Forex Blog

January 31, 2012

Record Eurozone Unemployment Pits North Against South

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 1:26 pm

The December unemployment rate for the 17-member countries comprising the Eurozone rose to the highest level since the Euro was introduced in 1999. For the month of December, the rate for the entire region rose to 10.4 percent after the November result was similarly revised upwards one tenth of a percent from the originally-reported 10.3 percent.

A total of 16.5 million people across the Eurozone are now out of work. This is an increase of three quarters of a million in the past year alone. But the pain is not being felt equally amongst all Eurozone nations.

Greece and Spain recorded the greatest increase in unemployment over the past year. At 22.9 percent, Spain had the highest unemployment rate for the entire area with Greece not far behind at just over 19 percent. Portugal watched helplessly as its unemployment rate continued to climb reaching 13.6 percent in December.

Comparing the results of these southern countries with the northern jurisdictions reveals the gap between the north and the south. In Germany, for instance, December’s unemployment rate actually fell more than expected to 6.7 percent – the lowest since German was reunited. Meanwhile, Austria and the Netherlands continued to record the lowest Eurozone unemployment at just 4.1 and 4.9 percent respectively.

Unemployment to Increase in Some Eurozone Countries

Looking ahead to the coming year and beyond, there is every likelihood that the situation will actually worsen. As even the most casual observer knows, the Greek government is presently under intense pressure to implement the infamous “austerity” measures to address the country’s widening deficit.

The massive spending cuts targeted to meet the goal of ultimately eliminating the deficit will require Greek authorities to eradicate a significant number of government jobs. Other countries including Spain, Portugal, and even Italy will be forced – to some degree at least – to follow the same agenda in order to get a handle on overall spending.

Widespread job losses will not be restricted to just the government, however; the private sector too will be forced to reduce costs as companies struggle with falling sales. In the face of the continued uncertainty and growing fears of recession, companies will postpone or even cancel all but the most essential new projects, delaying new hiring accordingly.

Again, it will be the southern countries that will feel the effects of this most keenly.

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January 30, 2012

More EUR Concessions Required

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 4:40 am

The 1.32 EUR handle is in danger of becoming a distant past. Today’s Euro summit could fail to appease investors concerns about the fiscal outlook of Greece. If that is the case, then the single currency price action is on the verge of repeating itself; a pattern of pre-summit gains and post-summit losses.

The Greek economy is only “one” of the Euro peripheries on the brink of deteriorating further into the abyss near term. The country’s own officials are pushing back on Germany’s proposal for Greece to cede control over its budget in return for aid. Without aid from the IMF and EU, a Greek private sector involvement deal is in danger of collapsing this week. Everyday the market is warned of this pending deal, a deal that was supposed to be concluded weeks ago, a deal that still has some Euro-euphoria premium priced in. Further uncertainty will convince the optimists that a near term EUR top may have been already been established last Friday.

The Fitch credit downgrading last week does not make it any easier for some of the struggling Euro nations to come to the table to raise cash. Auctions this week will be the biggest test of sentiment so far this year. This morning, the Italian auction cleared well, with Italy selling +7.5b of bonds out of a total of +8b. However, the ECB were seen post-results; not necessarily good. Italy, Belgium and Spain sell no less than +EUR22b’s worth of debt amongst a credit rating poisoned atmosphere. The pending issues will be somewhat of a litmus test at these much lower-than-before yield levels. The Italian benchmark 10’s (+5.90%) had only recently traded above the markets +7% default barometer.

The Euro-zone economic sentiment rising to 93.4 from 92.8 has only been capable of offering the single currency slight short-term support. The currency seems to want to check out further, the stop-loss orders touted below the bids into the figure at 1.31 option expiry fame. The economic sentiment indicator along with other Euro surveys may persuade Draghi and company to leave monetary policy unchanged at next months meeting as they look to see if the Euro-zone economic activity is stabilizing. Is the EUR top in for now?

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January 13, 2012

Have We Missed the EUR Sweet Spot after Italian Auction?

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 4:20 am

All dealers can talk about is the limited upside of the single currency and that the risk reward favors shorting the EUR. Analysts have been revising their first quarter and year end projections down to an average of 1.22 and 1.15. Despite the surprisingly positive sovereign periphery bill and bond issues this week, the prospect of additional ECB easing suggests that interest rate support for the EUR is likely to wane further over the coming week or months. The relative strength of the US economy compared to the Euro and UK means that the pound and EUR should record further upsets to the USD.

This mornings Italian bond auction has given the market more of an excuse to fade the single currency rallies. “Buy the rumor and sell the fact” played out very nicely. The market seems to have taken yesterdays stronger periphery auction results as an opportunity to own some ‘expensive’ EURs and even sell them at a profit and then some, proven by the price action over the last 24-hours. One gets the feeling that the market is again happily short at better levels. The solid prior sale of Italian bonds has only upped the ante and the results have only served as a trigger to short the EUR. Further tests of the 1.27 handle are eyed with fresh offers reappearing at the old option strikes of 1.285. The longer term support remains close to the option barriers of 1.265.

Italy managed to sell a total of +EUR4.75b 2014/2018 BTP (the top end of their range). The yields at the auction came in lower than the secondary market levels, some traders were disappointed with the bid-to-cover ratio; the FI market seems happy selling Italy and buying German Bunds as the spread looks attractive.

Even surprisingly strong EUR data is ignored by market players. The Euro-zone this morning posted an unexpected trade surplus surprise. The market had been forecasting a deficit of-EUR1b, however, the region registered a surplus of +EUR1b. A surge in exports helped the Euro-zone post this major surplus. Can the region avoid a severe economic downturn? The Euro tends to post trade deficits in the winter months due to the high fuel and energy inputs. However, the seasonally adjusted figures show that the inputs were the same month-over-month while exports surged +3.9%!

Now we have to wait and see if North America wants to cash in some EUR profit this morning, no matter what, offers are again appearing as the market seems to have more conviction about medium term direction. Before this weeks auctions, the bulk of investors have been happily waiting on the side lines.

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Will the US embrace the EURs new found confidence?

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January 12, 2012

Forex Market Outlook 1/12/12

Filed under: Forex News — Tags: , , , , , , , — admin @ 6:51 am

Well it looks like we’re dodging bullets in the financial markets today as just about every possible risk event came in with a positive result for risk appetite so that’s exactly what we are seeing today. Yesterday I mentioned the volatility of the markets and how yesterday’s down day was really nothing more than fear as there was little new information to change sentiment.

This has set today up for a risk-taking day, with stocks and commodities higher and the Dollar and Yen lower.  There was a lot of news today that could have derailed the markets today and continued the slow slide lower, but so far the news has been good.

Let’s start with the interest rates decisions, first in the UK.  The BOE this morning left both interest rates and the asset purchase plan unchanged as the market was expecting.  While there is no accompanying statement today, there was just the slightest chance they could have been more accommodative as the UK economy is starting to flounder, and there was absolutely no chance of tightening so the market is seeing the no-change as a positive.  Industrial production figures came in lower than expected.  We will find out in about two weeks time at the release of the meeting minutes how unanimous that vote was.

In the EU, the ECB also left rates unchanged and received the same response as the BOE decision, though now the Euro is starting to sell-off a bit ahead of Draghi’s speech later this morning.  While there was a greater chance of the ECB being more accommodative than the BOE, neither bank budged.  It will be interesting to hear what Draghi has to say today as clearly the Euro debt crisis is weighing heavily on the European economy and most economist think that the EU is facing recession, if they aren’t in one already.

However, Draghi and Europe received some excellent news on the debt crisis though as both Spain and Italy both had successful bond auctions that saw their interest rates cut nearly in half, as demand for this debt was huge.  Spain in fact got off nearly twice as much as they were expecting.  These bond auctions are going to be risk events going forward so every time there is a new one, the markets will be on pins and needles trying to figure out what the yields will be and whether or not they are feasible for the issuing country to service.

But Draghi today will likely address the overall EU economy and how to get banks lending again rather than just setting up carry trades between the ECB and the LTRO.   However, if yields can continue to move in the right direction than that makes the ECB chief’s job that much easier.  The fact that CPI data came in mostly lower than expected will also provide some temporary relief, but the ECB is going to have to be vigilant against deflation.

Overnight, China set the stage for risk appetite as their CPI data came in slightly higher than expected at 4.1% but lower than last year’s 4.2%.  At this level, China does not need to tighten monetary policy so in other words it is game on again.  This benefited the Aussie dollar, and in fact it traded exactly as I thought it might and posted on Monday.

However, risk appetite is starting to abate as the US data is coming in this morning worse than expected.  Advance retail sales figures have come in worse than expected showing a gain of .1% vs. the expectation of .3%, and the initial jobless claims also came in worse than expected showing 399K newly unemployed vs. the expectation of 375K and perilously close to the 400-handle the economy has been trying to shed.

So markets are pulling back from earlier highs though it will be interesting to see if this trend continues for the rest of the day.  My feeling is that if the market is happy with European debt this morning, then it should be positive for the markets overall.  While some of the US data may be showing weakness, overall the numbers have been positive though much of that may be because of the increased demand from the holiday season.

Draghi’s speech today should be supportive of the EU economy and recent stock earnings have been good so far.  Gold has been rallying in the wake of a lower Euro though overall risk appetite has been mixed.  So my hope today is that the markets can shake off this temporary weakness this morning and return to the early morning trend of risk appetite.

January 11, 2012

Fitch Warns of “Cataclysmic” Euro Collapse

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 7:43 am

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

Forex Market Outlook 1/10/12

Filed under: Forex News — Tags: , , , , , , , , , , , , , — admin @ 6:47 am

Traders will have a hard time trying to find a down market today with the exception of JPY and USD as the market has taken a decidedly pro-risk tone this morning, which is a welcome relief to some.  Both global stocks and commodities are trading much higher to start the US session.  There are a few different factors driving this sentiment and it is this confluence that is driving markets higher.

So what’s going on this morning?  For starters, the market is regaining confidence in the Euro zone and the ability of its leaders to tackle the debt crisis.  2012 is likely going to be a different year for EU leaders who appear to be out in front of the crisis unlike last year when they dragged their feet and let the politics play out in public forums which erased any credibility they had maintained up to that point.  Yesterday’s meeting between Sarkozy and Merkel was viewed as positive and the news that they may accelerate payments to the bailout fund is welcome.

Today Merkel is meeting with Lagarde of the IMF and there is renewed hope that they will further the mission of tackling the debt crisis.  So far they are winning the PR battle and have kept the bond vigilantes away for now, though there is a lot of bond issuances due out over the course of the next month so they are not out of the woods just yet.  But yields are coming down for EU debt, though Italy’s 10-year is still above 7% which is problematic.  Another good piece of news is that Fitch stated they would not downgrade France so long as the debt crisis doesn’t worsen.

However, news about the current Greek debt crisis has been met with mixed reviews.  It now looks like bondholders may have to take a haircut of greater than 50% which could bring some noise to the markets as investors balk and would prefer default in order to be paid out on their CDS. This will be the story to watch going forward, as well as if this has any impact on future investment in other sovereign debt issues.

News out of the Euro zone showed that French Industrial Production figures came in better than expected showing positive gains vs. expected declines across the board.

In the UK, home prices fell less than expected and the market is looking forward to Thursday’s rate decision where the BOE is still expected to make no change.

Today is a slow day for economic data but one of the big drivers of the markets will be US corporate stock earnings.  Last night earnings season kicked often with Alcoa (AA) posting better than expected results and a host of other equities look to beat expectations despite slowing profit growth.  The correlative effect of higher stock prices still holds some weight and is a major driver of risk sentiment.

Another driver of risk sentiment is oil prices, rightly or wrongly.  I have always contended that higher oil prices should be bad for risk sentiment and not contributing to risk appetite but I am just one voice out of many.   Oil has been higher this morning to $103, mainly because of Iran’s sabre-rattling, which is threatening the supply of oil to the global market.

Overnight, China reported a much better than expected trade surplus as reduced imports pushed the balance higher as exports remained steady.  The trade surplus of nearly 16B was almost twice what was expected so China needs to step up their importing if they don’t want to continue to draw ire over their currency peg.

There is no news of any significance due out in the US today but there is some Fed speak later today that could have a market impact, though unlikely.  In today’s Twitter age, the Fed folks have really learned not to speak out of school and their remarks are carefully vetted ahead of time.  So they will stick to the party line and will go un-noticed.

If things continue on this trajectory, then we could see further risk appetite if corporate earnings continue to be positive.  The private sector appears to be in good shape at this point but government health is likely to be the topic going forward.  2012 is an election year so expect the powers that be to try to pull out all of the stops to juice the numbers to make it seem like they have been doing a good job.

Despite our ability to persevere, I can tell you that things could be a whole lot better.  Don’t fall for the counter-factual argument that things could be worse, because the opposite also holds true, that things could be better.  If business gains confidence from the government, not from the economic results, then we could be on the path to recovery.

January 6, 2012

Cross Border Dollars Temporarily Diverge

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 9:47 am

The ‘big’ dollar remains the go to currency. The market seems to be shifting away from wanting to own it solely as a risk aversion strategy, to one where the buck is being used as an investment currency while the EUR trades as the funding vehicle. Whatever the reason the currency has garnered further support after a stronger than anticipated payroll print. The dollars neighbor and largest trading partner, Canada, has lost some of its shine after its own job report saw the unemployment rate tick to an eight-month high (+7.5%). Friday was not the day to want to own this ‘growth proxy’ currency outright. The crosses have been working in its favor to at least stem its cross-border slide. Next weeks refunding requirements by Italy and Spain again will dictate all dollars direction.

Below are some other highlights of the week:


Americas

  • US: ISM index rose to 53.9 in December (6 month high) from 52.7 the month prior (historical average about 51). Orders, production and employment were all up, a good sign that the US economy accelerated last quarter. Analysts note that “the data isn’t signaling a dramatic change in the hard data, which has consistently outperformed the indicators for some time”.
  • USD: The FOMC minutes did not have a major impact on markets. The key new news was that the Fed will now publish Fed funds forecasts on a quarterly basis when it provides other economic projections (next round due after the January 24-25 meeting). Officials would provide forecasts for the first hike. However, with rates expected to remain near zero until the middle of 2013 is not much of a market concern.
  • USD: Construction spending rose +1.2% in November after a -0.2% decline the month prior.
  • USD: US factory orders grew for the first time in 3-months increasing by +1.8% in November from previous months to +$459.18b. Non-defense aircraft orders were up +73.9%; ex-transport orders up +0.3%; orders for non-defense capital goods ex-aircraft down -1.2%.
  • USD: ADP saw an outsized jump in the employment report of +325k gain, far exceeding the median estimates of +178k. Historically, the print has technical issues and in the past has overshot the government by a wide margin.
  • USD: Last week was the eight time in nine weeks that initial claims came in below the psychological +400k print. Claims fell by -15k to a seasonally adjusted +372k (a strong positive sign for an economic turnaround).
  • CAD: Canadian producer prices (+0.2%) and the cost of raw materials (+3.8%) advanced in November ahead of market expectations, largely the result of higher fuel bills. A weak loonie also played a role in pushing industrial prices upwards.
  • CAD: Purchasing activity expanded from November. The IVEY PMI was at 63.5 on a seasonally adjusted basis in December.
  • USD: Crude supplies rose +2.21m barrels last week to +329.7m
  • CAD: Canadian employment showed a stronger headline print (+17.5k) than consensus (+15k) in December. The unemployment rate ticked to an eight-month high of +7.5% (full-time -25.5k, part-time +43.1k). Average hourly wages +2.2%, y/y, but hours worked took a hit which is not good for GDP.
  • USD: US payrolls beat all expectations, printing +200k job gains versus expectations of +155k. Even better, unemployment rate fell -0.2% to +8.5% and stronger than Novembers retreat because +176k became employed while only -50k stopped looking. In the revisions; November lost -20k, while October gained +12k, accumulating in a net loss of -8k for the two months. “Some of the strength in this report should be discounted because of an seasonal quirk in the courier category of payrolls (Fed-ex, UPS, etc). Jobs in this sector jumped 42,000 in December, repeating a pattern seen in 2009 and 2010 (see attached figure). We should see a payback in next month’s report.

Market Primed for Upside NFP Risk?

Filed under: OANDA News — Tags: , , , , , , , , — admin @ 4:03 am

Big picture, the markets are torn between the recent run of better than expected US data which has raised expectations for the payrolls number this morning, and worries about the euro-zone debt and health of European banks (UniCredit and Deutche etc).

So far this week the dollar has been the big winner. Yesterday, it managed to get a boost from both sets of US employment data and push the EUR down-1% intraday. Until recently, signs of economic growth would be dollar negative; however, Euro at 16-month lows on refinancing concerns has the currency better bid. Glum headlines from the Euro-zone include Italy’s stubbornly high 10-year bond yield (+7%), weak German data and mixed debt auctions results from France and Europe’s bailout fund. Investors are growing nervous over the sheer amount of debt that needs to be refinanced in the first quarter (+262b). It’s not just the sovereign debt, but bank debt, corporate debt and various derivatives that are coming due. Where is the money going to come from?

No analyst seems to have changed their forecast for today’s payroll number. Yesterday’s outsized ADP print (+325k) historically has technical issues and in the past has overshot the government number by a large margin. The median guess remains close to +155k. If anything, the market is primed for upside risk. Analysts note that other labor market indicators, most notably the sub-50 reading on the non-manufacturing ISM employment component, are not consistent with the very strong ADP result. This time last year ADP recorded a +184k forecast miss regarding the first-reported payroll release. Risk sentiment again seems numb over the past two sessions, unable to capitalize on the strong data yesterday. The market is afraid of Europe’s debilitating reach. I guess if we miss NFP consensus those growth proxy currencies will feel the brunt of this markets ‘pain.’

The lethargic nature of this market is evident when the euro-zone releases ‘not such good’ data and the currency has no interest. All the bets are on North America, at least for the first hour after the payroll print. The not so hot data saw euro-zone retail sales fall -0.8% on the month and -2.5% on the year in November, well below the -0.2%, m/m, and -0.8%, y/y, expectations. Unemployment in the zone held steady at +10.3%. Perhaps its time to admit that the EUR is more attractive as a funding currency, while the dollar is being viewed as an investment currency?

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January 4, 2012

BUNDs and PMI to hurt EUR?

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 4:29 am

What are we waiting for? Despite yesterday being the beginning of the New Year for the rest of the world, it seems that the markets are underwhelmed by the rise in the US ISM. Thus far, it has failed to sustain a broad global equity rally or a significant FX move. Yesterday’s FOMC minutes did not seem to have a major affect on the markets either way. The key new news was that the Fed will now publish Fed funds forecasts on a quarterly basis when it provides other economic projections (next round due after the January 24 meeting). Officials would provide forecasts for the first hike, although with current guidance still suggesting rates will remain near zero until the middle of 2013 that is not exactly earth shattering.

Technical analysts are telling us that the EUR is about to straddle their next pivotal point. A daily close above the 21 DMA at 1.3080 suggests a return to 1.32-1.3240 before the currency becomes a sell again. Now that this markets seems significantly long dollars over the holiday period, the potential for this ‘little blip’ is possible, again squeezing out the weak short EUR positions. The dollar is clearly a risk-averse currency, even falling against the Yen, in the general risk recovery seen so far in 2012. All this is occurring against a backdrop of solid US data and the market perception that the US is likely to outperform Europe this year. It seems all eyes are on this Friday’s NFP release (+153k and +8.7%-early estimates). Before the release any continuation of risk-positive sentiment should remain dollar negative.

Euro data this am shows that the Private sector activity in the region shrank again last month, another indication that the area is heading back into recession. Despite the composite PMI for manufacturing and services rising to 48.3 in December from 47 in November, the sub-50 print still implies that the 17-Euro member currency contracted lat month for a fourth consecutive time, including all the fourth-quarter. The slight uplift has done little for the currency or euro negative thinking this session. Analysts note that the last quarter fall in output was the sharpest in two-years. Do not bet against a first quarter decline, two consecutive quarters would confirm a European recession.

Big picture, all of this is only going to complicate efforts for the Euro-zone leaders. The “perception” of trying to put finances in order and regain investor confidence, a condition for ending the debt crisis, could yet threaten Italy and Spain (capital markets next target in the ‘cross-hairs’). Both of these countries continue to report big drops in output. Even Germany’s return to growth in the final quarter will do little to dispel any of the 2011 accumulated negativity by investors for the region. It seems that the market does not like a two-speed Euro-zone (stronger Germany and France versus almost the rest), the weighting is too heavy. Perhaps until Friday, the market will continue to try to cap the EUR despite the long dollar weighting. With a German January 2022 Bund bid-to-cover ratio of 1.3 for EUR+5.14b makes that a tad easier!

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January 3, 2012

Risk to hurt record long dollar positions?

Filed under: OANDA News — Tags: , , , , , , , , , — admin @ 4:05 am

We are back. Back to half-truths, a little despair and hope. The Euro agenda has not changed, leaders are out to save their beleaguered union, their currency and years of hard grafting. The US will spend the next 10-months deciding who has the honor of leading their once proud economy. China, again, will have to charter its country towards a soft landing; the rest of us are relying on this! If either of the regional policy leaders do not get their objectives-in-tow, then the global house of cards is in danger of tumbling down.

Despite a shortened trading week, European leaders will return to work looking to buy time for the Spanish and Italian governments to take control over their debt and rescue the EUR from fragmentation. The highlight of the remaining four trading sessions will be the employment situation in North America, to be reported on Friday.

The first half of this year is expected to be dominated by European leaders struggling to hold the EU together, threatened by credit downgrades, emerging splits in the union and a looming recession that could compound rising debt. The hurdles and obstacles are daunting, this will allow capital markets and investors to nervously push the EUR on some of the crosses to new record lows.

So far, risky assets have started the year strong, with the USD selling off. A rebound in China’s manufacturing and services PMI’s last month have added to the positive tone.The antipodean currencies have climbed for a fourth consecutive day this morning against the dollar amid signs of increased manufacturing output around the world. Last night, Aussie manufacturing expanded for the first time in six-months (50.2), further proof that the global economy is strengthening after German, Chinese and UK factory output reports beat economist estimates already this week.

This morning, the EUR is again testing close to the mid-1.30’s. Thus far, Eastern European sales have failed to cap the topside and have triggered the running of some stop-losses. Will sustaining these gains prove troublesome above the option expiry levels? The EUR remains high on investors radar and is expected to underperform against the risk sensitive currencies (CAD,AUD,NOK and SEK) over the coming days as fiscal uncertainty in Spain and Italy cloud investment judgment. Obviously, further risk rally will hinge on the US data today. Positive readings from ISM, construction spending and FOMC minutes should kick-start a new risk rally leg for the ‘interest rate’ sensitive currencies. Remember, the market is very long dollars after the “turn”, the squeeze is preferable!

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