month’s increase in the asset purchase program, they will likely take a “wait and see” approach and watch what is happening in Europe. Their next move though is likely to be on the side of easing if the economy continues to flounder.

In Australia, 10K jobs were added as expected, but the unemployment rate remained steady at 5.2% even though there was an expectation of a tick higher. This could be the result of much higher than expected Chinese import figures, which grew by 28.7% vs. an expected 22% which helped push the Chinese trade surplus lower than expectations. Reduced exports were also an issue. Also to note is that Japan and New Zealand’s consumer confidence figures came in lower than expected which is not surprising given the state of the Euro zone.

And speaking of unemployment, initial jobless claims here in the US came in better than expected showing that only 390K lost jobs last week vs. the usual 400K we have been seeing. This is a step in the right direction and I hope this trend continues but at this point it is woefully short of what’s needed.

In Switzerland, calls to weaken the franc further are not being heeded by the SNB as businesses are concerned about declining exports and want the floor on the franc raised from 1.20 vs. Euro. This is unlikely to occur with pressure on the Euro due to the debt crisis and risk in the markets.

But this morning, risk appetite has returned for now as global stocks and commodities are largely higher, though the risk in the Euro zone still remains. While no on expects Italy to solve their problems overnight, getting a new government in place would be a good start. With new leaders focused on debt reduction and managing the economies, there may be hope that the market will ease up on the rates demanded to buy their debt, thereby making it easier for them to service it.

At least that’s the hope.

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October 17, 2011

Forex Market Outlook 10/17/11

Filed under: Forex News — Tags: account, currency-pairs, fear, forex, japan, market-looks, time, whether-or-not — admin @ 7:32 am

Over the weekend, G-20 leaders re-iterated their desire that EU leaders pick up the pace and come up with the solution to the Euro debt crisis, essentially giving them a week to finalize the plan. This provided the market with some optimism to start out the day, but that optimism was short-lived as Merkel’s reps sought to lower expectations.

The message was that essentially the “dream” of solving the crisis in the next week was not likely, essentially dousing risk appetite lower. While European leaders believe that they have identified 5 areas that need to be addressed, as always, the devil is in the details.

One of the biggest points of contention is what level of losses will private investors voluntarily accept and whether or not those losses would trigger contagion to the other areas of the Euro zone. The previously agreed upon 21% loss is seen by leaders to be insufficient, so obviously banks are balking at higher figures. If banks are forced to take a larger “haircut”, then logically it makes sense that they will likely need to retain more capital.

News on the docket this week will be highlighted by inflation figures in the US, UK, and EU as well as the release of the minutes from the rate policy meetings at the BOE and RBA respectively. While inflation is seemingly not a problem at this point, it could increase significantly if the cloud of worry is removed from the markets on the potential Euro debt deal.

Tomorrow will bring economic data from China which could have a major affect on both the Aussie and Kiwi. GDP figures will show China’s growth rate and any perceived slowdown could be compounded if the currency manipulation bill here in the US gets more traction. Right now it appears to be DOA, but it’s sometimes hard to gauge what self-serving politicians might do. Regardless of whether the bill passes, the conversation has been turned up with the volume getting louder from both sides.

There is also going to be a bit of Fedspeak this week with the theme likely directed toward the Euro zone and their troubles. Markets here look poised to rally if EU leaders can come up with a decent plan. US corporate earnings have been acceptable so far given the overall economic environment, but so much more needs to be done.

If the risk trade can return in any meaningful way, then we could see higher prices across the board for both stocks and commodities. This is where it gets interesting though, as I could envision a scenario where stocks trade higher but commodities trade lower on overall reduced global growth. How this will all play out is anyone’s guess but I think the markets will react more forcefully to good economic data and less to negative data.

The Pound is likely to see some gains if money flows continue to move from Europe to other areas around Europe (including the Swissie) and tomorrow’s CPI report could put the BOE in an awkward position if inflation continues to rise after they increased the size of their QE program by 75 billion. The minutes released from the rate policy meeting could show what they might do next.

Other than that, it’s really just about risk this week emanating from the Euro zone and whether or not the market believes a solution may be forthcoming. Of course this is all predicated on the belief that there is a solution possible that would not kill the markets and cause further contagion.

This might be the problem that haunts EU leaders and the markets should be careful what they wish for!

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October 13, 2011

Forex Market Outlook 10/13/11

Filed under: Forex News — Tags: cad, carry trade, china, economy, fear, forex trading, fxedu, rsi — admin @ 6:51 am

Yesterday’s release of the FOMC meeting minutes was a complete dud and market hopes that the Fed was close to QE3 went unrealized. Part of that hope came from Bernanke’s speech to the Joint Economic Committee earlier this month, but it seems as though that mention of further easing was intended to keep the markets from falling off a cliff.

Yet they are no closer to QE3 then previously thought, so the “free money trade” will have to wait for another day or for the economy to worsen dramatically, which is not out of the realm of possibility if the EU fails to meet their deadline on the debt crisis resolution. The clock is ticking.

News out of Europe this morning showed that German CPI was slightly higher than expected though not enough of a gain to cause the ECB concern. What was more of a concern though was the ECB’s monthly report for October which was largely negative. Citing “moderate to lower growth”, reduced outlooks, and the like, the ECB essentially confirmed what we already know.

What was more concerting to the market though was a report out of China that showed that their gains in exports declined more than expected, showing a gain of only 17.4% vs. an expected 20.5%. While they will cry that the strengthening Yuan is hurting them, no one else will shed a tear as their trade surplus came in at $14.5B, which contrasted with the US trade deficit of 45.6B makes them look silly. The Senate passed the Bill to impose tariffs on China if they don’t move to revalue their currency, which could ignite a trade war and is likely not going to help the global economy recover. I’ve discussed an alternate solution to tariffs in this morning’s video.

However there was some good news for those with risk appetite, as Australia added 20.4K jobs to their economy vs. an expected 10K, which helped push their unemployment rate down to 5.2% from the expected and previous 5.3%. While the Aussie has pulled back on general risk aversion, the slight decline may reverse throughout the day.

Additionally, the Bank of Japan released the minutes from their rate policy meeting which called for additional monetary easing to attempt to weaken the Yen. Citing problems in Europe to global economic stability, prolonged Yen strength will harm exports though recent economic data in Japan has been better than expected.

Here in the US, initial jobless claims figures came in as expected, with 404K newly unemployed. 400K has been the “norm” which is unfortunate as we are not adding enough jobs to move the needle. Perhaps the passage of the Free Trade Agreements that have been sitting around for over 4 years will help, but structural reform is more likely needed.

Since the President’s “jobs” bill was rejected by the Senate, we are likely going to have to wait for the debt “super committee” to attempt to reduce our deficit and provide confidence to the markets. This is a big task and much like the Euro commission that is charged with finding the resolution to the Euro debt crisis, essentially puts us in a holding pattern until then.

So I’m going to focus on corporate earnings here in the US, which if the majority come in better than expected, could revive risk appetite in the markets. The general mood surrounding the markets seems to positive, though that could be derailed by the Europe failing to resolve by their self-imposed dead-line, or more of the same Washington DC gridlock.

The inverse correlation between the S&P 500 and the US dollar is still pretty high, so the risk trades are still intact and could be driven by stocks rather than perceived global economic risk in the near-term.

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October 12, 2011

Forex Market Outlook 10/12/11

Filed under: Forex News — Tags: currency trading, currency-pairs, fear, free, fundamental, japan, lower, markets, new zealand, practice, rsi, stock, vote — admin @ 7:21 am

This morning has started with risk appetite driving markets higher, with Dollar and Yen weakness acting as either a by-product or catalyst of the move. Regardless of who or what is leading the charge, a sense of calm is starting to return to the markets and they looked poised for a 4^th quarter rally into the end of the year.

Positive sentiment surrounding the resolution of the debt crisis has not been derailed by Slovakia delaying their vote on the EFSF expansion agreed to in principle on July 21^st as the market believes that the Franco-Prussian solution which Sarkozy and Merkel have promised is coming in early November will like supercede that package. The “Troika” has already agreed to Greece receiving the next tranche of money despite the uncertainty surrounding the vote of whether Greece has done enough to receive it, with the hope that whatever is offered in early November is enough to wipe the whole slate clean.

So the pressure is on to come up with a resolution that not only deals with the problem but is also something that is agreeable to all of the Euro zone members as well as the markets in general. Call me skeptical but I’m not certain if such a solution exists. Today a plan to re-capitalize European banks will be proffered which is a step in the right direction.

Meanwhile in the UK, policy-maker Posen has claimed that the BOE is prepared to ease further and the unemployment rate has ticked higher to 8.1% from 7.9% and an 8% expectation, yet the Pound is trading higher and hit our last week’s target of 1.57 vs. USD and then some. GDP estimates came in better than expected for September calling for .5% for last month vs. .2% for the previous month. Also to note is that even though the official unemployment rate rose, the number of new jobless claims came in lower than expected at 17.5K vs. an expected 24K.

Both the Aussie and the Kiwi are tracking higher with the former trading back above parity vs. USD. Related home sales and price figures show that there is moderate growth, and Australian consumer confidence figures came in better than expected. Australian employment figures are due out tomorrow.

Also adding to the risk trade is the machine orders figures that were reported by Japan that came in much better than expected, showing a monthly gain of 11% vs. an expected 3.9%. This has helped rally the Nikkei and caused some Yen selling and tonight’s release of the BOJ meeting minutes may show how close they are to intervening in the currency which could provide for additional risk taking.

Speaking of meeting minutes, the release of the September FOMC will be out later today and will definitely show how close Bernanke and Co. are to QE3. While he floated the idea at the JEC briefing earlier this month, it may have been in response to tanking markets and not any serious policy discussion. If on the other hand they are close to QE3, then this could push markets higher on the free-money trade.

US corporate earnings season is upon us and was kicked off by worse than expected numbers out of Alcoa, yet the S&P 500 has rallied to above 1200. The bar has been set so low for many of these companies that the beats should be more than the misses.

Also to note is that the Senate did not pass Obama’s “jobs bill” which was a more of political statement than a credible plan. This means that more money is not added to the deficit and taxes are not raised in the near-term, and we are likely to have to wait for the deficit reduction committee to take action before anything gets done.

Yet the mood surrounding the markets appears to be positive and I think we will definitely see that 4^th quarter rally that investors desire. Business can only sit on the sidelines for so long and if they start to believe that there may be a change in Washington DC in the next election cycle to more pro-business policies, then they may start to invest.

While I don’t think this will solve our unemployment problem in the near-term, if we can get the needle moving in the right direction then that could instill some confidence which is ultimately what this economy is sorely lacking.

So keep an eye out for the Fed release later today as it has the ability to create volatility as the market dissects the Feds intentions. Any hint at the “free money” trade could send markets even higher!

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October 7, 2011

Forex Market Outlook 10/07/11

Filed under: Forex News — Tags: account, bank, china, fear, forex market, fundamental, interest, loonie, lower, markets, party, within-the-next — admin @ 7:05 am

All eyes are on this month’s Non-Farm Payrolls report which is expected to show a gain of 60K, with a private sector gain of around 90K. Unemployment is expected to remain at 9.1%. While this is one of the most important data releases, the overall risk themes in the marketplace have held markets back. Economic data has been mildly weak of late, which I think is a positive given the risk environment.

One sign that we may see better numbers is the earlier employment report out of Canada, who reported a gain of 61K jobs vs. an expected 15K and the unemployment rate ticked down to 7.1% from 7.3%.

**Update** NFP has come in showing a gain of 103K jobs, better than the expected 60K estimate. Private sector jobs added was 137K, better than the 90K expected. Last month’s NFP was revised higher to show 57K jobs added vs. the reported 0. Unemployment rate remains steady at 9.1%.

The markets have used this opportunity to increase risk appetite, though today’s better than expected numbers may reduce the chance of QE3 from Bernanke and the Fed. While overall that would be a good thing, the markets may be slightly disappointed in that prospect.

There is an interesting dynamic taking place in the US economy and the “Wall St. Occupation” protests may be the sign that we have hit bottom. We know about the gridlock in Washington DC and the Euro debt crisis, but markets have been looking to move higher for some time. This may be a situation where the markets can no longer wait around for politicians to get their acts together so business may take the bull by the horns and run with it.

While this number does not change the economic malaise we are feeling overnight, it a step in the right direction. Should we get some sound economic policies here in the US, then we might actually see some improvement in confidence which in turn would help the economy recover. Not higher taxes, not more government spending, not more free Fed money. Confidence.

Meanwhile confidence has increased that Euro zone leaders may be getting it together as they are finally discussing the potential re-capitalization of banks. European bank exposure to sovereign debt is a major problem and the UK bank exposure was likely a reason that the BOE chose to increase QE to add further liquidity if the problems in the Europe got worse.

This prompted Moody’s to downgrade the UK banks (they’re always late to the party, aren’t they) and yet the Pound has rallied off of yesterday’s knee-jerk reaction the saw the Pound sell-off. As a mentioned yesterday, I thought the market got it wrong initially and indeed I was right. So risk appetite trumped QE in the UK and the markets are moving higher. PPI figures also came in slightly higher than expected showing signs that inflation is still a problem, but the BOE may be willing to deal with issue as the economy recovers.

Lost in the mix of what has been taking place in Europe, the Japanese interest rate decision came out last night to little fan-fare as it produced no change in policy. While this is exactly what was expected, there has been some hope that the BOJ might intervene in their currency as recent Yen strength could be extremely detrimental to Japanese exports and thus the economy. Last night’s meeting might seem like an obvious place to launch intervention, but my feeling is that the BOJ has been trying to do the unexpected. So if any intervention is coming, it would most likely occur on Sunday night when the Asian markets open.

Outside of this, the attention should return to the Euro debt crisis. There is hope that some sort of agreement can be reached within the next few weeks. While there is still risk in the markets, today’s report can give us hope that better times may be coming.

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October 6, 2011

Forex Market Outlook 10/06/11

Filed under: Forex News — Tags: commodity, currency trading, economy, england, fear, fundamental, nzd, top stories, usd, yen — admin @ 7:11 am

So far the news of the morning is that the Bank of England increased the size of its asset purchase program by 75 billion, pushing the total bond buying to 275 billion. While they kept interest rates unchanged, this sent the Pound plummeting lower 200 pips. The Central Bank cited severe strains in the funding market and maintained that inflation would undershoot the 2% inflation target in the medium term.

I suppose it would be more helpful if they identified what the medium term is, as inflation has stubbornly remained above 4% much to their chagrin. So I’m not certain how they think it will subside, and it appears as though they are content to let their citizens suffer through higher prices.

The ECB rate decision also came out and produced no change to official ECB rate policy, so now the market is waiting on the ECB press conference where Jean-Claude Trichet will speak for the last time as head of the ECB. The markets are hoping that he will offer some sort of hope that EU leaders are nearing a solution for the debt crisis. The ECB needs to go into “cheerleader mode” between now and when a solution is actually offered, but most think the perpetuation of “can-kicking” will continue. There is a meeting of EU leaders and a G-20 meeting on tap in the next few weeks.

Other than those two major events, the negative economic data from these two regions had little effect as UK home prices fell more than expected and German factory orders showed a decline vs. an expected no-change.

Initial jobless claims here in the US came in slightly better than expected, but still over 400K. While it is a good thing that it is not moving in the wrong direction, it is certainly not getting significantly better.

Tomorrow’s Non-Farm Payrolls report will give us a better idea of where the economy is headed but I think more importantly it will let us know when or if Bernanke will be adding more monetary easing to the economy.

Between now and then, the Bank of Japan will have its rate decision in the overnight session and while they are not expected to change policy, don’t be surprised if they try to jaw-bone the Yen lower as it is above 10-year highs vs. Euro and Pound.

So far Trichet hasn’t said anything to disrupt the markets any further today, and the Dollar strength that we saw earlier on the Pound and Euro sell-off is abating, which is helping equity markets move higher.

There is going to have to a point where the “risk on, risk off” trade decouples and the correlations break down as US dollar strength should not be an automatic sell in risk assets, especially if that strength occurs because of individual currency weakness.

Today’s action reminds us that these correlations are still in effect and the fact that the BOE wants to encourage inflation through a weakening of the Pound should have little effect on US stocks. Yet the markets have become so entrenched in the risk trade that it has a hard time differentiating between event risk and individual currency risk.

The market is never wrong; however in this case it is. While we know about the global economic slowdown, stock valuations right now are very compelling, especially those with high dividend yields. While the Euro debt crisis poses a major threat to global economic stability, an event like the BOE increasing quantitative easing should not.

Yet markets have this “all or nothing” mentality where a rising tide lifts all ships or the baby gets thrown out with the bathwater. How’s that for coming market metaphors?

But seriously, we may see some further market selling as the US session unfolds, but I believe that it is not warranted (unless Trichet says something dumb) as tomorrow’s NFP is likely to increase the chances that Bernanke will act.

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September 28, 2011

Forex Market Outlook 9/28/11

Filed under: Forex News — Tags: australia, cad, carry trade, credit-default, currency, currency market, currency trading, default-at-over, fear, interest-rates-, invest, loonie, president, rate-decision, trader — admin @ 6:52 am

Sometimes it feels like Groundhog Day in the forex market as we focus on the same thing over and over again. So it should come as no surprise that again we are focused on the Euro debt crisis as there is very little other news to sway market sentiment.

Perhaps it will be best if examine the recent events and what they mean for the markets. Yesterday, Greece was able to pass the vote that raised property taxes as was required by the deal that was made back on July 21^st as part of their austerity measures.

But now there is some concern that figures that were used to hammer out that deal have now changed, which means that there could be some opposition to the already-agreed-to plan. What’s more, the votes to ratify the EFSF are just taking place now in each of the individual countries of the Euro zone, to be able to ratify the previous deal.

The vote to ratify the EFSF deal has already been delayed and is just a formality if all of the countries agree to ratify. But why has it taken so long to put it to a vote? This really should be a done deal by now, that is, if they really want to rescue Greece. If you do X, you get Y.

But now there are fears that some countries are balking and the constant delaying has kept markets on edge. I agree with President Obama when he said that Euro inaction is “scaring the markets”. Of course this elicited a pushback response about the fiscal situation in the US, which of course is true, however it doesn’t justify Europe’s behavior throughout this mess.

So the markets are waiting for the “Troika” (ECB, IMF, EC) to come back with their findings in order to potentially move forward. One of the additional impediments is that there will be multiple votes over the course of this process and any on slip-up could put Greece in default. This is one of the reasons why the CDS (Credit Default Swap) market has the odds of a Greek default at over 90%.

So what can the Euro zone do? Well the idea of expanding the EFSF by levering the balance sheet up has been dismissed as “stupid” by a German official as it could incur a credit downgrade. So much for Geithner’s suggestions to help.

Contagion is the obvious issue that plagues the Euro zone right now. If they could let Greece go without causing similar problems in the other countries with debt issues then I think they would in a heart-beat as Greece is actually a pretty small percentage of the region. Which is also why Merkel’s comments about “building a firewall” around Greece the other day were telling as perhaps there may be more of a push to that end.

Surprisingly, the markets have been faring pretty well the last two days, though yesterday’s afternoon sell-off in stocks here in the US and the subsequent follow-through in Asian markets caused some overnight risk aversion. We have clearly been trading on risk themes in the market and the correlations of currencies have been pretty strong of late.

It’s essentially Dollar and Yen strength on risk aversion, everything else strong on risk appetite. The risk appetite we’ve been seeing this week has been pretty strong, though some are dismissing it as a bit of a relief rally. We have seen expanded to declining range-bound activity in the markets, and this makes sense when we consider that it is the same things over and over again that are ruling market sentiment.

This means increased volatility as the markets proceed with caution, knowing that at any given moment, news can break from the Euro zone which could impact market sentiment. Therefore, it is very important to keep yourself informed about the news and its potential impact, as it has the ability to disrupt trades if you’re not paying attention.

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