Forex Blog

March 26, 2014

Draghi: Impact of ECB’s Accommodative Stance To Increase

The European Central Bank’s accommodative monetary policy should be increasingly felt throughout the euro-region economy as disruptions in the financial system wane, President Mario Draghi said.

“As policies to reverse fragmentation accelerate, and bank deleveraging and restructuring proceeds, monetary policy should become increasingly effective,” Draghi said in a speech in Paris today. “I expect monetary policy to regain influence over the economic cycle, and our accommodative stance to support a gradual closing of the output gap in the coming years.”

Draghi’s optimism on the region’s rebound is buttressed by output data and measures of business confidence as the impact of economic reforms and the ECB’s record-low interest rates support the recovery in the 18-nation euro area. Still, the ECB president warned that risks including subdued prices and a strengthening euro remain.

“If any downside risks to this scenario appear, we stand ready to take additional monetary policy measures that ensure our mandate is fulfilled,” Draghi said. “In other words, we will do what is needed to maintain price stability,” he said, adding that “right now, we think that the risks of having deflation are limited.”

Bloomberg

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December 5, 2013

Japan Approves $182 Billion Stimulus Package

Japanese Prime Minister Shinzo Abe’s cabinet approved a $182 billion package on Thursday to pull the economy out of deflation, but doubts remain about the impact.

The package has a headline value of 18.6 trillion yen ($182 billion), which is an exaggerated figure as the bulk of the package includes loans from government-backed lenders and spending by local governments that was already scheduled.

The core of the package is 5.5 trillion yen in spending measures which Abe ordered in October to bolster the economy ahead of a national sales-tax hike in April. The government does not have to sell new debt to fund this spending.

The package has raised concerns that Japan’s government has not broken away from the stop-gap measures and piecemeal policymaking that some say has hampered long-term growth.

via Reuters

The post Japan Approves $182 Billion Stimulus Package appeared first on MarketPulse.

April 30, 2012

US Dollar Weakness Driven by More Than Just Risk On Trade

By Joel Kruger, Technical Strategist for DailyFX.com

  • Currency strength from risk on trade and Fed policy expectations
  • Fed still not ready to fully eliminate possibility for additional QE
  • Pound emerges as major beneficiary of latest round of USD weakness
  • Yen extends gains and looks poised for additional strength
  • Aussie could see volatility ahead of highly anticipated RBA
  • Still looking to sell EUR/USD rallies; see “Trade of the Day” below

The US Dollar has come under some intensified pressure in recent sessions, and the across the board underperformance in the buck suggests that there could be more at play than simply risk on market drivers. While there has been clear evidence of a resumption of risk buying over the past several sessions, which can be attributed to some of the weakness in the Greenback, we would also suggest that market participants are once again looking at the Fed and seeing a central bank that is not necessarily as ready to look to reverse policy as some may have thought. A couple of weeks back the possibility for another round of quantitative easing seemed like it had come off the table, but the latest FOMC meeting has not ruled out the possibility and we suspect that this could be the source of an acceleration in US Dollar selling.

Nevertheless, we would still not recommend getting overly bearish on the buck just yet, especially with the Euro only just now about to test some key resistance by 1.3300 and still locked within a downtrend off of the yearly highs. Other major currencies like the Pound are also well overbought against the US Dollar right now, and this further adds to the case that the Greenback could see renewed strength ahead. Similarly, the Canadian Dollar has rallied to fresh multi-month highs, and at current levels, USD/CAD could start to become more attractive as a long opportunity. Other currency pairs and crosses worth watching this week include USD/JPY, which has dropped back below the previous April lows, and now threatens a deeper pullback into the 79.00’s, and EUR/GBP, which is technically oversold and approaching some major multi-month support by 0.8065.

Moving on, key event risk in the early week comes in the form of the RBA rate decision on Tuesday, and we believe that this result could have a broader influence on trade that extends beyond the Australian Dollar and into risk sentiment. Aussie has been very well correlated to risk, and given the expected 25bp rate cut on softer economic data and inflation, the RBA decision could serve as a reminder to investors that all is not entirely well within the global economy and that there is in fact a good deal of risk that still needs to be priced in. One of these risks is China and the impact a slowdown in this economy could have across the globe. We contend that the impact will be quite large and most detrimental to the correlated commodity bloc and emerging market currencies.

TRADE OF THE DAY

EUR/USD: (This recommendation was issued last week but the entry and stop have been revised. See below.)

Although the latest rally has been impressive, we contend the market is still locked within a more well defined medium to longer-term downtrend off of the 2008 record highs, and as such, looking to sell rallies in 2012 is the preferred strategy. The rally has now extended beyond 1.3200 and from here we see scope for additional upside through 1.3300. However, once the 1.3300 level is tested and broken, there is a very compelling technical argument to be made for a bearish resumption. A closer look at the 1.3300 level shows a confluence of resistance which includes the obvious psychological barrier itself, some falling trend-line resistance off of the February 2012 peak, the upper bollinger band, and a very attractive 78.6% fib retrace off of the most recent March-April, 1.34400-1.3000 high-low move. As such, we really like the idea of fading and overshoots beyond 1.3300 and will place our entry accordingly.

STRATEGY: SELL AT 1.3320 FOR AN OPEN OBJECTIVE; STOP-LOSS ONLY ON ANY DAILY CLOSE (5PM NY TIME) ABOVE 1.3420.

ECONOMIC CALENDAR

— Written by Joel Kruger, Technical Currency Strategist

To contact Joel Kruger, email jskruger@dailyfx.com. Follow me on Twitter @JoelKruger

To be added to Joel Kruger’s distribution list, send an email with subject line “Distribution List” to jskruger@dailyfx.com

January 4, 2012

Forex Market Outlook 1/4/12

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

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

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

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

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

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

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

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

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

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

August 30, 2011

Fed Official Causes Gold To Spike Higher!

An interview this morning with Fed Governor Charles Evans produced a little more than the market expected.  While not scheduled to speak in an official capacity, he was giving an interview to CNBC where he was extrememly candid.  The interview did not inspire confidence in the economy or the Fed response to inflation, and as a result, gold went flying higher $35 in a few ensuing minutes. 

These Fed officials need to be more cognizant of the impact of their words and its a shame that a news outlet like CNBC is now creating news and not just reporting on it!

April 27, 2011

Focus on the releases not what Bernanke says in Q&A

The market is focused on what Ben is going to say, but they should be alert to the release of the forecasts which come first. The Fed’s projections of ‘central tendency’ for GDP, unemployment, and inflation will be released at the beginning of the press conference (2.15 EST) and could be the actual market mover rather than Ben’s performance during question and answers.

The recent rally in US Treasuries suggests that the market is priced for a dovish FOMC. The press conference is expected to touch upon several topics, including the timing of the withdrawal of liquidity and the impact of commodity prices on the FOMC’s economic outlook.

Elsewhere, Cable has found support after a solid UK GDP release this morning (+0.5%), even the Euro-zone’s industrial orders rising +0.9% on the month and +21.3% on the year is supporting the single currency short term as capital markets shift their attention to the FOMC.

The US$ is weaker in the O/N trading session. Currently, it is lower against 15 of the 16 most actively traded currencies in a ‘volatile’ session.

Forex heatmap

US data releases did little for the dollar yesterday, despite being somewhat more positive. Consumer’s current assessment of economic prosperity, fueled by job prospects, edged up +1.6 points this month to 65.4 from March’s unrevised print of 63.4. It failed to recapture all of last month’s loss which plummeted on consumer’s pessimism of the six-month outlook (-16.2 points). This month’s present expectations category was again outpaced by future-expectations. Digging deeper, the present situation rose +2.1 points to 39.6 on the belief ‘jobs were plentiful’, while the six-month outlook advanced +1.3 points to 82.6. It seems that higher energy prices are again weighing on expectations.

February’s S&P/Case-Shiller House Price Index printed a -3.3%, y/y, decline, meeting market expectations, deteriorating from a -3.1%, y/y, decline in January. On a monthly basis, the seasonally adjusted (10 and 20-city index’s) felly by -0.2%, compared to a -0.3% fall in January. It was the smallest seasonally adjusted monthly fall in over a year.

The USD is lower against the EUR +0.21%, GBP +0.51%, CHF +0.07% and higher against JPY -0.36%. The commodity currencies are mixed this morning, CAD +0.00% and AUD +0.39%.

Investors seem to collectively dislike the dollar, otherwise the loonie should have traded much lower yesterday as commodities came under pressure. It seems that the consumers ‘disgust for US monetary and fiscal policy’ had the ‘small’ positive CAD carry overcome this drop in commodity prices.

Fundamental reason have aided the CAD rise of late, but the speed of its rise has been somewhat over zealous, requiring a pull back from its four-year high print of last week that occurred after the stronger than expected domestic inflation data. The market has been pricing in a tightening bias for the July BoC meeting.

Expect investors to covet the loonie as an alternative to the EUR and the dollar, assuming risk appetite remains the same and Bernanke gives the market no more surprises (0.9525).

The AUD has rallied to a post-1983 float high above 1.08 overnight after higher-than-expected Australian CPI-inflation in the first quarter has increassed expectations of further RBA rate hikes. Inflation rose +1.6%, q/q, far higher than the consensus forecast of +1.2%, pushing the year-on-year rate to +3.3% from +2.7% in the fourth quarter. It seems that flood related food price spikes and higher oil prices drove the headline. However, the underlying inflation was also high, rising +0.9%, q/q to +2.3% from +2.2%, y/y in the fourth-quarter.

Currently, the RBA seem comfortable with interest rates as highlighted in the released minutes earlier this month. The Governor viewed his policy setting as appropriate, saying they will ‘look through’ higher inflation and slower growth stemming from natural disasters. It’s expected that Governor Stevens will want to see more data that’s not so distorted by weather, which may take some time to come through, before moving on rates again.

Australian yields are still the highest in the G10 and do look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on any pullbacks as the currency marches towards 1.10 outright(1.0825).

Crude is little changed in the O/N session ($112.35 +14c). Oil prices remain range bound, despite the dollar underperforming and MENA unrest. Even comments from the Saudi’s about the impact of high oil prices on the global economy have been unable to provide sustainable pressure on the commodity just yet. Investors are waiting for the potential of ‘a signal of a change in monetary policy from the Fed’ this afternoon.

To a certain extent, last week’s EIA report has provided a level of support for crude. Supplies of commodity fell -2.32m barrels while the market had forecasted a stock increase of +1.3m. Gas inventories fared no better, falling -1.58m barrels. Stocks were expected to decline by -1.75m barrels. Year-to-date, crude has rallied +20%.

The IEA said it maintains its 2011 global oil demand growth forecast but noted that the high oil prices are beginning to dent demand growth based on its preliminary data for January and February. Both the IEA and IMF have said that prices above the $100 watermark are beginning to hurt the global economy.

Recent price movements are being dictated by the value of the dollar and on speculators pushing prices to extremes. Even OPEC sides with the other agencies and added that they are unlikely to alter output targets when it meets in June as there is ‘no shortage of oil anywhere in the world’ even after supply curtailments in MENA.

Gold came under pressure yesterday from investor uncertainty over the likely course of Bernanke and company’s monetary policy and tomorrows USD GDP release. Some investors were happy booking profits on event risk despite the dollar remaining under pressure.

It seems that gold’s usual inverse relation to the dollar has been weakening over the last few trading sessions. To date, the rally has been strong and it’s not surprising to see some profit-taking ahead of the FOMC meeting and Ben’s first public appearance post-rate announcement.

On these pullbacks, prices remain supported on speculation that record-low interest rates will encourage demand for an inflation hedge amid expectations that the Fed will maintain its accommodative monetary policy. Gold, as a non-yielding asset, has a higher opportunity cost when interest rates rise.

The precious metal has become the currency of choice, rallying +30.5% in the past year. At the moment, any price pullbacks are viewed as favorable opportunities for investors to continue to diversify into safe-haven assets, especially metal being used as a store-of-value ($1,508 +$4.70c).

The Nikkei closed at 9,691 up+133. The DAX index in Europe was at 7,399 up+43; the FTSE (UK) currently is 6,064 down-6. The early call for the open of key US indices is higher. The US 10-year eased 3bp yesterday (3.35%) and is little changed in the O/N session.

Ten year product yields have fallen to a new-month low on speculation that the Fed will keep overnight lending rates accommodative and consider steps to stop yields from rising as the end of QE2 approaches.

With the auctions also this week, it’s difficult for the market to set up to take down the product. That’s probably why, even with equities rallying, dealers are keeping things close to their chest.

Yesterday’s $35b 2-year auction was fair, printing a yield of +0.673% that was 3.06 times subscribed versus the four-auction average of 3.34. Indirect bidders took +37.9%, while direct took down +13.4%. Dealers will now change their focus to today’s $35b 5-years and tomorrows $29b 7’s. Now we wait for Ben’s first post-FOMC announcement appearance.

March 22, 2011

C$ firms despite retail sales disappointment

Supported by steady commodity prices, the Canadian dollar was higher against its U.S. counterpart on Tuesday morning, but off its highs as Canadian retail sales data for January came in lower than expected.

Retail sales fell by 0.3 percent in January from December, dragged lower by weaker new-car sales, Statistics Canada said. Other data showed Canada’s leading indicator for February was up 0.8 percent from January on strength in the manufacturing sector but that was insufficient to offset the impact of the retail figures.

Reuters

February 2, 2011

S&P Warns of Further Rating Cuts

After reducing Ireland’s credit rating one notch to A- earlier today, Standard & Poors warned that a further reduction is possible but is waiting to evaluate the impact of recent capital investments into the banking sector. S&P said it estimates that the indebtedness of Ireland’s domestic banking groups at over 170 per cent of the country’s gross domestic product. As a result, S&P said Ireland’s banks are currently dependent “almost entirely” on the European Central Bank to refinance their current market debts.

Source: The Canadian Press

September 13, 2010

Oil Gains on Stronger Asian Demand

Oil broke through the $77 a barrel mark in early afternoon trading in Europe as investors considered the impact of increasing demand from Asian countries and China in particular. Concerns over supply disruptions also impacted prices as shipments were shutdown for a second day as repair crews attempted to fix a leak in a major pipeline running through Chicago and the US mid-west.

By early afternoon in Europe, benchmark crude for October delivery was up 72 cents to $77.17 a barrel at late afternoon Singapore time in electronic trading on the New York Mercantile Exchange. The contract rose $2.20 to settle at $76.45 on Friday.

Source: The Associated Press

June 29, 2010

Japan’s Unemployment on the Rise, Spending Decreases

Analysts were caught off guard today on news that Japan’s unemployment rose to 5.2 percent in May from 5.1 percent the previous month. It was expected that unemployment would actually fall slightly to 5.0 percent in May.

Household spending fell 0.7 percent in May when compared to May 2009. Again, this was a surprise as the forecast called for a 0.4 percent increase year-over-year.

“Today’s reports show Japan’s economy is clearly slowing down” after growing at an annual 5 percent pace in the first quarter, said Kyohei Morita, chief Japan economist at Barclays Capital in Tokyo. “Consumer spending is weakening because the impact from government stimulus measures is fading.”

Source: Bloomberg

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