Forex Blog

December 30, 2011

Forex Market Outlook 12/30/11

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

Let’s just get it over with!  That’s what the markets are thinking when looking back at 2011.  The S&P 500 stock index is finishing the year essentially flat, posting neither significant gains nor losses.  If you are a stock market investor, perhaps you are just thankful to get out with your account in tact.  But with Treasury yields near all-time lows, and traditional bank accounts not paying interest, what’s a person to do?

Well those of you reading this are probably already aware of the tremendous opportunities available in the forex market as an alternative to “traditional” investments.  2011 has been a tough year indeed and based on today’s information, next year doesn’t look to be much better.

The obvious overhang in the markets is the Euro debt crisis and the impact of a likely recession in the Euro zone and how it will affect the global economy and global banking system.  Meanwhile, European banks are still very nervous so they are parking their cash at the ECB for fear about counter-party risk.

The Italian bond auctions were not well received, though yields were lower.  There is an obvious penchant toward shorter-term maturities as there way too much risk to take a long-term view.  So this saga may continue to play out not just in Italy but in the other debt-laden countries as well.  This means we could see very choppy markets going forward, even if things appear to be getting better.

While there is not a lot of news today, the economic data in the US continues to show improvement, marked by the pending home sales figures yesterday that came in much higher than expected.  Markets rebounded yesterday from the prior day’s sell-off, and this morning’s US open look to be positive.

Overnight, Japanese PMI figures came in at 50.2 vs. last month’s 49.1 which means that expansion is taking place.  ‘50’ is the magic number for expansion vs. contraction.  In China, Manufacturing PMI came in at 48.7 which was better than last month’s 47.7 which shows that contraction is slowing.

These figures helped push both the Aussie and Kiwi higher as did yesterday’s market rise, and the Aussie has traded back to pre-Wednesday levels.  Yet the Euro and Pound are still lower, though the former is faring worse than the latter.

The Pound’s strength vs. the Euro is interesting considering that home prices in the UK fell for the first time in 4 months last night showing signs of economic contraction.  What was interesting to note is that Wednesday’s sell-off was actually lead by the Pound and not the Euro, despite the fact that it was concerns from the Euro zone that caused the risk aversion.  The thought behind that move was that UK bank exposure to the European debt was great and they do not have a seat at the table and would have to bail themselves out if a problem occurred.

The last thing the market is looking at is the release of the balance sheet from the Swiss National bank that will show their potential ability to continue to weaken the franc vs. the Euro as risk continues to emanate due to the debt crisis.  If there is weakness in the balance sheet, then traders may try to challenge the SNB intervention.

But that’s really it for 2011.  There is no scheduled data due out in the US today so today is likely to be a slow day.  Then again, I said that on Wednesday.

Happy New Year to all and I wish you good trading in 2012!

December 22, 2011

Euro/Pound (EUR/GBP) About To Rebound?

Filed under: Forex News — Tags: , , , , , , , , , , , , — admin @ 8:14 am

Most of the time the pairs that I look at are US dollar-related as they give both an indication of general risk themes in the market and the specific strength or weakness in a currency.  However today I am looking at EUR/GBP as the chart looks too juicy to pass up.

As we can see from this chart, the overall trend for the Euro vs. the Pound as the debt crisis in Europe has sent money flows seeking the relative safety of the Pound.  The economic data has been coming in better than expected in the UK and the Euro debt crisis has sucked the life out of the Euro.

But for how much longer will this continue?  There has been some speculation that the BOE is oing to increase their asset purchase program which would weaken the Pound, while at the same time the Euro could strengthen as the impact of the ECB lending program could be less than expected.

So I’m looking at a low risk trade here to buy EUR/GBP ahead of .83 as a possible double-bottom formation has occurred, putting a stop just below .83 with the hope that this pair will retrace to .84.

Sometimes as traders we need to buck conventional wisdom to find the best trades!

November 23, 2011

Forex Market Outlook 11/23/11

Filed under: Forex News — Tags: , , , , , , , — admin @ 6:32 am

Well there’s not much to be thankful for, economically speaking, ahead of tomorrow’s Thanksgiving holiday here in the US.  Markets and banks will be closed tomorrow, and Friday will be a half-session, though the forex market will continue to trade, albeit on lighter volume during the US session.  So if investors have fears about the global economy or markets in general, now would be a decent time to take some money off of the table.

And that’s exactly what we are seeing this morning as there is some major risk aversion to start the day and fears have picked up, primarily on two major developments.  Global stocks and commodities are down to start the day ahead of the increased docket of data releases due out here in the US.

The first bit of bad news came out of China overnight when they reported manufacturing PMI that came in with a 32-month low of 48.  Last month’s reading was at 51 and could be a major sign that the global economy is indeed slowing.

The second piece of news came out of Germany, who had a poor showing on a 10-year bund auction which failed to get bids for some 35% of the offering, which sent yields higher for Germany.  While they are blaming some sort of technical glitch, the reality is that investors did not step up to the plate to purchase German debt which could have happened for a few reasons.  This is being dubbed a “disaster” by market pundits.

First, investors may be trying to lighten the load on the Euro zone region in general.  Second, they may feel they already have enough exposure to Germany via their stake in the ECB and all of the other Euro zone debt which they are essentially on the hook for a big portion of; lastly, investors may be sending a message to Germany that they will hold out in protest unless Germany steps up to back the ECB in further asset purchases or re-considers the Euro-bond solution to the debt crisis.

Whatever the reasoning, global markets are sending a message to Germany that they won’t buy their debt (at the lower rates of course) unless they will increase their participation in the rescue programs.

In addition to this, Euro zone industrial production figures came in way worse than expected, though various PMI figures were mixed.   This takes the wind out of the sails of yesterday’s news that the IMF was expanding a lending facility to the Euro zone and that the Fed meeting minutes showed a readiness to expand monetary policy yet again, causing a late-morning rally.

This morning is action packed here in the US on the data front, as essentially 3 days worth of data is being released this morning.  In a situation such as this, it is usually best to step aside for a few minutes and let the markets figure out what the aggregate sentiment is based on the data.

So here is the laundry list of what will be released later this morning:  Durable goods orders, Personal income, Personal spending, Initial jobless claims, and U Michigan confidence figures.  Usually this data would play out over the next three days but has all been jammed into today because of the Thanksgiving holiday.

In other news, the BOE released the minutes from their rate policy meeting and were unanimous for the first time in a while with their decision to maintain the current policy, though some noted that they would be willing to become more accommodative should a fall-out from Europe happen.  They expect that somehow inflation is going to magically fall to below their 2% target by the end of next year from the current 5%.  Good luck with that one!

Tomorrow’s release of GDP in the UK is expected to show a paltry .5% growth and may change some tunes at the BOE, but my guess is that like most of the economic data we have been seeing from the UK will surprise to the upside, allowing for a break from further easing for a while.  Tomorrow will also bring the release of German GDP figures as well.

So again, it’s not a pretty picture going into essentially what is a long weekend here in the US and the fear out-trumps the risk at this point.  Should we make it through the weekend with no further “problems”, then next week could be risk on again.

As for now, I am going to enjoy the Thanksgiving holiday with family as I still have some things to be thankful for.  Although the global economy is offering little hope at this point, things could definitely be worse!  I’ll be back on Friday with a recap.

Happy Thanksgiving!

November 22, 2011

Forex Market Outlook 11/22/11

Filed under: Forex News — Tags: , , , , , , , , , , — admin @ 7:03 am

It’s a slow day in the marketplace this morning and we’re seeing a bit of a rebound after yesterday’s sell-off.  The “Super-Failure” of the debt reduction committee was extremely disappointing to the markets yesterday, though it always baffles me how the markets could have thought they could succeed in the first place as it was set up to fail.

However the markets got an early pop as the fear of another US credit rating downgrade never materialized as the ratings agencies re-affirmed the current level despite the failure to act.  This basically is setting up for a year-long battle of blame-game politics heading into the 2012 elections.  I just may have to throw away my TV.

Despite the failure though not much has changed for the average American who is slowly seeing their prospects of a better life diminished.  Automatic cuts will be made to the deficit, though they come largely from defense spending and domestic programs, like education.  So now we are less safe and dumber to boot—just awesome!

But seriously, economic conditions slowly continue to deteriorate and the 3Q GDP figure (revised) came in this morning and was revised lower to 2% from an expected 2.5%.  That is a huge miss and indicative that the economy is not getting better but worsening.  Personal consumption figures came in slightly lower than expected at 2.3% vs. 2.4%.

Later today the Fed minutes will be released which should show a continued willingness to ease monetary policy.  With today’s floundering GDP figure, that easing could come much sooner than expected. 

Other news on the docket showed that the budget deficit in the UK came in lower than expected due largely in part to the government austerity measures.  However with that austerity, economic activity has decreased and we will know just how far on Thursday when the UK reports their GDP figures.   Tomorrow though we will get the release of the minutes from the BOE rate policy meeting which will show just how dovish they have become in light of the expectations for economic growth and the stubbornly high 5% inflation they have in the UK.

In Canada, retail sales figures for last month came in better than expected posting a gain of 1% vs. an expectation of .5%. 

And not to forget about our friends in Europe, bond yields continue to rise (especially in Spain where they had to pay double the yield on short-term debt) and there is now concern that France could be close to a credit rating downgrade.  Germany continues to back away from the idea that the ECB needs to become the lender of last resort which may be the only hope the Euro zone has to remain in its current form.

So what started out as a mild risk-taking morning has reversed course and is leaning back toward risk aversion after the horrible GDP figures that were reported here in the US.  Perhaps the Fed minutes can save the day for market bulls later today but it is unlikely that Bernanke can be any more dovish than the market expects him to be. 

With the Thanksgiving holiday a few days away, there is seemingly little in the economy or in the government to be thankful for.  Perhaps the only thing to be thankful for is that 2012 is an election year and we can vote them all out office.

That and that Europe has imploded yet.

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 10, 2011

Pound (GBP) Holds Support On BOE Inaction!

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

The British pound has held support vs. USD at just under 1.59 after the Bank of England made no change to its monetary policy, leaving rates unchanged at .5% and the asset purchase program at 275 billion.   This has helped strengthen the Pound this morning after yesterday’s risk-based selling sent investors to the safety of the US dollar.

One of the features of the UK rate policy meeting is that they do not issue a statement with the release of the policy.  We will have to wait two weeks to see the minutes from the meeting but there is a decidedly dovish tone to the BOE given the recent economic stagnation that have been seeing in the UK economy.

They will also likely take a wait and see approach to monetary policy and see how the Euro debt crisis unfolds.  Should the economy worsen, then further easing could be next.  But for now, short-term support at 1.59 looks to be in tact.

November 2, 2011

Forex Market Outlook 11/2/11

Filed under: Forex News — Tags: , , , , , , , , — admin @ 7:12 am

How does one get invited to that ultra-ritzy resort town of Cannes, France?  Apparently by upsetting G-20 leaders as you potentially re-neg on a deal that may be the most important economic event of the past year.  Yet that’s where Greek PM Papandreou will be as he has been “summoned” to the G-20 meeting to explain what the heck is going on in Greece.

For the record, Greece is not part of the G-20 so his presence is unwelcome to say the least.  Both European and G-20 leaders have been blind-sided by the referendum vote in Greece and it has the potential to derail all of the wheeling and dealing that has taken place over the last month as the Euro debt resolution was announced.  Picture this—say you owe a lot of money and your creditor agrees to reduce the amount you owe by 50%. What to you do?  You take it of course and say ‘thank you’.  What you don’t do is say let me get back to you.

Yet that’s exactly what Greece has done, which is essentially a slap in the face to Euro zone leaders and by proxy, the rest of the world.  If Greece does not back away from this action or mitigate its impact, then the rest of the world may suffer.  Don’t be surprised if this referendum turns into an “opinion poll” which has little consequence.  Yet this may go down as one of the biggest idiotic blunders in the history of geo-politics.

Despite this SNAFU, the markets are up-beat to start the day as anticipation of today’s FOMC meeting may give markets hope that there is more free money on the horizon.  It is unlikely to produce any change to policy, as the last change dubbed “Operation Twist” hasn’t had enough time to work.  But, Bernanke may officially open the door for QE3 if he deems the economic environment to be worsening.  So far, the Fed has been way behind the curve and their economic forecasts and estimates have largely missed the mark.  This can be problematic when you consider that they use these estimates to make policy. 

In the meantime, economic data is trickling in and is mixed.  In Germany, PMI manufacturing figures came in better than expected, but the unemployment rate ticked higher to 7% from an expected 6.9%.  Italian PMI figures were a lot worse than expected.

Tomorrow the ECB is having its first rate policy meeting with their new chief Draghi at the helm.  Will this produce a change of policy?  Market expectations are that there will be no change, but if they fear a weakening they could be prompted to cut rates.  This is one of those times that a rate cut might make sense, so I’m a bit surprised more people aren’t talking about it.  A rate reduction in Australia just took place, so we could begin to see the start of some ratcheting down. 

But the most important data to round out the rest of the week is on unemployment figures, with New Zealand reporting later tonight and Canada reporting on Friday.  Today marks the first day of the US employment reports with Friday’s Non-Farm Payrolls report being the most important of the bunch.

This morning, the Challenger jobs cuts figures came in better than expected, as did the ADP employment change figures.  The ADP report shows private payrolls changes and today’s report of 110K net new jobs was better than the expected 100K.

However, one cannot make a direct correlation between today’s ADP number and Friday’s NFP.  Friday’s figure is the official government report and takes into account both government and private payrolls.  So it will be interesting to see what that figure is, as it is one of the most significant economic barometers we have.  Expectations are for a gain of 95K with unemployment rate to remain stubbornly high at 9.1%.

For now, the markets are content to drift higher and hope for some Fed love later today and are also hopeful that the G-20 summons for the Greek PM will remove the uncertainty surrounding the deal.  Should Bernanke fail to produce or should the G-20 fail to change Greece’s intended course of action, then we could slip back into risk aversion mode in a heartbeat.

As a result of these uncertain prospects, I am content to keep the trading to short-term and am not looking for the home-run trade. 

October 24, 2011

British Pound (GBP) Grinding Higher– For Now!

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

The British pound (GBP) has been moving higher of late as risk appetite in the market and the heightened concern over the Euro due to the debt crisis has made it a viable alternative.  But is all well in the UK? 

Not exactly.  Recently the BOE has embarked on an expanded path of monetary easing through further bond purchases which under normal circumstances might weaken the Pound.  But other macro events have made the Pound seem “less ugly” than some of the alternatives so it has been getting a nice bounce.

As you can see on the daily chart below, the recent gains in the Pound have just bumped up agains a “double area” of resistance just ahead of both the 50% Fibonacci retracement level and the R1 daily pivot resistance.  However, the near-term trend is still higher so we may have some more room to go, before a potential sell-off.

Wednesday’s Euro debt summit could be the catalyst for selling as the UK banks have big exposure to European sovereign debt and if they are required to take a hefty haircut, they may not be part of any European backstop for the banking system.  In other words, they may be required to take the losses but may not be re-capitalized like some of the European banks.  While this is total speculation on my part, I think Wednesday could have some major implications for the Pound.

October 18, 2011

Pound (GBP) Down Despite Record Inflation!

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

Those in the market who were expecting British Pound (GBP) strength based on record inflation were sorely disappointed as the Pound is trading lower to start the day.  There is a general misconception that the BOE is concerned about responding to inflation when in fact they are committed to just the opposite. 

When I saw the CPI expectation at 4.9% yesterday, I though it had to be a mistake.   When the actual figure came in at 5.2%, I saw it was the awful reality.  Tomorrow, the BOE will release the minutes from their rate policy meeting where they voted to expand their asset purchase program to keep monetary policy accomodative.  That doesn’t sound like inflation-fighting to me.

While I understand the general concern about a declining economy due to governmnet austerity measures, higher prices act like an insidious tax on the poor as things cost more for those who can least afford them.    The BOE target rate of inflation is 2% and it is well higehr than that.  While the BOE is convinced that prices will come down on their own accord, my sense is that they won’t and the UK is headed straight for stagflation. 

Good luck with that!

October 10, 2011

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