In an interview with a Canadian newscaster, Bank of Canada Governor Mark Carney said it will take several years for the U.S. economy to recover and even then, it is unlikely the American economy can ever return to its pre-recession level.
“It’s going to take a number of years before they get back to the U.S. that we used to know — in fact, they are not, in our opinion, ultimately going to get back to the U.S. that we used to know”.
“It’s going to take multiple visits, multiple initiatives. Not, obviously, from the public sector alone, but clearly a focus from the private sector,” Carney said. “That is absolutely essential for developing our future and it’s a key element of our medium-term growth.”
On the week, the USD and JPY made substantial losses against most majors amid positive data coming out of the US, suggesting recovery for the world’s biggest economy. EUR/USD touched a two-week high before a report forecast to show sales of existing U.S. homes rose to the highest in 1&1/2 years. In Asian trading the EUR/USD peaked at around 1.2983, its highest level since Jan 4. In addition the euro has risen 2.3% since Jan 13. Overall the currency market had a very quiet day during Asian session perhaps due to the winding down in readiness for the Lunar new year or that traders are waiting for news as Greece heads into a third day of talks with private creditors on a debt-swap plan. In summation for the week, we have seen euro recover across the board on the back of short covering, technical retracement and stop losses. That said market players are still quite comfortable with the thought that EUR/USD remains bearish as a trend due fundamental factors. However in our opinion and with regards to risk/return ratio, the daily chart seems to indicate that the downward trend may resume on the break of 1.2930.
The markets are off to a quick start this morning after last week’s worst-performing stock market since the Great Depression. Global stocks are soaring this morning, as are commodity prices, particularly oil. The Dollar is lower with risk currencies (including the Euro) moving higher.
There are two obvious factors at work this morning, but there is also a renewed hope that EU leaders will be increasing efforts to stem the debt crisis. There is a 2-day EU Finance Ministers’ conference starting tomorrow and the debt crisis is obviously going to be the main topic of conversation.
As to what has moved the markets this morning, the first was a rumor that the IMF was prepared to make a huge loan (around 600 billion euro) to Italy in order for them to deal with rising debt costs. This “bazooka” type action has since been denied by the IMF and is not likely to materialize. What is more likely is that EU leaders are going to feel intense pressure to quit their bickering and solve the crisis. The markets have spoken through last week’s sell-off so if they can’t get something accomplished in short order, it’s likely bye-bye Euro.
The other factor moving markets higher this morning is the reports of a large increase of retail sales from “Black Friday” here in the US, largely known as the biggest shopping day of the year. I watched in amazement the reports of people pepper-spraying one another to buy stuff so for an economy that relies some 70% on consumer spending, I supposed this type of behavior is a good thing.
Today is “Cyber Monday” which is supposed to encourage on-line shopping for the holiday season so a good number from today’s activity could show that the US consumer is not dead just yet. However with 9% unemployment, there are many who won’t be doing any shopping and this is a larger concern.
On Friday we will get the Non-Farm Payrolls (NFP) report which will show how many jobs have been added to the economy last month. The expectation is for a gain of 120K jobs and for the unemployment rate to remain steady at 9%. It is doubtful that seasonal hiring will show up in this report.
With such stubbornly high unemployment, it is no surprise that many are now saying that they expect QE3 to be unleashed on the markets as inflation expectations are supposed lower. But with $100 oil and the seasonal demand that comes with colder weather, in my opinion inflation is already upon us and it is disingenuous at best to suggest otherwise,
But we will likely hear just that on Wednesday when the Fed releases its Beige Book Economic Survey. So expect to hear the same tune from the Fed as little has changed for as we know by the failure of the debt super-committee, Washington DC is content to do nothing for the people they purportedly represent.
This lack of confidence is glaring and tomorrow’s Consumer confidence figures being reported both here in the US and in the EU will be telling. For the majority of what plagues us stems from a crisis of confidence. There is very little leadership today that leads people to believe that solutions are attainable so activity continues to spiral lower as fear persists.
Apparently the start of what’s known as the “Santa Clause Rally” may be starting early with this morning’s market activity. Or perhaps it is a bit of short-covering or profit taking ahead of this weeks news. Either way, fund managers who need a strong month to show decent performance numbers would love nothing more than to see this market rally into the year end so absent a complete Euro melt-down, we may get just that.
In an interview earlier today on German television, Chancellor Angela Merkel expressed her clearest opposition to date against the concept of a “eurobond”. The use of a eurobond – essentially a security backed by all the Eurozone economies – has been suggested as the means to raise capital to fight the European debt predicament. Merkel described the eurobond approach as “exactly the wrong answer” to solve the crisis.
“They lead us to a debt union and not a stability union,” Merkel said during the interview on German public television.
Because eurobonds would be backed by all Eurozone members including the two strongest economies of Germany and France, the cost to attract investors would be considerably less than debt backed by individual nations. For countries like Greece and Portugal which have suffered credit rating downgrades, the premium required to attract investors has increased dramatically. This premium represents an additional cost and remains a severe roadblock hampering efforts to recapitalize individual economies.
Earlier this month, Spain and Italy watched helplessly as the risk premium on their respective debt offerings rose to a record since the formation of the Eurozone. The spread difference for an Italian government 10-year bond climbed to 416 basis points (or 4.17 percent) over the benchmark German 10-year bond now trading in the range of 3.25 percent. The Spanish 10-year government bond jumped to a spread of 417 basis points.
French President Nicolas Sarkozy has also spoken out against the creation of a eurobond. Following an August 16th meeting with Merkel, Sarkozy described the formation of a eurobond as an ill-advised approach that would put “most stable countries of the Eurozone in grave danger”.
Given their hesitation to participate in the scheme, you can’t help but wonder if Merkel and Sarkozy have not already accepted that some form of default for a sovereign Eurozone member is inevitable. If that is the case, it may be the situation in Italy that led to the formation of this opinion.
Italy is the third largest economy in the Eurozone and is more than six times the economy of Greece as measured by GDP. So far, about 200 billion euros have been provided to Greece in emergency funding and even this level of commitment has not translated into an assurance that Greece can avoid bankruptcy. Image then, the pending quagmire facing Italy.
The Italian debt is estimated to be about 130 percent of the country’s GDP; this explains why Italy is now thought to be on the fast-track to its own financial meltdown. This may also explain why Merkel and Sarkozy are hesitant at this time to co-sign a loan for their southern neighbor.
This morning markets are looking to take back some of yesterday’s losses as Dollar weakness is driving risk appetite. But is this merely a technical bounce, or a continuation of recent trends driven by Dollar weakness. The thesis I put forth yesterday was that the Dollar would continue to strengthen going into this weekend’s G-20 meeting, as US officials want to attempt to shed the label of currency manipulator.
In my opinion, this is a short-term bounce and we could see continued Dollar strength. Today the market is waiting on the Fed beige book this afternoon, which will show the state of the economy. So it looks like the market is expecting the QE2 talk to continue but they may back away ahead of the G-20 which could induce some Dollar strength. Also, US corporate earnings have been strong, though on declining revenues.
In the UK, the BOE minutes came out and showed a slightly dovish stance, which should keep the Pound weak in the near-term. Additionally, the UK budget cuts were revealed today with a plan to eliminate the budget deficit through job cuts and bank levies. How this plays out is anyone’s guess.
Meanwhile in the EU, German PPI figures came in slightly higher than expected, showing signs that mild inflation is steady.
As a result, the market is starting the day in classic risk taking mode, with stocks and commodities higher and Dollar weaker. However, the Fed’s beige book could change this sentiment later today.
In the forex market:
Aussie (AUD): The Aussie is higher on risk appetite and it is being reported that the market thinks the RBA could raise rates next time around, though I didn’t get that feeling from the release of yesterday’s RBA minutes. While the Australian economy is still strong, the global economy is still fragile. (Click chart to enlarge)
Kiwi (NZD): The Kiwi is also higher on risk-taking and will continue to trade on risk themes this week.
Loonie (CAD): The Loonie is mixed as risk appetite and higher oil prices are pulling against the negative forces due to the pause in rate hikes and the reduced Canadian economic outlook. However, Dollar weakness is driving the market at this point.
Euro (EUR): The Euro is higher taking advantage of its “anti-dollar” status benefiting from greenback weakness. German PPI figures came in slightly higher than expected which is seen as positive.
Pound (GBP): The Pound is mostly lower although higher vs. USD as the BOE minutes showed a slightly dovish stance going forward, and the budget cuts announced could force the BOE to ease further if the economy slows too much toward the end of the year. (Click chart to enlarge)
Dollar (USD): The Dollar is weaker today as the market is expecting the Fed to continue the QE2 rhetoric in its release of the beige book report today. However, my own belief is that recently the Dollar has fallen too far too fast and that if indeed they do want to ease further at the next FOMC meeting, they most likely won’t telegraph that today. If they do continue the easing rhetoric, then I expect they may not actually ease going forward.
Yen (JPY): The Yen is mixed today as Dollar and Pound weakness offset risk appetite in the market. Should Dollar continue to weaken against the Yen going into the weekend, we could see some sort of intervention-type action take place early next week.
A dead cat bounce is a brief recovery from a major price decline and in my opinion yesterday may have been the start of a reversal in the Dollar weakness trend. While Dollar weakness has been driving global markets, it cannot continue to weaken forever.
Already economies around the globe are crying foul, as emerging markets are seeing inflation (exported from the US naturally) and currency gains which could threaten their stability. This comes ahead of the G-20 meeting this weekend, where currency movement is likely to dominate talks.
How can the US chastise other countries for currency manipulation, when the US Fed might be the biggest manipulator of them all? Right now we are at a tipping point, where currencies have pulled back from recent highs against the Dollar, so the question must be asked if this is a temporary condition, or a short-term reversal?
Many are saying that the US wants to weak Dollars to encourage our exports; however I think the plan is to encourage inflation. This is a dangerous proposition which could get completely out of hand as the global economic marketplace can now move in speeds unfathomable in Bernanke’s textbooks. With a potential shift in the political landscape coming soon, I expect Bernanke to play it close to the vest.
This means we could see some Dollar strength and some range-bound trading at these levels.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
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While US market are closed today for the Fourth of July holiday, oil was trading at $72.24 a barrel in Europe after losing 81 cents on Friday. Investors remain uncommitted following last week’s worse-than-expected employment news showing the US economy created fewer jobs in June than in March and April. This, together with a slowing Chinese economy, has some traders heading for the exists with their profits.
“Obviously, speculative investors are taking their profits because of worries regarding an economic slowdown in the USA and China,” said a report from Commerzbank in Frankfurt.
A report from ANZ bank confirms the opinion:
“The balance of crude oil price risks appears skewed towards the downside” because of “negative demand shocks from a sluggish economic recovery,” ANZ bank said in a report.
ANZ said it expects crude to trade between $65 a barrel and $75 this month.
In time for the weekend and after a 20-hour marathon session, the US House and Senate reach a deal on financial system reform this morning. They happened to reconcile the multitude of versions with the ‘approval of proposals to restrict trading by banks’. It will be voted on next week and should be passed into law by Independence Day. That’s progress, as opposed to what’s expected from this weekend’s G20 meeting. The universal belief is that no big breakthrough will occur at the summit. The array of differing views on how to achieve economic recovery, on how to regulate banks, and on how the policy mix should look, is too vast for a ‘stop-over’ session. Risk aversion trading strategies continue to rule the day as European credit spreads print new highs over bunds for Portugal and Greece.
The US$ is mixed in the O/N trading session. Currently it is higher against 10 of the 16 most actively traded currencies in a ‘subdued’ trading range.
With US policy makers giving the nod to unemployment dampening its recovery earlier this week, unemployment claims were eagerly waited for yesterday. Similar to the Fed’s interest rate announcement, it was no biggie, with no shattering everlasting headline print (+457k vs. +461k). It managed to print its first decline in 3-weeks. The less volatile indicator, the 4-week moving average of jobless insurance claims, fell -1500 to +462.7k. Digging deeper, the report also indicated that the number of individuals receiving unemployment benefits happened to also fall -45k to just over +4.5m. The US unemployment rate stands at +9.7% and continues to pose a threat to a recovery. Higher unemployment and modest income growth coupled with lower housing wealth, as seen by this weeks data, does not provide a recipe of sustainable growth for the world’s largest economy.
A big drop in airplane orders (-29.6%, m/m) pushed total durable-goods orders down -1.1%, m/m (vs. +3.0%), the largest decline in a year. Ex-transportation, orders advanced +0.9%, the third increase in the past 4-months. Digging deeper, analysts note that orders for core capital-equipment rose +2.1% after a -2.7% decline the previous month and provides stronger evidence that the upward trend in manufacturing remains intact. The previous months gains were also revised up to + 3.0% from +2.8%. The Fed indicated this week that growth is not as good as it has been and indicated that financial market tensions as a result of the European crisis was a key reason for the deterioration. European contagion fears are expected to affect export demand and provide an obstacle to manufacturing growth. The shipments of durable goods advanced +0.4% vs. +1.8% in the previous month.
The USD$ is lower against the EUR +0.05%, GBP +0.00%, CHF +0.14% and higher against JPY -0.21%. The commodity currencies are mixed this morning, CAD +0.22% and AUD -0.23%. All good things sometimes temporarily come to an end. The loonies four day weakness on the back of declines in equities and commodities had investors seeking sanctuary in some risk-aversion currencies like the JPY. With the CAD underperforming across the board will only give the stubborn bulls a better average to enter new long CAD positions. Fundamental data this week did not do the currency any favors. Weaker monthly sales figure showing consumer purchases happened to fall in 10 of the 11 subsectors has fueled this four day dive. The commodity currency have fallen as equities and oil slump after weaker US Home data coupled with a Fed determined on extending low rates for the foreseeable future has reignited concerns that growth with Canada’s largest trading partner may stall. Despite domestic fundamental data showing that the Canadian economy is ‘firing on all cylinders’, the recent bid to the loonie may have been a tad overdone and a healthy purge technically was on the cards. Year-to-date the currency has appreciated 8.3% vs. its largest trading partner. Speculators continue to place bets that Governor Carney will raise interest rates faster than other developed countries. Big picture, the CAD is holding its own as the currency is seen as a safer way to play an economic recovery in the US with linkage to commodities and less banking. Now, with talk that the currency is to be used as a Cbanks safe haven destination for capital should lend even more support to the currency in the medium term. Do not be surprised to see the currency trade beyond parity in the coming months.
The AUD has lost ground in the O/N session and ending the week in losing territory as signs that a weak global economic recovery is exhausting demand for higher-yielding assets. Traders are taking the high road ahead of the G20 this weekend on fear that the leaders will discuss proposals to tighten regulations for the financial sector again. Global risk sentiment is weakening which causes growth related currencies such as the AUD to succumb to increased selling pressures. Earlier this week Prime Minister Rudd resigned after a leadership challenge from his deputy Julia Gillard, who becomes the first female Aussi PM, after his plans to boost taxes on the mining industry affected his opinion polls. It’s expected that a mining tax compromise, initiated by Gillard, will end up be significantly positive for the currency. Earlier last week, comments from the RBA, who said that Europe’s debt crisis would ‘inevitably weigh’ on global growth, had fueled speculation that the Governor Stevens may keep rates unchanged until at least the end of the year. It seems that that ‘previous rate rises has given them flexibility to leave borrowing costs unchanged at next month’s meeting’. To date, the crisis in Europe has not had a material impact on the Australian economy, but, that’s been called into question. With European stress test disclosures lined up failing to calm investor’s fears has technical analysts wanting to sell the currency on rallies (0.8608).
Crude is lower in the O/N session ($76.11 down -40c). Crude prices have managed to pare earlier losses yesterday on weaker global bourses after the dollar lost traction vs. the EUR, thus temporarily increasing the investment appeal of commodities. The black-stuff has remained under pressure after this weeks EIA inventory release reported an unexpected gain in supplies and US data showed that the purchases of new homes tumbled the most on record m/m. Oil stockpiles rose +2.02m barrels to +365.1m vs. an unexpected fall of -800k barrels. On the flipside, gas supplies fell -762k barrels to +217.6m vs. an expected market decline of -180k barrels. Imports of crude oil climbed +4.3% to +10.1m barrels a day, the highest level in 18-months. The headline print certainly fly’s in the face of the ‘bulls’ way of thinking. They have been looking for demand growth to accelerate and this weeks report shows that the opposite will probably occur. Crude stocks remain well above the five-year average level, and are +3.2% above a year ago, the biggest year-on-year surplus in 6-months. Distillate stocks (diesel and heating oil) rose +297k barrels, less than expected as demand dropped to its lowest level in 7-months. Currently there are too many negative variables that support the bear’s short positions. The fear that a double dip is on the cards has the speculators wanting to sell. Year-to-date, the commodity has appreciated +11%. Weaker global economic releases have managed to encourage some ‘risk-off’ trading strategies. Direction is dictated by demand and with ample supply and global growth worries has speculators once again wanting to sell any rallies.
Bigger picture, Gold continues to be a safe heaven attraction. With the Fed indicating this week that they are willing to keep rates low for an extended period of time will weigh on the USD and by default the yellow metal will provide an alternative investment vehicle. The commodity price was better bid again yesterday as renewed credit worries and concerns about a global economic recovery trigger a safe-haven demand for the metal. Technically, all week, pull-backs have been bought. The commodity’s prices will remain robust on speculation that European’s Economic woes will be prolonged. With broader risk appetite under pressure, the market is capable of printing new record highs again. The upward bias trend remains intact as the ‘yellow metal’ is trading with a greater consideration of its safe haven status. The asset class is well sought after, technically encouraging individuals to want to own more of it for hedging purposes. Year-to-date, gold has gained +15%. Generally, it has become the benefactor when all other currencies fail. Thus far, Europeans have been content in using the commodity as a hedge against their European holdings, believing that the EUR has not bottomed out just yet. For now, buyers are waiting in the wings to purchase product on all pull backs as equities remain under pressure ($1,244 -200c).
The Nikkei closed at 9,739 down -191. The DAX index in Europe was at 6,079 down -36; the FTSE (UK) currently is 5,076 down -24. The early call for the open of key US indices is lower. The US 10-year eased 1bp yesterday (3.11%) and is little changed in the O/N session. All week Treasury prices have remained better bid because of the disappointing US housing data and on the Fed’s announcement that they will keep ‘rates low for an extended period of time’. With the cost of protection insurance from a Greek default surging to a new record has again pressurized equities and pushed the FI asset class back into the limelight. Yesterday, most bonds managed to print the lowest intraday yield in two months. Investors continue to gravitate towards the shorter end of the curve on fears of ‘sluggish economic growth’. Again, and not much of a surprise was the 7-year auction being well received. In total this week the US government auctioned off $108b’s worth of new product. The $30b 7-year sale was a success. Notes yielded 2.575%. The bid-to-cover ratio was high at 3.01, above the 2.82 four auction average. Indirect bidders took 51% of the notes vs. the four auction average of 48.2%. Direct bidders on the other hand took down 10% vs. a 12.2% average. The belief that the US economy’s momentum is not being built upon should continue to provide a better bid on deeper pullbacks.
Every once in a while, my status as a blogger gives me access to resources that otherwise might not be available to me.One such “perk” of the job is that I get to meet experts in the forex field and have an opportunity to pick their brain.
One such opportunity just came about with Abe Cofnas, one of the original pioneers of retail forex trading and author of three books on the subject.I first had occasion to run across Abe’s work when I started my own journey into forex.At the time I was trading futures and stocks, and came across Abe’s column in Futures magazine.
I was impressed by his straight-forward approach and ability to explain the intricacies of the forex market.I was hooked.So I went out and bought Abe’s book and dove right in and it was instrumental in my development as a forex trader.
In addition to his books, Abe is the president and founder of Learn4x.com and has been teaching students the forex market since 1999.I had a chance to catch up with Abe, and here are the highlights of the interview:
(FTB): You’ve seen a lot of traders come and go in the forex market. What is the one common trait all successful forex traders must have?
(AC): When all is said and done it comes down to psychology-the trader’s mindset. Successful traders may have different technical analysis tools, and fundamental views, but they have a mind-set that permits them to survive. The best of us lose money, and maybe even 40% of the time. The mindset is to recognize the opportunity and not dwell on the loss. Also, of critical importance is recognizing just what is driving the currency prices. There is a lot of noise, and you have to filter out the noise as well. The most successful traders “listen” to the market.
(FTB): In your opinion, why is the forex market the fastest growing financial market to trade and what are the advantages over other markets?
(AC): The key reason is that the world is interconnected as never before and forex allows a person to ride what I call, “the light-beam” of the world economy. By trading currency pairs you participate globally immediately and that is exciting.
Also, an average person no matter what their background can trade and win! I see it all the time, the “best and the brightest” often can’t trade better than Mr. Joe Six-pack!
(FTB): How has the industry changed since you began as one of the pioneers in forex trading?
(AC): There is greater awareness of forex. Today forex is considered a legitimate alternative investment and trading medium. The industry was the “wild west” years ago. Spreads were 5 pips and more and today, retail trading offers institutional spreads. The industry has acquired legitimacy and the players are required to be more capitalized.
(FTB): Which is more important, fundamental or technical analysis?
(AC): There is a common notion that it’s a battle between fundamental thinking and technical analysis. I don’t think that is true. Let’s define the terms. Technical analysis is deriving insight into the price action by ONLY looking at charts. Fundamental analysis is detecting the forces that move the prices. So price action is both fundamental and technical. You need to know what moved the price and not just that it moved a certain distance with momentum. The movement of the EURUSD in the next 5 minutes may be a reaction to the words of a central banker, or the release of a budget policy. If the trader doesn’t see what is going on outside the chart, there is exposure to misinterpretation.
(FTB): What is the biggest mistake novice traders make time and time again?
(AC): One word: Anticipation. “Newbies” or novice traders think they can anticipate the price direction. So they assume the currency pair will move to “their” script. The more experienced trader reacts and confirms what the price is doing, and THEN decides to join a direction instead of anticipating one.
(FTB): What advice would you give to new traders looking to enter the forex market?
(AC): Get into the action as soon as possible with real capital. I have found the best traders in the world in virtual trading-until they go live and face the psychodynamics of real trading. Set aside some risk capital and join the action. Put on trades, learn from errors, etc.
(FTB): Do you have a favored style of trading that you use?
(AC): I do have many different styles that fit different goals. But to answer the question, I like what I call “sniper” trading. I focus on entry conditions, and get into the action and ride the predominant wave. A good entry can result in a short grab of 5-10 pips or even more. But you have to catch the momentum and then-get out of the way and protect your profit. I have pioneered Price Break charting and Renko charting for detecting trend variations and what I call the “micro-detection of sentiment”. We can go down to the pip level of granularity in detecting if it’s time to get out!
(FTB): What is the “secret” to making profits in the forex market?
(AC): Hmmm…. ”Pip Accumulation”. What I mean by that is that one can spend an entire day waiting for a big move opportunity or scan about 12 currency pairs for 5 good moves per pair for short term gains. It’s easier to get 50 pips with several trades than with one.
(FTB): What was the best trade call you ever made?
(AC): Long the Aussie at .63 in March 09 and it went to .94 in November 09. I didn’t hold it that long but it was a beautiful move I caught several times in and out on the way.
(FTB): How has becoming a best-selling author impacted your trading?
(AC): My books: The Forex Trading Course (Wiley), The Forex Options Trading Course (Wiley), and my new book Sentiment Indicators (Bloomberg Press) were probably the best source of improving my trading than any other. The reason is that it forced me to be clear in my thinking about how to trade. I learned that if you can teach and tell someone exactly how to do something, the process of doing so forces you to detect your own weaknesses. It was a therapeutic experience.
I’d like to thank Abe Cofnas for speaking with me and providing insights for our readers.He has graciously agreed to entertain questions from our viewers.If you’d like to ask Abe a question, you can email them to me here.
To read today’s blog article on the forex market, click here.
I talk often about carry trades in the currency market which go hand in hand with the risk themes that drive daily price action. When there is confidence in the financial markets, investors look to take on risk and seek out higher yielding assets. They can do this by selling the currency of a low interest rate country and buying the currency of a higher interest rate country, thereby capturing interest through yield differentials. This is known as a carry trade.
The currency pair that represents the greatest “carry” among the most actively traded pairs is the AUD/JPY pair which can also be used as a proxy for risk-taking in the market. Currently, the positive carry of this pair is roughly 4.4%, as rates in Australia are at 4.5%, and rates in Japan are .1%. So just by owning this pair, an investor would earn that rate difference. This is a common trade when there is confidence in the financial markets.
Currently, there is little confidence in financial markets, as the EU debt crisis has brought to light many problems in the global marketplace. And unless you have been living under a rock for the past few weeks, this should not come as news to you.
So what we are seeing is major risk-aversion in the markets, and no pair is getting hit harder than the above mentioned as investors unwind a risk-taking position. In addition, global stock markets and commodities are selling off, adding additional fuel to the fire as investors run to the “safety” of the Japanese yen and US dollar.
In the forex market:
Aussie (AUD): The Aussie is the biggest loser this morning, as risk-aversion is causing the un-wind of carry trades. It is currently at an 8 month low vs. the US dollar, as gold prices have sold off to the 1178 level. Gold is often used as a proxy against inflation, which does not appear to be as great a concern as deflation is, as the world prepares for a global slowdown. Concerns about a Chinese slowdown could really derail the world economy, but all eyes are on the Euro crisis for now.
Loonie (CAD): The Loonie is also selling off as commodity prices, particularly oil at 68, are lower across the board. The Loonie does not benefit as much as the Aussie (or Kiwi) from carry trades, as low rates in Canada do not encourage carry trades. The Loonie may be better off in the long run, as the US is its largest trading partner, and the US keeps throwing money at its financial woes instead of adopting austerity measures that the rest of the globe seems to be taking.
Kiwi (NZD): The Kiwi is selling off for the same reasons as the Aussie; however in NZ they just announced that they will be cutting income taxes but raising sales taxes to encourage savings and debt reduction. This will help NZ reduce its foreign debt as financial discipline is needed in the region.
Euro (EUR): The Euro is higher vs. the commodity currencies above on the carry un-wind as well as risk aversion pervades the marketplace. Now this may seem counter-intuitive to some as the major risk in the market is the Euro, which appears to be stabilizing as banter about Euro intervention is thrown about. In somewhat decent news, PPI figures in Germany were higher showing signs that massive deflation has not taken hold. Yet.
Pound (GBP): Retail sales were higher in the UK for the third month in a row, in what may be short-lived gains in consumer sentiment. With the new government looking toward austerity measures and a return to fiscal responsibility, and the BOE pledging to stay the course on monetary policy, the Pound may continue to be weaker vs. the Yen and the Dollar.
Dollar (USD): US jobless claims came in higher than expected though continuing claims fell, most probably the result of discouraged workers losing their benefits. This does not bode well for the US economy which, quite frankly is only seeing strength because everything else looks so bad. US equity futures are lower, though off of their lows of the morning.
Yen (JPY): GDP figures came in worse than expected to 4.9% vs. an expectation of 5.5%. The export led recovery did not encourage consumers to spend, and higher yen values due to risk-aversion could derail exports going forward. Nevertheless the yen is higher on the flight to safety trade, despite the fact that the BOJ may have to do more to combat deflation.
What we are seeing now is a global “ratcheting down” of economic bubbles that ran rampant over the last few years. As different economies around the globe pare back spending and attempt to get their debt under control; economic slowdown is the natural consequence.
This is going to send a ripple effect through the global market place and fears of a global double-dip recession may not only be founded but likely. I believe there is much more pain to be felt in the market place and have little confidence that world leaders can come up with a solution.
Because of the fractured nature of the world economy and competing interests, a solution may be impossible. In my opinion, we are going to start to see either debt defaults or massive money printing which will eventually lead to inflation. But that could be YEARS away.
So for now, think globally, but act prudently locally.
And take advantage of these extraordinary times by trading forex and shoring up your own personal balance sheet!
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
