Forex Blog

November 21, 2011

November 17, 2011

Forex Market Outlook 11/17/11

Filed under: Forex News — Tags: , , , , , , , , , , — admin @ 6:59 am

All eyes continue to focus on Europe and the rising yield situation as it unfolds and pushes the cost to finance debt to record levels.  Italy and Spain have seen record yields as of late, and now the attention is starting to turn toward France, the EU’s second largest economy.  Spain also downgraded their GDP outlook.

This has prompted a bit of a battle between France and Germany with the former wanting a much greater participation from the ECB in this whole debt debacle.  The idea is that the ECB would become the “buyer of last resort” which theoretically should stabilize the market and allow yields to come down.  This action would be similar to the “bazooka” that the US Fed claimed to be ready to use, essentially scaring off the potential bond vigilantes.

However the EU situation is different and because they have let it drag on for so long the credibility of such an action would be in question.   And this is where the ECB in general runs into problems.  Even if they said that they would be the buyer of last resort, the market would most assuredly test that resolve and it is likely that a worse situation would unfold even if they did follow through with it.  To say that this is not a good situation is an understatement.

Italy and Greece though look prepared to institute the austerity measures they must undertake, as Papademus in Greece has received initial support.  In Italy, PM Monti has also declared himself the Finance Minister, thereby eliminating a potential conflict.  So its Monti or bust!

On the data front, the most important numbers have come from the UK.  Consumer confidence figures came in way lower than expected with a reading of 36 vs. and expectation of 43 which itself was lower than last month’s 46.  But yet the retail sales figures came in gangbusters showing a gain of .9% vs. an expectation of a decline of .2%. 

Perhaps this disconnect can be explained by the fears that are instilled by the government despite the decent economic data that is released.  The government keeps harping on how bad the economy is to justify their easy money position and explain 5% inflation, but I think the economic data tells a different story.   Right now, the UK is doing exactly what should be done around the globe by reducing government spending.  The inevitable dip in GDP due to that action should be welcomed and not feared.  Are you listening, Bernanke?

Here in the US, the data was largely positive with initial jobless claims coming in at 388K vs. the expected 395K.  Building permits also rose 10.9% vs. an expected 2.4% with the expected 603K exceeded by the reported 653K.  Housing starts also came in better than expected, with 628K reported vs. the 610 K expected.  Later this morning the Philly Fed Index will be released and there will be some Fedspeak from one of the Fed minions.

So the number here in the US while not great are improving, and it will be interesting to see if Bernanke can justify further Fed monetary easing with the improving data.  Obviously the risk in the EU could cause a liquidity dry-up so he may have to resort to that line of reasoning.

Nevertheless the markets are in slight risk-aversion mode, having improved some since the data releases earlier this morning.  Yesterday’s move higher in oil to $103 is being explained as the un-wind of crack-spread trades, although I find the timing of the move curious with yesterday’s release of CPI data.

With oil prices above $100 it will be much harder for Bernanke to mask the true inflation we see in the economy unless housing prices continue to tank further.  My general feeling is that the only thing holding back the markets right now is the Euro debt crisis and we would be seeing some massive inflation (in everything but housing) if they truly solved the problem.

But for now nothing appears to be close to light at the end of the tunnel so I prefer to keep my trades to the short-term and take advantage of the volatility, rather than trying to avoid it.

November 8, 2011

Forex Market Outlook 11/8/11

Filed under: Forex News — Tags: , , , , , , , , — admin @ 6:38 am

Today is one of those days where there is seemingly nothing happening, with little economic data released but one major event holding the market’s attention.  The budget acceptance vote in Italy is now being viewed as a proxy for Berlusconi’s power in Italy and the potential for political theatrics at this vote could bring about a no confidence vote for the Premier.

Essentially what is taking place today is the Italian Parliament is voting on whether to accept the budget for 2010 (last year) and while it is expected to pass, some members may abstain from the vote in an attempt to show their displeasure with Berlusconi.  If this occurs and the abstention is great, then there will be pressure for a no confidence vote which could lead to his resignation.  This is the ideal scenario for the market, as they would prefer to see a technocrat in office who can navigate the economy and bring Italy back to fiscal health. 

However, Italian politics is such that this could be a drawn out process.  It must be noted that Berlusconi has a media empire and controls several newspapers, so he has a much louder voice than most.  It will be interesting to see what comes about, but recent rises in Italian bond yields may make it more expensive for the government to service its debt if the political uncertainty continues.

Things are going a lot nicer in Greece, where PM Papandreou has reportedly said his goodbyes as they are close to forming a unity government intended to enact the measures laid in the debt crisis deal.  Speaking of that deal, it is expected to be operational by next month, provided these governments can get their houses in order though timelines have known be extended in Europe.

On the data front, the Aussie was lower overnight as the Australian trade surplus came in lower than expected, though it is rebounding on risk appetite this morning.  Stocks and commodities are higher to start the day, though in general the currency markets have been trading in a tight range.

The British pound has also been moving higher as it benefits form money flows leaving the Euro.  Both industrial and manufacturing production figures in the UK came in as or slightly better than expected which is acceptable at this point given the state of their economy.  Later this morning, an unofficial GDP estimate will be released.

As soon as the Swiss franc starts to weaken on its own (see yesterday’s chart of the day), the market takes notice and starts to buy it again!  Consumer confidence figures came in worse than expected but the big news was a statement from the SNB that claimed that they would manipulate the currency for competitive advantages in exporting goods and services.  The market has taken this to mean that there will be no further intervention, after yesterday’s calls to move the peg to the Euro up to 1.25 from 1.20.

In the US not much is happening today, with some Fedspeak due out later today.  This will likely produce little in the way of market reaction as it is insignificant in the grand scheme of things. 

Meanwhile the debt debate here in the US continues forward and the media is grasping at the slightest indication of any news.  It is times like these when the markets can become jittery, as unexpected releases could produce market movement.

Right now the currency market is trading a fairly tight range, so I prefer to keep my trades to the near-term and attempt of buy ahead of support and sell ahead of resistance, essentially trading the range.   The risk at this point to putting on longer-term positions at these levels is too great, so until some clarity emerges I will stick to the shorter-term.

October 18, 2011

Forex Market Outlook 10/18/11

Filed under: Forex News — Tags: , , , , , , , , , , , , — admin @ 7:04 am

With the overhang of the realization that indeed Euro zone leaders will not have a resolution in place by next week like the G-20 leaders asked for, it is now questionable what exactly Merkozy were referring to when they claimed to be able to have something ready by early November.  Is their timetable still in play?  From where I sit, it doesn’t seem likely.

So the markets have turned their attention to global economic data and at this point it isn’t pretty.  Overnight, China reported GDP figures that came in less than expected but nevertheless were impressive, showing growth of 9.1% vs. an expected 9.3%.  This was worrisome for the markets as this was the slowest pace China has grown in nearly two years, but some encouraging signs are that domestic demand is picking up as retail sales figures were higher than expected, as were industrial production figures.

This put pressure on both the Aussie and Kiwi as the RBA also said that they could envision a rate reduction as inflation there is “less concerning”.  However, the RBNZ governor said that rates may need to move higher in New Zealand as the economic activity generated from the rebuilding from the earthquakes may no longer require stimulus.  

This sent markets into risk aversion mode right away and that sentiment was carried into the European session as German economic confidence figures came in at 3 year lows.  In addition, France’s credit rating is in jeopardy if the Euro debt resolution puts too much strain on the French economy though the pace that these negotiations are taking place may not make this a worry any time soon.

What we are seeing though is the signs of inflation creeping up around the globe, most visibly in the UK who reported CPI of 5.2% inflation vs. the expectation of 4.9%.  I thought that expectation figure yesterday had to be wrong, but boy was I mistaken. To be clear, the BOE has an inflation target of 2%, which means it is running more than twice their mandate.  I’m sure the UK citizens love this as the economy slows down.  Stagflation anyone?

As bad as the UK seems, there may be a bigger stagflationary problem and that is occurring right here in the US.  This morning PPI data came in hotter than expected, posting a headline figure of 6.9% vs. the expected 6.5%, with the core figure showing 2.5% vs. an expected 2.4%.  This may mean that tomorrow’s CPI data could be hotter than expected and that we are experiencing inflation, despite declines in housing prices.  Were it not for the drag of the housing market, inflation might be much, much higher.

Yet the markets know that Bernanke is going to do nothing about higher costs because that is EXACTLY what he is hoping will occur.  Meanwhile, misguided protesters will continue to direct their anger toward Wall St. and not Washington DC even though US bank earnings are coming in way lower than expected. 

But I suppose it is easier to point the finger at those who actually show up for work, as Washington DC is in full-on election mode right now which means that virtually nothing will get accomplished which at this stage of the game may be a blessing in disguise.  The debt “super-committee” will likely do the bare minimum and kick the can further down the road and the blame-game politics we’ve come to endure will only grow as more and more people donate to the campaigns of these fools who have caused the economic malaise we are experiencing.

Maybe the Occupy Wall St. movement will help reduce the unemployment rate as fewer people show up to pick up their checks, though the auto-apply feature comes in pretty handy especially when you are not looking for work as you are supposed to be.

Bernanke will be speaking later today and will likely shift the focus back on the Euro zone, which is an entirely different mode of blame politics.   We’ll be told that if the Europe can just get their act together then things will be alright.

Do you believe this?  Me neither.

September 30, 2011

Kiwi (NZD) At 6-Month Lows!

Filed under: Forex News — Tags: , , , , , , , , , , , , , , — admin @ 7:54 am

Thanks to a dual downgrade of their credit rating in New Zealand, the Kiwi has fallen to 6-month lows vs. USD.  Part of the reason is also because of the risk aversion in the markets due to the Euro debt crisis, which is seemingly a reason for just about everything being lower. 

However, the Kiwi is taking an extra hit because China is seeing its economy slowdown, as evidenced by declining PMI figures.  Much of the NZ economy relies on exports to China so if Chinese demand declines, so will NZ exports.  We saw on Monday worse than expected trade balance figures for NZ, which prove this point.

Nevertheless, the Kiwi does experience a positive interest carry and is currently sitting on its S1 daily pivot support just above 76 vs. USD.  With the usual pattern of “risk on” to start the week and “risk off” to end the week, I can see the Kiwi holding the S2 pivot support just ahead of 75 so I’m looking to buy NZD/USD at 75.5 (should it get there) on a test of that support, with my stop just below 75.

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 6, 2011

Forex Market Outlook 9/6/11

Filed under: Forex News — Tags: , , , , , , , , — admin @ 7:21 am

I suppose it was just a matter of time and the market has been aware that the Swiss National Bank would ultimately desire a weaker currency.  Recent rounds of risk aversion due to the European debt crisis (among other negative economic data) apparently were the last straw, as the SNB moved to weaken the franc by setting the target at 1.20 Euro and saying that they will defend it with unlimited resources.

That’s pretty strong language and the rumors over the last few weeks of this taking place shouldn’t come as a surprise.  This has helped push money flows back to the US dollar and gold, and increased the risk aversion in the markets.

The European debt crisis is still the number one concern to global recovery and yesterday, Chancellor Merkel’s party in Germany lost elections that show the growing discontent among Germans for the bailouts of the periphery countries.  This helped push yields on Greek 10-year debt to over 50% as waning support for the Euro in its current form is starting to grow. 

Nevertheless, the Euro bounced this morning on GDP reports that were largely in-line with expectations, showing economic growth in the region at 1.6% YoY vs. the expected 1.7%.  German factory orders came in lower than expected further contributing to negative economic sentiment. 

So we are in risk aversion mode this morning, with European stock markets moving lower and US equity futures drastically lower to start the day.   This comes after yesterday’s Labor Day holiday in the US where markets were closed.  There is not a lot of economic data due out in the US this week, though there are plenty of risk events on the docket.

President Obama is set to speak about a jobs plan on Thursday that is likely to be a non-event and Bernanke was due to speak but has since been re-scheduled.  Europe also has risk events this week, led by a decision from the German courts over the constitutionality of the European debt bailouts.  In addition, Italy will be meeting to discuss austerity measures designed to reduce their deficit and a G-7 meeting round out the week.

On the rate decision front, the Australian Central bank left rates unchanged at 4.75% and there was some thought that perhaps their next move would be to lower if the global economy begins to slow more significantly.  At the end of the week, China will report some economic data that may influence sentiment.

Overnight, the Bank of Japan will have its rate decision and tomorrow will bring the Bank of Canada.  Both are expecting no change to policy.  Thursday will bring both the Bank of England and the ECB rate decisions and no change is expected there either.  But there is a markedly growing shift toward dovishness as the global economy slows and the “race to the bottom” hastens. 

It could be entirely possible that the BOE may make a move to provide more monetary stimulus to its economy as sentiment has shifted on the BOE at the last meeting.  While the ECB just raised rates recently, it is unlikely that they will move to lower, though quantitative easing could become a part of policy to try to deal with debt crisis.

So there is a lot to navigate this week and so far the markets are erring on the side of caution to start the week.  Lack of risk appetite may cause additional volatility, but all metrics add up to further US dollar strength in the short-term as markets attempt to unwind risk.  Sooner or later we will find a “happy medium”, but traditional market correlations will have to break down first.

The swings and ranges have been friendly to traders, so it is advisable to keep it to the short-term at these levels until some more clarity returns to the marketplace.

September 1, 2011

August 23, 2011

August 11, 2011

Market Outlook 8/11/11

Filed under: Forex News — Tags: , , , , , , , — admin @ 6:11 am

The markets are undergoing a major reversal this morning as equities were higher to start the morning in Europe and in the US but that has now turned negative and looks like risk-aversion is back on the table.

The focus has shifted back to the European banks this morning and the ECB monthly report came out earlier this morning and said that downside growth risks may have intensified and economic uncertainty is “particularly high”. This obviously does not bode well for the European economy in light of the attacks the European banks are facing. 

While French bank Soc Gen has repeatedly denied it is in trouble and facing liquidity problems, the markets have a short memory as Lehman issued denials as well right up until the day it collapsed.  I have no knowledge of this situation but must treat it as a “where there’s smoke, there’s fire scenario” as it could become a self-fulfilling prophesy if there is a run on the bank.

Today’s early forex action has been interesting from the safe-havens, as SNB officials are floating rumors that they may attempt to peg the Swiss franc to the Euro in an effort to keep it from appreciating any further.  In Japan, a curious move at the European open of Yen crosses may have been the BOJ actively selling Yen in the market, though not a formal intervention.  A Japanese MOF official declined comment when asked about it.  (See chart of the day below).

Overnight, the unemployment rate in Australia was higher to 5.1% from 4.9% as there was an unexpected net loss of jobs when 10K jobs were expected to be added.  Nevertheless, the Aussie traded higher in early action.

US initial jobless claims are due out later this morning, with the usual 400K expected to lose jobs. 

Market volatility has been intense over the past week as the ranges have been expanded and the moves somewhat violent.  This can at times throw the technicals for a loop and the market can behave irrationally for some time.  Case in point; yesterday gold traded briefly above $1800, an all-time nominal high.  The CME just imposed higher margin requirements to stem the rapid appreciation of the precious metals by speculative buyers.

There is still great risk in the marketplace so the individual fundamentals are largely meaningless.  This means we are in a constant risk-on/risk-off environment where the markets can be easily spooked by rumors or announcements.

So trade cautiously and always use proper risk management techniques!

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