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 26, 2012

Market Outlook for January 26, 2012

Filed under: Forex News — Tags: , , , , , , , , , , , , — admin @ 8:36 am

Recap of the Latest Global News

After the U.S. Dollar sold off across the board late in North American trading yesterday, it appeared that some relief was on the horizon, with the Greenback clawing back in early Asian trading on Thursday. This was merely a short-term correction, and by the time European markets opened up, the higher yielding currencies continued to surge.

Ahead of yesterday, the U.S. Dollar was primed for a strong year; after the ill-advised policy decision, one that does little more than buy time for banks to shore up their balance sheets, the U.S. Dollar is poised to be one of the worst performing majors in 2012. The implications of the Fed’s decision go beyond this year, however. Now, with low rates indicated for the next two years, the groundwork for the American Lost Decade – no different than Japan’s – has been laid.

Of interest has been the price action displayed by gold, which has surged through the $1700 per ounce mark and maintained its gains ahead of trading in New York. To me, this is a clear indication that market participants are worried about the U.S. Dollar losing its value substantially over the next few months. The key to watch would be the short-end of the U.S. Treasury yield curve: if these rates turn negative, the demand for precious metals will pick up.

January 16, 2012

Debt Downgrade Jeopardizes Eurozone Recovery

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 12:23 pm

Friday’s sovereign credit rating downgrade by Standard & Poor’s brings a new sense of urgency to the European debt crisis. The move also shines a spotlight on the region’s abysmal adherence to the Eurozone’s fiscal management rules as leaders prepare for yet another European summit on the debt crisis slated for January 30th.

Greek officials will actually get a head start on the summit as they are schedule to meet on January 18th following a series of unsuccessful discussions last week to reach an agreement with the country’s largest creditors. Last fall it appeared that a deal had been arranged that would see Greece’s largest creditors receive 50 percent of the face value on Greek debt. This arrangement was expected to reduce Greece’s deficit to 120 percent of GDP by the end of the next decade, but the deal now appears to be in question. Talks between the banks and the Greek government are scheduled to resume on January 18th.

Failure to come to terms on the debt discount places the release of the next tranche of emergency funding to Greece at risk. Greece has more than 14 billion euros ($17.8 billion) in debt due to mature over the next two months and if unable to meet the obligation, Greece would have no option but to enter into a full and uncontrolled default. Few expect it to come to this, however, as a calamitous default of this nature would spread debt contagion throughout much of the Eurozone at a rate beyond the region’s capacity to maintain.

Europe’s Largest Economies Suffer Credit Downgrade

In actual fact, few were surprised when Standard & Poor’s slashed credit ratings for a total of nine Eurozone countries late last Friday. Of the region’s top five economies, France and Austria both lost their coveted triple-A ratings leaving only Germany at the top tier. Italy and Spain were further downgraded to below investment grade status.

Citing deteriorating economic prospects and the anemic attempts so far to meet austerity targets and reduce deficits, S&P also placed the countries on a “negative” credit outlook leaving the door open to additional downgrades.

Following the official notice of the demotion, European officials rushed to minimize the impact of the historic downgrade. German Chancellor Angela Merkel said she believed the credit action would prove to be positive as it would urge member states to agree to a “financial compact” to help salvage the union and the euro.

Markets were less optimistic and the first full day of trading following the downgrade was mixed. European stocks were up slightly near the end of the day, while markets were off by the mid-way point in the North American trading day. Still, the real test is expected to come tomorrow when Spain will attempt to raise about 6 billion euros ($7.6 billion) in short and mid-term bonds, with another 4 billion euros ($7.6 billion) in long bonds.

“The rating downgrade is definitely going to create headwind for the Spanish bond auction,” Christian Lenk, analyst at DZ Bank, told the Financial Times Deutschland. He said he didn’t believe that the country could “repeat last Thursday’s auction result,” in which it was able to sell twice as many bonds as envisaged at lower interest rates than before.

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January 11, 2012

German Debt Well Received No Effect on EUR

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

European currency markets are range bound with investors weighing up decent European data and mixed economic news, along with the prospect of key, market moving developments tomorrow including sovereign issues by Italy and Spain and an ECB rate announcement. The EUR is being held captive by market offers in the early 1.28’s and bids in the 1.2730’s. So far January is in danger of recording the slowest opening period for currency volatility for a New Year on record!

Germany auctioned +EUR4b of five-year debt earlier this morning while Spain and Italy will offer as much as +EUR17b in the remainder of the week. The new 2/2017’s OBL auction received solid bidding. A total of +EUR9b bids were received, well above the average of +EUR6.8b at the last three-issues. The resulting cover of 2.84 times is thus about twice the average an is the strongest in eight years. It’s no wonder we saw negative German bill yields earlier in the week! It seems that the market does not believe in an ECB rate move Thursday after last months launching of various new policy measures. The central bank is expected to stay on hold until March with no new announcements on ECB bond buying. Draghi and company are only expected to launch QE when there are “clear signs of deflation risk.”

Germany’s economy grew in line with expectations last year, as robust domestic consumption and exports offset the “affect of the Euro-zones ongoing debt crisis.” Despite finishing out the last quarter with a weak close, contracting a supposedly -0.25%, the Euro-zone’s largest economy grew +3% in price adjusted terms in 2011, following growth of +3.7% in 2010 and a -5.1% contraction in 2009. Germany is no “Atlas,” the Euro-zone remains in danger of heading into a mild recession.

In North America, the markets will shift their focus to the details of the Fed Beige Book and on speeches by Atlanta Fed President Lockhart (voter) and Philadelphia Fed President Plosser. So far this week Fed speakers, Williams and Pianalto, have given the impression that further QE operations are possible if US data turns softer again and that there is little inclination to even consider tightening among the committee despite the recent improvement in data. Lack of movement this week has been a tough pill to swallow, however, investors remain in the game.

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Bunds and Treasury Yields Narrow

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January 10, 2012

Bunds and Treasury Yields Narrow

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 11:46 am

Despite the increase of product, US Treasury yields continue to fluctuate ahead of this week’s three US issues totaling $66b. German Bunds on the other hand are definitely trading under pressure, falling for the first time in four days, ahead of the Merkel and Christian Lagarde meet later this evening. The market seems somewhat optimistic that both leaders are “taking steps to resolve the region’s debt crisis.” Chancellor Merkel has indicated that the euro-zone is considering accelerating capital contributions to the region’s bailout fund (EFSF). French bonds have gotten the thumbs up after Fitch said the country will probably retain its AAA credit grade for this year.

Across the Atlantic, dealers have the privilege of taking down three auctions totaling +$66b this week, beginning with today’s three-year +$32b. Even with yields closer to their record lows, volatility in the asset class has dropped to its lowest level in almost seven-months because of the reduced participation rate as investors head to the sidelines. Big picture, the euro-region crisis remains at the forefront of the mind of many investors, and it is this that remains supportive for Treasuries at current key yield levels. The attractiveness of domestic debt affirms the “breakdown in the statistical relationship with economic data”. Stronger North American data seems to be providing investors better yield opportunities to add to their asset mix. The market remains skeptical about the “sustainability of the Euro recovery short term.”

Treasury prices turned a tad higher despite the +$32b three-year supply hitting the market. Some Fed officials remain open to the idea of further easing action. Both Fed members Williams and Pianalto remain “open to the efforts”. The US Treasury Department sold the 3-year notes at a yield of +0.37% to above average demand. The bid-to-cover was 3.73 versus a four auction average of 3.37. Indirect bidders (foreign central banks) took down +39% of the sale versus an average of +37.8%. Direct bidders took +5.3% vs. +11.3% in past sales.

The Nikkei closed at 8,422 up +61. The DAX index in Europe was at 6,162 up +145; the FTSE (UK) closed at 5,696 up +84. US indices remained in positive territory with the Dow currently trading at 12,454 up +61.

    January 6, 2012

    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 5, 2012

    FX requires EUR Fixed Income to trade?

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

    Fundamentals could not get the ball rolling, that was left to rumors of a ‘larger’ German bank requiring capital. Dollars and Yen continue to grind stronger allowing the EUR to print a 15-month low on funding stress issues in Euro-land. What Euro financial institution does not require capital? Not helping investors mood were comments from the Greek Prime Minister Papademos. He stated that slashing incomes are the only way for his country to remain in the EU and receive more financing from international creditors to avert an economic collapse. As they say, it’s difficult to get ‘blood from a stone’.

    Over the next two weeks FX traders will hopefully have become experts in the FI income sector. It is there that the front line action will occur. There are a few important issues coming to the market that will be testing investors appetite for risk. The demand for varying issues will be highlight the “faith” being put into the various economies. Yesterday’s German Bund auction, a solid product in market theory, received a somewhat lackluster response to the issue. This certainly is not an encouraging response for Italian and Spanish debt auctions next week. Both of these economies are in the investors ‘crosshairs’. We can expect the back-room staff, the ECB and company, to create a positive atmosphere around troubling issues. This morning they were in buying Spanish product. Remember, all of this trading in various markets and market prices is about perception. Dealers are required to create it and traders deal on it! Expect the ECB to be buying government bonds as part of its SMP, where it intervenes in the secondary bond market to ensure depth and liquidity.

    This morning France was on the agenda. With Sarkozy publicly concerned about his country retaining its AAA rating status, the issue of +8b euros of debt today was the country’s first test this year of investor appetite for its bonds. The result, France sold +4.02b euros of benchmark 10-year bonds at an average yield of +3.29% from +3.18%. The 10-year sector, usually the benchmark indicator, debt bid-to-cover ratio fell to 1.64 from 3.05. Despite being somewhat well received for other remaining maturities, Frances cost of borrowing has increased, providing another reason to want to own less of the EUR. Last tally, with Italy and Spain amongst countries in the coming weeks to sell debt that may reach EUR+262b’s worth in the first quarter, rising funding costs will not make saving the 13-year old currency any easier.

    The market will now focus on North American employment data, with NFP out tomorrow. This morning’s ADP report will provide a preview of tomorrows print (the correlation between the two prints has been tentative at best of late). It seems that market consensus is looking at an +178k ADP result, which approximates a +170k private payrolls print. The non-manufacturing ISM is also released and is expected to rise off November’s two-year low of 52, with seasonal effects in the employment component contributing. Jobless claims will also be a focus, though the holiday period complicates interpretation of this data into year-end. Will the stronger data provide support for US growth proxy currencies like the CAD and AUD? In theory they should, however, strong risk conviction has been fleeting at best and a surer bet would have participants wait until tomorrows job release for direction.

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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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    November 22, 2011

    What is the EUR’s next price?

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

    Worrying about a European recovery has very much come to a standstill, with trading ranges nothing to write home about. The Euro has extended its European morning rally, moving the price above its 10-DMA (1.3540), triggering some weaker stop-losses, and eyeing the technical orders on top where there are EUR’s to go. Thus far, regional trading ranges have been relatively contained, however, the market is short EUR’s long dollars and that, together with the lack of meaningful government bond issuance this week is a “proper recipe for a EUR short squeeze”.

    So far, any EUR short covering has been rather modest. Even the credit rating agencys giving a temporary thumbs up has had a limited risk effect. Yields at this mornings Spanish auction were sharply higher and is yet to have an impact on the EUR outright. Any pop above the O/N high could generate a bullish follow through, but further failure at these levels will only encourage comfortable renewed short selling.

    Euro-zone debt concerns are being overlooked so far intraday, perhaps we may have to leave it up to North America? That would be a switch for the first time in probably two-weeks. Wider risk appetite remains constrained following the “super committees” failure and the upcoming Asian and US holidays. With month-end next week, the market will be witnessing panic, illiquid premium buying and selling, confusing even more the whole market thought process. It’s difficult enough trying to keep a handle on the legal requirements and mandate of the ECB and all the pawn brokers that are offering varying opinions on what the “lender of last resort” role should be.

    These markets are lacking leadership. All the important players continue to wait and still there is ‘no horizon”. The worlds largest FX bank has raised its forecast for next year and indicated that the most likely scenario was that the “EUR remains intact in its current form despite the ongoing debt crisis”. The currency will eventually end up trading close to here ($1.35), previously they had been targeting $1.23, however it does expect the EUR to at least “dip” to their previous target level.

    This morning we get Q3 US GDP. The market is expecting a headline to be revised lower (+2.4% vs. +2.5%), but with better details. Later in the afternoon its the FOMC turn, the minutes may provide further indications on the prospects for additional easing measures.

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    November 10, 2011

    Risk Currencies are finding it a Grind

    Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 1:06 pm

    CAD traders were caught red faced with Septembers trade surplus surprise print (+$1.25b), the first in eight-months. Market consensus called for a deficit of -$560m. This was achieved by a drop in imports and the strongest monthly export sales figure in nearly three years being powered by energy. Digging deeper, six of seven sectors outperformed, with prices for exports rising +3.9%. Volumes also advanced by +0.3%. Not a surprise was the export sector being driven by energy products (petroleum and coal, +11.3%), which also saw a price increase of +8%. As for imports, they declined -0.3%, led by fewer purchases of machinery. The US remains the largest trading partner, climbing +5% to +$28.2b. This release, coupled with a narrowing US trade deficit and S&P clarifying an erroneous message on France’s credit rating, had the bulls buying the loonie and steering it comfortably away from its monthly lows.

    The currency’s gains have been a grind throughout the North American trading session. The improvement in risk sentiment appears to have established a dollar high for the short term. There seems to be a medium term bias to wanting to own the currency on dollar rallies. That been said, in this trading environment and a market on holiday mode, the next Euro sensational headline will have most risk trading strategies again tightening the belts.

    The tight trading range is been dictated to by sovereign sellers on top and corporate bids below. The weekly flow data this week is showing that the loonie demand has retreated, an indication that the currency valuation may be a tad rich for interested parties at these particular levels. Volatility (price swings) in the currency out right is little changed this week, one week after reaching the lowest level in more than a month (-6bp to +12.84%). The loonie has dropped -4.6% this year and is the worst performer among the G10. The greenback is down -2.5% (1.0180)


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