Forex Blog

December 6, 2011

Forex Market Outlook 12/06/11

Filed under: Forex News — Tags: , , , , , , , , , — admin @ 6:42 am

Well it looks like S&P is at it again, reversing yesterday’s promising start to the US trading session by putting 15 Euro zone countries on negative credit watch, including France and Germany based on the potential non-actions of the EU leaders summit at the end of the week.  This is similar to the actions they took against the US with issuing the warning shot, though they did actually follow through with the downgrade based on Washington political ineptitude.

However this could be more problematic for the Euro zone as yields had been declining which would help them in debt service relief.  This comes on the heels of the Merkozy announcement yesterday which is attempting to provide a stronger European fiscal union by requiring countries to have a balanced budget, then imposing sanctions against those who don’t comply.  They are also looking to speed up the establishment of the ESM, in addition to a change in the Basel rules over what type of assets banks can hold.

None of this is ground-breaking stuff and the S&P downgrade is essentially saying that they need to do more.  Apparently they haven’t been watching the scene unfold over there and the pace at which things get done.  US Treasury Secretary Geithner is over there this week to try to force action.  My sense is that this meeting like the others will be more of the same.

The data in the Euro zone did look promising though, as GDP figures came in as expected showing a gain of 1.4%.  More importantly, German factory orders came in much better than expected posting a quarterly gain of 5.2% vs. an expected .9%.  The ECB rate decision on Thursday is expected to reveal a 25bp reduction to 1%.

Contrary to my speculation yesterday (see chart of the day) the RBA reduced interest rates 25bp to 4.25% citing global recession concerns and the problems in the Euro zone.  Australian GDP figures are due out tomorrow, followed by employment figures on Thursday.

Later this morning, the Bank of Canada will release its rate policy decision and are expected to remain steady at 1%.

In Switzerland, CPI data showed a decline in prices of .5%, the most in nearly 2 years and lower than the consensus estimate of a decline of .3%.  This is worrisome for the SNB who have struggled to weaken the Swiss franc to help with exports so they are considering further action, including lower the target area vs. Euro from 1.20 to 1.30 or even going so far as to make interest rates negative.  Should the problems in the Euro zone exacerbate, they may be fighting an uphill battle.

As a result, we are seeing some Japanese yen strength which has received some money flows from the other safe havens on risk aversion and unwind of carry trades from the Australian interest rate reduction.

Not much happening in the UK today, with home prices coming in lower than expected.  The pound has been trading in a “middle ground” somewhere between the Euro risk appetite and the Swissie risk aversion.  Industrial and manufacturing production figures will be out tomorrow, followed by the BOE rate decision on Thursday where no change is expected.

There is little news expected out of the US for the rest of the week so all eyes are on Europe.  This morning’s mild risk appetite has just flipped to risk aversion so we are seeing some early selling after some overnight gains.  If we can make it through the first half of the US session without some Euro negativity, then we could see a late-day rally.

November 30, 2011

November 29, 2011

Forex Market Outlook 11/29/11

Filed under: Forex News — Tags: , , , , , , , — 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.

November 16, 2011

Forex Market Outlook 11/16/11

Filed under: Forex News — Tags: , , , , , , , , , — admin @ 7:20 am

Buy the dips and sell the rips.  That is exactly how one should navigate this forex market as headline risk from the Euro zone is countered by the US need for stock prices to go higher.  So the market action of late has been selling in the Euro session and buying in the US.

This has obviously left trend-traders and longer-term investors scratching their heads as there has been great range-bound volatility with no longer-term patterns emerging.  In short, take what the market gives you.

What we received overnight out of the UK was more of the same, as the BOE inflation report suggested that further stimulus was needed to ward off the effects of a Euro zone recession and that inflation would be back under 2%– in 2 years time!  What will happen in those two long years is anyone’s guess but it should be noted that they reported 5% headline inflation just yesterday.

And also speaking of inflation, the Euro zone reported in-line CPI data with the headline figure at 3% and the core figure of 1.6%, as was expected.

In the US, the headline figure came in lower than expected at 3.5% vs. an expected 3.7% and the core figure was expected at 2.1%.  Yet here we are with oil prices back up above $100 (see chart of the day) and all the talk is that we are facing further recession.

Inflation is coming folks despite Central bank efforts to help economic recovery.  Stagflation is actually more likely and is exactly what the UK is experiencing right now.  The unemployment rate in the UK ticked higher to 8.3% vs. an expected 8.2% as only 5300 jobs were added vs. a pipe-dream hoped for expectation of 21K.

Let’s remember, these data points are backward looking and do not forecast the future, so in the grand scheme of things they are pretty immaterial other than talking points that allow Central bankers to point their policies as not being destructive.  One does not need to be a rocket scientist to know that as oil prices go, so goes everything else as the cost to produce and transport are greatly impacted by energy costs.

Perhaps its time to throw another $500 billion at failed solar companies to relieve the pain?  But seriously, the problem is the Fed and cheap money policy trying to offset the disaster that is fiscal policy here in the US.  Every day the news that the super-committee may fail becomes louder and louder thereby making their failure a foregone conclusion.

Meanwhile, don’t think that I’m going to ignore the European crisis that is now spreading to the banks that own a lot of this bogus sovereign debt.  The bond vigilantes are in full-force as I mentioned yesterday and are selling out of this junk causing yields to rise and making financing costs nearly impossible to service.

The failure of the ECB to step in as the buyer of last resort and their daily attempts at meekly purchasing some of the Italian and Spanish debt are pathetic at best.  If they want the Euro zone to continue, they need to make a forceful statement that they will step in and buy to provide confidence to otherwise fearful market.

The new governments in both Greece and Italy face political challenges and it will be interesting to see if they can garner enough support to enact the measures that are necessary to save themselves. 

In other words, just another ordinary day in the forex market!

November 9, 2011

Forex Market Outlook 11/9/11

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

There’s really only one story to discuss today and that is Italy.  Italian bond yields are soaring and I mean soaring and the market reaction is not pretty.  In a story of “be careful what you wish for”, Italian Premier Berlusconi is said to be stepping down next week but today’s crisis may actually reverse those wants and return him to power.

Since the announcement that he would step down after austerity measures were implemented, bond yields jumped to above 7% for the first time in the Euro-era.  This is an unsustainable level and the uncertainty over the new Italian government is weighing heavily on the market.

Stocks are lower in Europe and in the US, as are commodities.  Risk aversion is high right now as Italy is the third 3rd largest Euro zone economy, as well as the world’s 8th largest.  It is clearly too big to fail and it is doubtful whether or not it could be saved.

As bond yields rise, it becomes harder for them to service their debt and creates market dislocations as everyone runs for the exit. 

Making matters worse, there is no news on the docket that could potentially save us today, with the exception of a Bernanke speech later this morning.  I wouldn’t be surprised at this point if his speech today is not the one he started out with earlier this morning.

And that is the problem with contagion; at first it was Greece and now it is Italy.  As the size and scope of the indebted nations gets bigger, the larger the problem occurs.  And guess who is up next?

The United States.  That’s right, the good ol’ US of A.  The budget super-committee is working right now to attempt to fix our problems and if this is not a wake-up call, then nothing ever will be.  The only thing keeping US yields low right now is the threat of Bernanke and the Fed tanking interest rates and the Dollar much lower.

While it will be a difficult task to do that, the potential of QE3 may mean negative real interest rates which could be disastrous for the markets.

For the sake of global harmony, let’s hope that the situation in Italy comes to a close rapidly.  Just don’t be surprised if Berlusconi is the one who comes out on top!

October 13, 2011

Forex Market Outlook 10/13/11

Filed under: Forex News — Tags: , , , , , , , — 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.

September 22, 2011

Forex Market Outlook 9/22/11

Filed under: Forex News — Tags: , , , , , , , , , , , — admin @ 7:13 am

The markets have been tanking for the last 18 hours as Bernanke unleashed “Operation Twist” on the marketplace.  Perhaps this should be called “Operation Disaster”.  What he has essentially done is tanked markets in the short-term in favor of potential longer-term gains.  With the Euro debt crisis worsening every day, the timing is less than ideal.

The last time this obscure policy measure was used was in the early 1960’s and though the intended effects are happening—to lower yields on longer-term maturities—the immediate impact has not been well-received by the markets.  At some point all of this Fed tinkering and tweaking is bound to produce a problem and yesterday’s move may be it.

Since yesterday’s announcement, the Euro has fallen nearly 4 cents, or 400 pips in forex parlance.  The Aussie has experienced a similar move and is now trading under parity with USD to .98.  If you follow our “chart of the day” section below, I also called the move on the Loonie and Pound from the last two days.  Monday’s short call on EUR/USD is still in play with a longer-term target of 1.30.

Global stock markets are also retreating, with the Dow Futures off 200+ points today after selling off over 250 points yesterday.  Asian markets were down overnight in the 2-4% range, and European stock markets are down close to 5% across the board.  Oil is also lower to an 81 handle, and gold is off $75 to around $1730. 

So if the twist was intended to induce US Dollar weakness, it is failing miserably and the correlative effects of a strong dollar is taking world markets lower.  I’m sure Bernanke’s intention is to get people out of bonds and into stocks, commodities, and possibly housing to encourage inflation, but in the near-term this has backfired.  Risk aversion has picked up to the point where this policy mistake may not be reversible.

This brings us back to the Euro zone, which is still under pressure to figure out the debt crisis.  The Greece situation is becoming more and more unsustainable as time goes on and a potential default could send world markets spiraling lower out of control.

Lower manufacturing in both China and Europe (for the first time in 2 years) reflect a slowing global economy, but the debt crisis in Europe and the threat of contagion from Greece to other countries is a ticking time-bomb.

Politicians both in Europe and in the US are way out of their depth and lack the ability to make the tough choices necessary to right the ship.  The last few years of extend and pretend has finally come home to roost and the lack of action has brought us to this uncomfortable place.

US initial jobless claims rose slightly but that was to be expected, and at this point there is no economic data that can paint a rosy enough picture to induce risk-taking.  So markets may continue to fall, though where that bottom may be is anyone’s guess.  In the long-term “Operation Twist” should be US dollar negative and eventually money will have to go somewhere, most likely to dividend paying stocks as yields there improve with lower prices.  Or perhaps Bernanke will embark on more quantitative easing.  One of the things to note about the “Twist” is that it did nothing to expand the money supply, but rather just re-shuffled the Fed’s holdings.

And this also does nothing for Main St. here in the US as confidence is near all-time lows and improvement is nowhere in sight.  Until the Fed gets some help form the fiscal side of the ledger, they may be all out of bullets and further action is losing its effectiveness.

These are uncertain times right now and the uncertainty causes fear, which in turn causes risk aversion.  The pressure is on global leaders to find credible solutions to the global economic downturn otherwise we may continue to slide toward further recession or possibly depression. 

Until these solutions emerge in Europe with the debt crisis and in the US with the economy in general, the trend will remain to the downside.  Perhaps a bottoming out process is necessary to get things moving again, but the pain experienced along the way may cause irreparable harm. 

There is ample opportunity in the forex market to take advantage of this volatility, but don’t get caught in losing positions! 

September 13, 2011

Forex Market Outlook 9/13/11

Filed under: Forex News — Tags: , , , , , , , , , — admin @ 7:51 am

Well I’m just back from the FXCM currency trading expo in Las Vegas and man, did we have a lot to talk about there!  The markets essentially collapsed last Friday and heightened fears have been ruling trading action ever since.

Yesterday the markets here in the US opened much lower after tanking in the Asian and European sessions, as European banks are now being attacked as the market believes they are misreporting their exposure to European sovereign debt.  Why is this an issue?  Because the market believes via the bond market that there is a 98% chance that Greece is going to default!

The problems in the Euro zone are starting to accelerate, likely more quickly than leaders’ ability to solve the problems.  Considering they have had almost 2 years and have done little, this makes sense.  Italy is attempting to take matters into their own hands, and a vote in Parliament over an austerity package is expected today.  The market also bounced yesterday when it was revealed that they were meeting with the Chinese to find a buyer for their debt.

It is a sad day now that the US is losing its sphere of influence and world economies are turning to China and not the US for help.  Perhaps that is because they have seen the disaster that Washington DC has become and would rather side with a quasi-communist country for economic help. 

Case in point:  the details of the President’s “jobs” program were revealed and it is just more of the same.  Higher taxes, more government spending.  That’s really it.  He is trying to set up the debate for 2012 and the only job he is interested in creating is his own in Washington DC after the next election.   It’s time to fire this guy, so that the rest of America can get back to work!

On the data front, UK inflation came in slightly higher than expected, though no one is expecting the BOE to tighten any time soon.  In fact, their next move may be to ease further, though likely not through interest rates.

In the US, small business confidence is near all-time lows.

So the markets in the US are opening flat to slightly lower, and it is doubtful that any major risk-taking is going to occur until we something from the EU that can be deemed positive.

August 25, 2011

Forex Market Outlook 8/25/11

Filed under: Forex News — Tags: , , , , , , , , , , , , , , — admin @ 7:07 am

August 10, 2011

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