Forex Blog

February 2, 2012

China to Play the Eurozone’s White Knight?

Filed under: OANDA News — Tags: , , , , , , , — admin @ 2:27 pm

Since the early days of the Eurozone debt crisis, insiders have identified China and its $3.2 trillion in foreign reserves as a potential contributor to a Eurozone bailout fund. Today, Premier Wen Jiabao gave markets reason to believe this may yet be the case when Wen suggested that China is considering the options for how it may contribute to keeping the Eurozone together.

The original European Financial Stability Fund (EFSF) is scheduled to be superseded by the European Stability Mechanism (ESM) later this year. The ESM is expected to provide 500 billion euros ($656 billion) to the establishment of a bailout fund. Wen did not confirm whether China would contribute to the ESM directly, but this does seem to be the most logical way China could help support the region.

China Desires a Stable Euro and Eurozone

It is in China’s interest to help stabilize the Eurozone. It is estimated that up to one quarter – or roughly 620 billion euros – of China’s foreign exchange is held in euros. Shielding this investment from further decline is obviously of vital importance to China.

However, China also wants to see prosperity return to the region as quickly as possible to protect its export interests. The wider European Union is China’s largest export market with 282 billion euros worth of goods exported in 2010. Sales for 2011 continued to increase but at a slower pace and there is a growing worry that sales could soon start to decline.

German Chancellor Angela Merkel arrived in China today to kick off a three-day visit aimed largely at reassuring China that European leaders have a handle on the debt crisis.

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January 13, 2012

Week in FX Europe Jan 8-13

Filed under: OANDA News — Tags: , , , , , , , , , — admin @ 10:12 am

The Spanish Bond and Italian Bill auctions were well received this week and gave the single currency hope for at least 24-hours. However, this morning’s final Italian issues of the week have provided the market an ideal opportunity and excuse to sell the currency again. Dealers have been talking about the limited upside of the single currency and that the risk reward favors shorting the EUR. Analysts have been revising their first quarter and year end projections down to an average of 1.22 and 1.15 respectively. So far in 2012 the EUR has weakened against all G10 and major EM currencies. This weakening has been a function of ECB easing and stronger global data, which have boosted risk sensitive currencies across the board. Now we must ask ourselves, can this downward trend outright and on the crosses continue? The ECB’s easing policy has provided a massive liquidity injection (LTRO), lowered the cost of shorting the currency and encouraged the funding of risk trades using the EUR.

Below are some other highlights of the week:


EUROPE

  • EUR: Merkel and Sarkozy turned up the pressure on Greece and institutional creditors; warning that a loan backed by EU and IMF is on hold until Greece enacts budget reforms and concludes talks over reducing its debt load.
  • GER: sold +EUR3.9b t-bills at a negative yield (-0.122%) for the first time amid demand for the debt securities of Europe’s biggest economy as a haven from the sovereign debt crisis roiling the region. Investors are prepared to pay when lending in exchange for the assurance of getting their capital returned.
  • EUR: Mainland data continues to under perform. German November, IP was down -0.6%, m/m, below the -0.5% consensus following weak orders data last week.
  • CHF: Retail Sales rose +1.8%, y/y, in November, well above the consensus forecast for +0.2%. Including the stronger PMI print last week points to “a somewhat less negative growth affect from the stronger currency.” Lack of a deflationary shock will have policymakers keeping the 1.2 floor in place awhile longer yet.
  • CZK: Czech inflation fell slightly to +2.4%, y/y, from +2.5%, below the consensus for a stable reading. The market expects this to “tame the recently more concerned language from the central bank”.
  • FRF: French manufacturing production for November unexpectedly posed a +1.3%, m/m, gain. The October release was also revised higher, to +0.2% from flat. The BoF business sentiment indicator rose to 96 from 95-better data may suggest that the “fears of recession across the region are not materializing.”
  • Fitch rating agency has indicated that a French downgraded is unlikely this year.
  • EUR: Reports indicate that progress is being made towards a private sector participation agreement.
  • SEK: IP dropped -1.9%, m/m/ in November, much worse than the -0.8% expected. The annual growth rate stands at +0.2%, y/y, down from +4.5%. Digging deeper, orders were less encouraging, down -4.8% on the month following a -2.3% drop in October. The manufacturing intensive Swedish economy is becoming more affected by growth concerns in core Europe, making the SEK more vulnerable.
  • NOK: CPI surprised weak at +0.2%, y/y, down from +1.2% in November and below the consensus expectations for +0.5%. Electricity prices were the main downward driver. Analysts note that the inflation reading is much weaker than forecasted by the Norges Bank and would suggest another rate cut.
  • EU: Parliament group objects to a new draft of euro fiscal treaty; it needs more democratic controls and should do more to promote growth.
  • EU Said to Weigh Iran Oil Embargo Exemptions for Member States.
  • ITL: The Social Democrat Party Calls For an exit From EUR and EU.
  • FRF: Rumor denied by French Treasury that the country was to be downgraded within a tight time range.
  • FITCH: Rating agency calls for ECB to step up SMP program and increase its sovereign debt purchases in order to prevent a ‘cataclysmic’ collapse of the currency.
  • GER: Germany auctioned +EUR4b of five-year debt on Wednesday. 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, resulting in a cover of 2.84 times.
  • GBP: UK trade deficit widened to -£8.6b in November. With the negative trade balance remaining disappointingly wide suggests a slog to rebalance the UK economy.
  • EUR: German GDP grew +3%, y/y, in 2011, implying a small GDP contraction of -0.1, y/y, in the fourth quarter. Germany is not the European “Atlas”!
  • EUR: Strong demand at auction for Spanish bonds and Italian bills. The Spanish treasury successfully auctioned +EUR9.98b of government bonds, double the amount it had planned. Italy sold 1-year bills at +2.735%, vs. +5.952% on December 12. In total, Italy successfully sold +EUR12b T-bills, meeting its target, and at the same time seeing its borrowing costs plunge in the country’s first debt sale of the year.
  • ECB: After keeping rates on hold, Draghi expressed his satisfaction that the auctions support the view that the provision of 3-year liquidity via LTRO’s is improving the financing backdrop for the peripheral sovereigns. With no indication of a rate change gave the single currency a boost.
  • ECB Press conference: Monetary policy to remain accommodative with policy makers ready to act.
  • ECB: Substantial downside risks to economic outlook persists.
  • ECB: Price developments to remain in line with price stability mandate.
  • ECB: Euro austerity measures are weighing on the output of the region.
  • ECB: Aim is to anchor inflation at or close to +2% over the medium term-it’s required to make its contribution to economic growth and job creation in the region. December inflation was at +2.8%.
  • BoE: they kept rates on hold at +0.5% and kept its target for its asset purchase program at +GBP275m.
  • EUR: Significant risks remain ahead with the Greek PSI talks and the completion of the haircut by months end.
  • EUR: Regional data continue to come in better than feared. The Euro-zones November IP fell -0.1%, m/m. It was better than the -0.3% forecasted. However, negative revisions to the October reading leave growth momentum poor.
  • ITL: Their IP grew +0.3%, m/m beating all expectations of -0.5%.
  • GBP: UK data continue to point to a weak 4Q GDP number. Their IP surprised weak in November, falling -0.7%, below the consensus forecast for -0.1%, m/m. However, manufacturing production happened to be less disappointing, falling -0.2%, m/m.
  • SEK: Inflation decreased to +2.3%, y/y, in December from +2.8%. The core-inflation registered a substantial fall to +0.5% from +1.1% and it is now at its lowest levels in nearly seven-years. Low inflation and weak growth point to a risk of a more dovish Riksbank.
  • ITL: Italian bond auction disappointed after their strong Bill issue. 3-year product saw a relatively poor bid-to-cover ratio of 1.2 times, while the 6-year came in at 1.6. Demand was greater for a smaller +4.25% coupon issue and a total of +EUR4.75b were allotted across all auctions.
  • S&P Rating: Several euro zone countries could face imminent downgrade by S&P as early as today
  • EU: Euro-zone posted an unexpected trade surplus surprise. The market had been forecasting a deficit of-EUR1b; however, the region registered a surplus of +EUR1b. A surge in exports helped the Euro-zone post this major surplus.
  • EU:IIF Says Greece Talks ‘Paused’ After No ‘Constructive’ Response

Have We Missed the EUR Sweet Spot after Italian Auction?

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

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

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

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

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

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

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Will the US embrace the EURs new found confidence?

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January 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.

    December 12, 2011

    Risk Aversion absorbing US Debt Supply

    Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 11:39 am

    Even with $78b of US product (notes, bonds and inflation-linked debt) coming down the pipeline this week, treasuries remain in demand. The heavy issuance’s in the remainder of the year (+$177b of varying duration-bills, notes and bonds) normally would make it easier for dealers to take advantage of both supply and price, however, developments in Europe has investors wading towards the sidelines and requiring more product for surety reasons.

    It was not a market surprise that the mention of a rating agency had US yields under pressure today. Bond prices rose after Moody’s said it will review ratings for all EU countries, citing a failure to produce “decisive” measures to end the region’s debt crisis at “the” summit last week. The US 2/30’s yield curve flattened -7bp to +282bp as Italian (+43bp to +6.79%-highest since Dec 1) and Spanish (+32bp to +6.07%-also highest since Dec 1) sovereign bonds led price declines among higher-yielding European sovereign debt. Even Germany managed to dip their oar into the ECB debate by questioning the duration of the central banks role. The Bundesbank president stated that the “onus is on governments rather than the ECB to resolve the crisis with financial backing”.

    With the lack of decisiveness out of Europe has led to treasuries remaining better bid on pull backs. The continuing uncertainty will keep safe-haven Treasuries from selling off much even as the market absorbs the supply. Fitch has echoed a lot of what Moody’s warned about earlier, citing that the latest EU agreement is “not big enough to stem the region’s debt crisis”. They are predicting a “significant economic downturn” in the short term.

    Today, US treasury auctioned off +$32b in three-year notes. The note sale booked the highest bid-to-cover ration (3.62 vs. 3.29) in 18-years. Indirect buyers took down +39.1% of the sale, on par with +40% average over the past four-auctions. Direct buyers picked up +7% of the offering, below the +12.4% recent average. With volumes drying up near year-end and participation at December auctions normally lighter, market attention will now shift towards tomorrow’s +$21b 10-year offering and Wednesdays +$13b long bond.

    Tomorrow, we also get the FOMC rate announcement, before that it’s US retail sales. Will an underperforming sales surprise print open up the QE3 debate again?

    The Nikkei closed at 8,653 up +117. The DAX index in Europe was at 5,785 down -201; the FTSE (UK) closed at 5,427 down -101. US indices remained in negative territory with the Dow currently trading at 11,970 down -213.

      December 9, 2011

      Week in FX: Europe December 4-9

      Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 10:43 am

      This week was supposed to be an historic week for the EUR. It’s actually ending on a whimper. The ECB cut rates and delivered more significant measures to improve bank funding conditions. However, the ECB has again stopped short of signaling a level of support for peripheral bond markets. Even the Euro summit progress today towards fiscal union will not trigger an accelerated pace of bond purchases, end result, this will leave the EUR vulnerable. Market participants will now be trying to anticipate any ECB market activity early next week. The market needs to be convinced that the EU actions will be great enough to avoid a credit downgrade from the ratings agencies, which could come as early as next week.

      Below are some other highlights of the week:


      EUROPE

      • EUR: The start of the week saw Italian 10-year yields down to +6.16%, more than +100bp off the November highs. However, the real challenge for the sovereigns comes in Q1, when issuance picks up again, and markets appear to be pricing in a good deal of progress towards fiscal union at this week’s EU summit.
      • ITL: The Italy’s government approved new fiscal measures totaling +EUR30b.The package is divided into +EUR20b of budget tightening and an additional +EUR10b that will be pumped back into the economy in the form of measures to help companies and boost growth. The spending cuts come from pension reforms and revenue raisers mostly related to taxation of wealth/real estate.
      • EUR: EZ November services PMI was revised lower to 47.5 from of 47.8 and remains in contraction territory. Services PMI was particularly weak in Spain, falling to 36.8 from 41.8. German PMI was revised substantially lower to 50.3 from 51.4. In contrast, Italian services rose slightly while French services were revised higher, but both remained below 50.
      • UK: Service PMI surprised strong rising to 52.1 from 51.3 in October. Analysts note that the details were less encouraging with new orders falling to 52.3 from 53.2 and employment down to 48.2 from 49.8. This suggests that the general weakness of the UK economy continues to justify extension of the QE program in February.
      • EUR: S&P put 15-Euro zone countries, including Germany and France, on negative credit watch prompting many comments that the rating agency should “stay out of politics” ahead of this weekend’s EU meetings. All six AAA countries were placed at risk, and S&P noted that they could see a two notch downgrade. This creates a 50% probability of ratings downgrades in the next 90-days.
      • EU: ECB’s 1-week deposit auction succeeded in fully sterilizing the +EUR207b SMP.
      • EUR: German factory orders surprised strong, rising +5.2%, m/m, in October, more than reversing the -4.6% drop the previous month. Digging deeper, foreign orders and capital goods orders were particularly strong. However, analysts still expect “a sharp slowdown in Q4 growth in Germany”.
      • CHF: Swiss CPI declined more than expected (-0.2%, m/m), pushing headline inflation to -0.5%, y/y, in November (lowest level in two years). Core-inflation also fell to a record low of -1.0%. Analysts note that deflation risk has emerged earlier and deeper in Switzerland than the SNB’s projection in their Monetary Policy Statement. Much of the deflationary pressure comes from foreign goods (-2.7%, y/y), while domestic inflation remains at +0.3%. However, with the labor market remaining solid, wage growth positive and credit expanding should help fight deflationary pressures.
      • S&P: Put the long term credit rating of EFSF on credit watch negative.
      • EUR: Event risk fears and rumor mongering had many investors wading to the sidelines ahead of the ECB announcement and EU summit.
      • EU: European banks borrow USD50b from Fed via ECB. The funding was conducted at the new lower OIS +50bp rate.
      • EU Rumor: That discussions were ongoing on an enhanced ESM which might even be able to borrow from the ECB.
      • German Officials: Warned that many countries and institutions will have to change their positions for a deal to be achieved this week, “Nein Bazooka”.
      • EUR: EU activity remains weak, with October IP data weaker in Italy (-1%), the UK (-0.7%) and Norway. These numbers are consistent with the soft PMI surveys and suggest expectation of a sharp slowdown in Q4.
      • Germany: In contrast, German IP surprised stronger with a +0.8%, m/m, gain, much higher than the +0.3% expected.
      • Germany: Officials rule out decisions on IMF aid at summit.
      • EUR: Official comments continue to warn against excessive expectations for the summit meeting.
      • UK: BoE MPC announcement saw no change in the scale of the asset purchase facility. The minutes gave a clear signal that although the Bank’s projections warranted further policy accommodation, it was difficult to accelerate the pace of purchases. Nothing until February’s meeting. Market is leaning towards the committee announcing an additional +GBP75b of Asset Purchases.
      • UK: Next week’s CPI inflation data are likely to confirm that the peak for inflation is past.
      • ECB: reduced its benchmark rate by -25bp to +1%, matching a record low and offered banks unlimited cash while steering clear of any signal that they will buy more bonds to stem the region’s debt crisis.
      • ECB: The two 36-month Refi-Ops and full allotment for banks at fixed rate in translation is a form of QE. They will ease the collateral rules and accept ABS as collateral. For the first time they will cut the reserve ratio to +1% from +2% effective January 18 and discontinue fine tuning operations at end of maintenance period. Draghi indicated that all non-standard measures are temporary in nature.
      • EUR: The European Banking Authority said the region’s lenders will need to raise +114.7b euros in fresh capital.
      • EU: The EU Summit agreement was largely in line with expectations and the “draft” released on Thursday. It will represent another step in the direction of an integrated fiscal “compact”.
      • EU: There was an agreement on a semi-automatic fiscal rule. Members will bring forward the launch of the ESM to mid-July 2012. They announced the possibility of increasing the size of the ESM above €500b to be discussed next March. The highlight for Germany was the announcement of no PSI in the ESM as a precondition, but adherence to the “well established IMF principles and practices”. Voting is to be done by a qualified majority (+85%) instead of unanimity for the emergency procedure in case of the ESM. Finally, discussion about an IMF provision of an additional €200b of resources is to be confirmed in ten-days
      • EU: UK and Hungary are not supporting the agreement for now. The accord is a Euro area plus accord instead of being an EU one.
      • EUR: French IP was flat in October, a touch above the expectations for a -0.2%, m/m drop.
      • NOK: Headline inflation fell to +1.2%, y/y, this month from +1.4%, weaker than the Norges Bank forecast of +1.6%. Core-inflation also came in weaker than expected at +1%, y/y. The Norges Bank expects the rise in prices to slow ahead for the first-time in two years. It remains a close call if the Norges Bank will ease next week.
      • GBP: October UK trade balance came in much better than expected with the trade deficit narrowing to -£1.6b from -£4.3b in September. The improvement was broad based.
      • SEK: Swedish IP surprised stronger than expected, rising +0.4%, m/m, vs. the consensus forecast for a -0.5% drop. The trend, however, remains weak, with IP contracting -1.9% on a three-month momentum basis.

      November 14, 2011

      Another Day, Another Record Interest on Italian Debt

      Filed under: OANDA News — Tags: , , , , , , , , , — admin @ 7:29 am

      Berlusconi may be gone but the legacy lives on with yet another record yield on new issues of Italian debt. On Monday, Italy sold 3 billion euros ($4.2 billion) worth of 5-year bonds with a yield of 6.29 percent shattering the previous Eurozone-era record.

      At the same time, it was announced that Eurozone Industrial Production fell by 2 percent adding further to fears that the region could be slipping back into recession.

      “Eurozone manufacturers are clearly now finding life extremely challenging as domestic demand is hit by tighter fiscal policy across the region,” said Howard Archer from IHS Global Insight. “Slower global growth has hit foreign demand for eurozone goods hard.”

      Source: BBC News

      November 10, 2011

      Is There Any Merit to Operation Meatball Rumors?

      Filed under: OANDA News, Uncategorized — Tags: , , , , , , , , , , , — admin @ 2:24 pm

      By Abe Raymond
      Benzinga Staff Writer

      In short, I doubt it.

      The ECB and EFSF have decided to use the power of leverage to fund the European-wide bailout. Not only is this a foolish plan, since they are essentially refinancing and transferring the debt to the European Union as a whole, but there is no way that the organizations have been able to find over $1 trillion in debt capital.

      Very few investors have the faith to invest significantly in the European continent. Considering the obvious risks associated with the region, the EFSF would be pressed to find a multitude of investors to fund their goals. One of the main problems with this is that they have to resort to financial institutions. The majority of financial institutions already have significant exposure to European debt.

      For example, Jefferies, whose stock plummeted last week on fears of significant exposure, has started to wind down its European holdings. Moreover, banks including Societe Generale, BNP Paribas, Deutsche Bank, and Credit Suisse all are based in the Europe and clearly have some of the highest exposures to the region. Similarly, Morgan Stanley stock got hammered over the last few months on similar fears.

      Considering the obvious risks involved, these institutions, which are already filled to the brim with exposure, may not be willing to be direct investors. On the flip side, what they may be able to do is act as a liaison between investors and the EFSF. Investment banking platforms already partake in this activity, whether it is for investors in IPOs or debt offerings, or investors for exotic securities and derivatives.

      Taking part of the middle-man process could garner lucrative revenues for the investment banks. The only problem is the risk of a conflict of interest, which may be something banks want to avoid. For example, banks typically take the risk up front, and divvy up the securities – debt or equity – to investors after they have already been packaged. The same would probably take place for European debt, and it may not be likely that investment banks want this sort of exposure, considering the lack of frothy, confident markets.

      Another thing investors need to be wary about is that the confirmed bailout plan primarily covers Greek problems. The EFSF would have to amplify the leverage to be able to cover Italy’s problems, assuming that its debt issues are similar to Greece’s and not much smaller. This makes the prospect of a solidified Italian bailout all the more uncertain.

      The EFSF would have to consider how it would go about covering all the debt. For example, the EFSF may think that using so much leverage to be able to cover everyone is not the best idea. It may think that using an approach similar to the US – taxing its citizens – would be the best way to raise funds for a comprehensive bailout.

      Operation Meatball, as some rumors have dubbed it, does not seem very likely. The EFSF will have to find many investors along with more sources for leverage. On the flip side, markets seem to have rallied since the rumors started spreading at 1:15pm. Investors will have to be careful going into Friday, as news may dispel the rumors or may confirm them, meaning that extreme volatility may be in store in the near-term.

      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)


      Loonie

      Discussing Eurozone Breakup No Longer Taboo

      Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 12:41 pm

      Since it was first created in 1999, the Eurozone has never been so close to breaking apart as it is today. The pressure that comes with trying to serve the divergent needs of 17 different economies, sharing little more than geography and a common currency, appears to have finally pushed the region to the very limits of its ability to endure.

      Famed economist Milton Friedman was no fan of the Eurozone. In 2000, just one year after the official launch of the Eurozone, Friedman was asked for his outlook on the region after addressing a conference hosted by the Bank of Canada. Twelve years later, it is clear that Friedman’s early assessment was spot-on accurate:

      I think the euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them. Right now, Ireland is a very different state; it needs a very different monetary policy from that of Spain or Italy. On purely theoretical grounds, it’s hard to believe that it’s going to be a stable system for a long time.

      As part of his appraisal, Friedman suggested the Eurozone would last no more than 10 years. He may be a little off in his timing, but may yet be proven accurate over all.

      Officials Now Acknowledge Eurozone Breakup Possible

      Over the past few years the debt crisis in Europe has only worsened. Yet, during this time, the one subject that remained taboo was any talk that a member nation could be forced to leave the euro or even leave on its own volition. Even as recently as the days leading up to the summit meeting on October 26th, German Chancellor Angela Merkel and French President Nicolas Sarkozy were adamant that Greece would remain within the euro.

      After a couple of false starts during the summit meeting, an agreement was – eventually – arranged to provide Greece with emergency funding in exchange for a stronger commitment from the Greek government to balance the budget. The markets were heartened by this and stock prices rebounded.

      But then Greek Prime Minister – er – former Prime Minister Papandreou revealed that he would hold a referendum before officially agreeing to the terms of the deal. Exasperation with this unnecessary action and the resulting panic in the markets drove some officials to finally mutter that maybe everyone would be better off if Greece were no longer part of the Eurozone.

      What Was Once Unmentionable is Now Tolerated

      Breaking further with the former message of Eurozone solidarity, British Prime Minister David Cameron took on a sinister tone when he described Italy as a “clear and present danger” for the euro:

      Italy is the third-largest country in the euro. Its current state is a clear and present dander to the Eurozone and the moment of truth is fast approaching.

      Sinister or not, the British PM is simply being pragmatic. The Italian debt is now pegged at roughly $2.6 trillion, or five times that owed by Greece. This is simply beyond the scope of the EU to backstop with direct financial support as has been attempted with Greece.

      When it comes to dealing with its debt, Italy is on its own – coincidently, “on its own” may be exactly how some Eurozone members feel Italy should be right now.

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