Forex Blog

January 20, 2012

Inflation Moderating Around The World

Filed under: OANDA News, Uncategorized — Tags: , , , , , , , , , , , , , — admin @ 12:02 pm

By Sam Mattera
Benzinga Guest Writer

On Friday, the Canadian consumer price index printed at less than expected, coming in at negative 0.6% against an anticipated drop of 0.1%. The prior month’s CPI reading was an increase of 0.1%.

Canada’s drop in inflation echoes trends seen around the globe.

Although headline inflation in the US continues to increase at a modest pace, core inflation has held tight for some time and has decreased from relative highs seen in the summer.

Earlier in the week, CPI figures released in the Eurozone indicated that inflation had receded, although it remained sharply above 2%. Likewise, inflation figures in China had recently shown a declining trend.

This leads to an increasing amount of speculation that more easing could be coming. This includes in the US, where it seems more and more likely that the Federal Reserve will implement a third round of quantitative easing.

In China, investors may have become convinced that further easing is a being planned. Chinese stocks have rallied tremendously in the wake of comments made by the People’s Bank of China, which promised that it would work to help keep the economy growing.

Inflation may be declining due to commodity price pressures being relieved. This is in line with what the Federal Reserve’s chairman Bernanke had predicted in early 2011.

The fall in commodity prices may have been due to a shift in the sentiment of investors, who may have become more concerned with the prospect of deflation once again.

As pressures have mounted in the Eurozone, the possibility of a severe financial crisis has emerged. With ratings agencies downgrading multiple countries in the Eurozone, and a default in Greece looking increasingly likely, deflationary pressures could rule the day if major financials begin to break down.

The US dollar index bounced early on Friday, but has been trading lower all week. Should the dollar continue to weaken, higher inflation rates could return.

October 30, 2011

Trading Week Outlook: Oct. 31 – Nov. 4

Filed under: Forex News — Tags: , , , , , , , — admin @ 8:37 am

Oct. 30, 2011 (Allthingsforex.com) – With many unknowns still lingering after the rally fueled by the EU Summit’s new plan to contain the sovereign debt crisis, the first trading week of November could prove crucial for the fate of the financial markets, the euro and the U.S. dollar as the G20, the Fed and the European Central Bank convene to chart the direction of their future policies.

In preparation for the new trading week, here is the outlook for the Top 10 spotlight economic events that will move the markets around the globe.

1.    EUR- Euro-zone HICP- Harmonized Index of Consumer Prices, the main measure of inflation preferred by the European Central Bank, Mon., Oct. 31, 6:00 am, ET.

Following the surprising spike in inflationary pressures to 3.0% y/y in September from 2.5% y/y in the summer months, the Euro-zone’s main inflation gauge is forecast to show consumer prices holding up near the 3.0% y/y level with a preliminary estimate of 2.9% y/y in October. The inflation spike came only a week before the European Central Bank’s October meeting and was one of the factors keeping the central bank from cutting rates then. However, if inflation slows along with the Euro-zone’s economy, the odds of an ECB rate cut will increase exponentially.

2.    AUD- Reserve Bank of Australia Interest Rate Announcement, Mon., Oct. 31, 11:30 pm, ET.

Last week’s unexpectedly hawkish Reserve Bank of New Zealand stance shocked the markets as New Zealand’s central bank begged to differ from all other major central banks which have made it clear that they are steering further away from tightening in an effort to stimulate growth. Although the Reserve Bank of Australia would be likely to keep the benchmark rate at the current 4.75% level, even the slightest hint of a similar to the Reserve Bank of New Zealand’s view that rates might need to be adjusted higher at some point in the future, could serve as a catalyst for further strengthening of the Australian dollar. On the other hand, a dovish Reserve Bank of Australia statement, opening the door to rate cuts, would be a major risk factor for the higher-yielding commodity currency “down under”.

3.    GBP- U.K. GDP- Gross Domestic Product, the main measure of economic activity and growth, Tues., Nov. 1, 4:30 am, ET.

Growing by only 0.1% q/q in Q2 2011, the U.K economy is forecast to regain momentum by up to 0.4% q/q in the third quarter of 2011. The GBP could enjoy a bit of a boost on stronger Q3 growth, provided the recent risk rally continues to distract the market from the fact that the Bank of England expanded its Asset Purchase Program by 75 billion pounds and is in the process of doing more quantitative easing.

4.    USD- U.S. ISM Manufacturing Index, a leading indicator of industrial activity, where a reading above or below 50 is the dividing line between economic expansion and contraction, Tues., Nov. 1, 10:00 am, ET.

The U.S. manufacturing sector index is forecast to gain strength for another month with a reading of 52.2 in October from 51.6 in September, continuing the sequence of cautiously optimistic U.S. economic data ahead of the Fed’s monetary policy announcement.

5.    USD- U.S. ADP-Automatic Data Processing Employment Report, a measure of jobs lost or added to the private sector of the economy, also serving as a leading indicator for the outcome of the monthly non-farm payrolls, Wed., Nov. 2, 8:15 am, ET.

In a prelude to Friday’s employment report, payrolls in the private sector of the U.S. economy are expected to register an increase by up to 114K in October compared with the 91K new payrolls added in September.

6.    USD- U.S. FOMC- Federal Open Market Committee Interest Rate Announcement, Wed., Nov. 2, 12:30 pm, ET.

The recent U.S. dollar weakness was fueled not only by the return of risk appetite but also by increased QE3 market speculation. Some members of the FOMC have been “warming up” to the idea of more quantitative easing and even calling for it. Although QE3 is not completely out of the picture yet, the Fed might decide that the prudent thing to do at the moment is to acknowledge the recent signs of improvement in the U.S. economic backdrop and to allow a few more months to asses the impact of “Operation Twist” before they take on additional asset purchases at the expense of the U.S. dollar. If the Fed rules out QE3, the greenback could start correcting some of its recent losses.

7.    EUR- G20 Meeting of finance ministers and central bankers of the world’s twenty most industrialized nations, Thurs., Nov. 3 and Fri., Nov. 4, all day events.

Scheduled to serve as another deadline to work out more details of the EU debt crisis-fighting plans, the G20 meeting participants will examine closely all aspects of the promised comprehensive solutions and will ask for fast implementation, while the EU reps try to pass the tin can asking for contributions to the EFSF bailout fund, which is about 750 billion euro short of its proposed 1 trillion size. The EU leaders hope for a significant Chinese participation in EFSF, but with China making it very clear that they want guarantees and that they should not be viewed as a “source of dumb money”, the G20 meeting will be a spectacle worth watching.

8.    EUR- European Central Bank Interest Rate Announcement, Thurs., Nov. 3, 8:45 am, ET.

With plans to contain the EU debt crisis and the ECB involvement still being discussed, President Trichet leaving and the new President Draghi taking over, the European Central Bank would have the difficult task to navigate through a sea of uncertainty. To add to the difficult situation, the Euro-zone economy is slowing, while inflationary pressures have unexpectedly spiked. What is the central bank to do- cut rates to help the economy avoid a double dip or keep rates high to curb inflation? Considering his past record, Mr. Trichet would have preferred the latter option, but the new ECB President Draghi may have something else in mind. Should the ECB announce, or at least open the door, to an impending rate cut, the EUR could see selling pressures building up quickly, especially if the Fed has ruled out QE3 the day before the ECB meeting.

9.    USD- USD- U.S. ISM Non-Manufacturing Index, a leading indicator of economic conditions in the services industries: agriculture, mining, construction, transportation, communications, wholesale trade and retail trade, Thurs., Nov. 3, 10:00 am, ET.

Just as the manufacturing sector, the U.S. services industry activity is forecast to expand for another month with an ISM Non-Manufacturing index reading of 53.5 in October from 53.0 in September.

10.    USD- U.S. Non-Farm Payrolls and Employment Situation Report, one of the most important indicators of economic health, measuring the number of new jobs created or lost in the world’s largest economy, Fri., Nov. 4, 8:30 am, ET.

The most important of all U.S. economic data will hit the newswires in the aftermath of the FOMC and the ECB interest rate announcements and in the midst of a G20 meeting. Kick-starting the market’s quest throughout October to find out if the U.S. economy is really as bad as the Fed’s gloomy outlook painted it to be ahead of the FOMC meeting on November 1-2, the previous Non-Farm Payrolls report managed to instill some cautions optimism with the U.S. economy adding 103,000 jobs in September, compared with a sequence of dismal employment reports throughout the summer. The trend of positive job creation is expected to continue with the U.S. economy adding up to 95,000 jobs in October, while the unemployment rate remains unchanged at 9.1%. Consistent improvement in the U.S. economy and labor market, coupled with signs that the EU leaders may be able to put out the fire from the debt crisis, while the ECB cuts rates to help the euro-area economy avoid a double dip, should steer the Fed further away from QE3 and could become the formula for a U.S. dollar relief rally.

September 16, 2011

Eurozone ‘coming to a standstill’

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 5:14 am

The European Commission has predicted that economic growth in the eurozone will come “to a virtual standstill” in the second half of 2011.

It halved its forecast for July to September to growth of just 0.2%, while the forecast for the last three months of the year is down from 0.4% to 0.1%.

The commission blamed financial market problems over the summer as well as weakening demand from outside Europe.

But it remained confident that there would not be a return to recession.

“Recoveries from financial crises are often slow and bumpy. Moreover, the EU economy is affected by a more difficult external environment, while domestic demand remains subdued,” EU Economic Affairs Commissioner Olli Rehn said at a news conference to unveil the report.

“The sovereign debt crisis has worsened, and the financial market turmoil is set to dampen the real economy.”

BBC Business

August 26, 2011

Bernanke Challenges Congress to Make “Difficult Choices”

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 11:47 am

Federal Reserve Chairman Ben Bernanke used this years Economic Symposium to challenge Fed policymakers to “make the difficult choices that are necessary to put the country’s fiscal house in order”. Bernanke also repeated last year’s message that despite record low interest rates and yields on Treasuries, the Fed still has policy tools at its disposal to stimulate the economy.

Unlike last year’s gathering however, Bernanke did not make any specific announcement on the timing of any actions the Fed may have in mind. The only commitment from Bernanke is to say that September’s policy meeting would be extended by a day to allow a “fuller discussion” of the state of the economy.

QEIII On Hold?

In the days leading up to the symposium there was much conjecture on the possibility that the Fed would announce another round of quantitative easing. Bernanke made no mention of kicking off a third program of bond buying to inject more liquidity into the banking system but this option likely remains a matter to be discussed at next month’s meeting.

US Federal Reserve Chairman Ben Bermanke Fed

Fed Chairman Ben Bernanke

Investors were no doubt disappointed that today’s address offered no official confirmation of further spending. As a result, markets responded negatively in the aftermath of Bernanke’s comments but by mid-afternoon both the Dow and the Nasdaq were back in positive territory.

Bernanke Challenges Policymakers

In a surprising move, Bernanke directed a considerable part of his speech to the nation’s policymakers including a strong indictment of how Congress dealt with the recent credit ceiling debate.

In what can only be described as a rebuke to Congress, Bernanke urged federal legislators to take the problems facing the economy more seriously. Bernanke practically implored lawmakers to set aside the politics and to act now “to put in place a credible plan for reducing future deficits over the longer term”.

“The negotiations that took place over the summer disrupted financial markets and probably the economy as well,” declared Bernanke. “Similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses.”

This is certainly the strongest language to date for the Fed Chairman and may possibly underscore a growing sense of desperation at the Federal Reserve. It is fine for Bernanke to tout the Fed’s policy tools but these have been tried with limited success. Bernanke now appears to be handing the ball to the fiscal policymakers.

August 12, 2011

US data to outperform EUR

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 4:26 am

What a week, and its only Friday morning. The market still has some data to chew on before one can sit back and figure what all this really means. The Central Bank thoughts and threats, swing’s in equities, and maybe the loss of a reserve currency. These and more has investors even more worried as the rumor mill intensifies.

This morning the focus will be on US July retail sales and August’s University of Michigan consumer sentiment. Some analysts expects that the headline retail sales rose +0.5%, m/m, making it the best reading in four months, with the increase mostly driven by a rebound in autos, after Japan’s supply related weakness earlier. Ex-autos and gas, market expects a modest gain of +0.3% m/m gain. Market should pay extra attention to the core release, a negative surprise, and it’s proof that a drop-off in final demand would drive concerns of recession risk further.

Michigan sentiment should be affected by the recent rout in global equities and the US ratings downgrade last week. Watch the inflation component. Any easing could increase the probability of further Fed implementing easing measures.

The EUR is hanging in tough with a lot of support. Its top side remains contained, with the bottom more vulnerable. The glue holding everything together will last only so long.

The US$ is stronger in the O/N trading session. Currently, it is higher against 10 of the 16 most actively traded currencies in a ‘subdued’ session.

Forex heatmap

A mixed bag of US data yesterday tried to distract the market from the SNB doing or not doing whatever they are intending to do. The US trade gap widened in June, with the deficit rising to -$53.1b from -$50.8b, as exports fell quicker than imports. It’s the widest margin in three-years, and proof that the US economy grew even slower during the second quarter than estimated by the government. Nearly all the negative surprise came from a -2.3% fall in exports (supposed to be one of the US’s few positives). This would suggest that Europe’s problems are starting to undermine exports. Imports fell by -0.8%, on a mix of weaker demand and falling oil prices.

The surprise was weekly unemployment claims falling-7k to +395k. The market did not expect this given the FAA furlough that had been in effect and ending just before the reporting period. The average claims figure fell by-3.25k to +405k. Continuous claims declined-60k, its largest weekly decrease in six-months, from 3.75m to 3.69m. The percentage of the eligible population receiving unemployment insurance fell to +2.9%. With three consecutive weeks of declines, claims are moving in the right direction. Let’s hope that this is a trend.

The dollar is higher against the EUR -0.01% and CHF -1.18% and lower against the GBP +0.29% and JPY +0.17%. The commodity currencies are weaker this morning, CAD -0.28% and AUD -0.28%.

The loonie advanced from almost its lowest level in seven-months as equities stateside rose, reducing the demand for the buck as a refuge. The CAD, despite this week’s turmoil remains one of the better behaved currencies, even with weaker data. Yesterday, Canada recorded its biggest trade deficit in nine-months in June (-$1.56b the fifth consecutive), as energy and auto exports fell, adding to evidence the country’s recovery is waning. Governor Carney said last month that export growth will remain modest because of a strong currency and the need for companies to regain competitiveness. This month, the loonie dropped -3.8% as global equities tumbled on renewed concern that the Euro-zone’s sovereign-debt crisis is getting worse.

There is a flip-side, because of the stronger Canadian fundamentals and yield differential (for now), investors will want to divest away from the EUR and USD. Once the markets absorb all of this weeks Cbanks actions or lack of, there will be an appetite from investors for a second tier reserve basket. Most commodity and interest rate sensitive currencies certainly belong to this basket.

The loonie remains at the mercy of risk aversion trading strategies and commodity prices. In the O/N market, investors look to be better sellers of dollars on rallies (0.9855).

The wild ride for commodity currencies continues, with the AUD being the prime example. A matter of day’s ago, the market was happily singing its praises, witnessing the currency breach the 1.10 barrier, some weaker global data and a credit downgrade later and this growth and interest rate sensitive currency is bouncing back from the USD trading premium a couple of sessions ago.

The AUD again is on the back foot this, following regional equity prices for direction. This weeks domestic data has been mixed. Full-time employment fell -22.2k in July, while part-time employment gained +22.1k, keeping total employment largely flat. June full-time employment was revised down to +18.2k from +23.4k. The unemployment rate rose to +5.1% from +4.9% in June, with the participation rate unchanged at 65.5%.

On the flip-side, consumer inflation expectation fell to +2.7% in August from +3.4% in July. The weak employment print should keep Governor Stevens rate changes in check, remaining on hold until further notice. Even with core inflation still running above the RBA’s target range, the policy makers can afford to step aside, unless there a dramatic collapse in global financial markets. That can be said for all other Cbanks. Just like the loonie, the AUD will trade with the swings in global risk appetite (1.0337).

Crude is lower in the O/N session ($85 down -$0.72c). Crude prices rallied for a second consecutive day, rebounding from their ten-month low, as declining US jobless claims sent bourses higher, adding to optimism that the US economy is strengthening. Some of the market believes that the Fed will implement a third round of asset buying to bolster the economy further.

US inventory numbers were also bullish for the commodity. The report showed that oil stocks fell -5.2m barrels to +349.7m last week. The market had projected a +1.5m barrel build. Crude imports fell-34k barrels per day to +9.07m. The IEA stated that the US’s SPR saw its stock levels fall -2.5m. Not to be outdone, gas stocks dropped -1.59m barrels to +213.5m, compared with market projections for a +500k barrel build. Average gas demand over the last four-week’s has fallen-3.4%, y/y. Distillates (heating oil and diesel) fell-737k barrels to +151.5m versus an expected rise +1.1m barrels. Refinery utilization increased +0.7% point to +90% of capacity, whereas the market projected a decrease of -0.4%

Crude prices continue to hold just above strong support levels. The Fed’s monetary policy will be bearish for the dollar and so should be bullish for crude in the longer term.

Gold bulls yesterday had their backs against the wall yesterday, as commodity prices plummeted, falling the most in two-months after the CME hiked margin requirements on futures contracts (+22%), a day after printing a record topping $1,800 and on the strength of equities being in the black. Big picture, the metal continues to be a recipient of safe-haven flows. Prices have more than doubled since the recession began in late 2007. This summer, its climb has accelerated because of the US Congress inability to stabilize the government’s ‘medium-term debt dynamics’, and on the back of Europe’s debt crisis threatening to spread to three of its biggest economies, France, Spain and Italy. The Fed’s efforts to drive interest rates lower to support lending are curtailing the dollar’s appeal as a safe haven.

Investors have bought more gold in the last month than in the prior six months according to CFTC data last week. Expect speculators to wait for a deeper correction before they start buying again. This week’s weaker longs should help their cause. The commodity is heading for its eleventh consecutive annual gain. In this environment $2,000 is very much in the realms of possibility over the next six months ($1,762 +$11).

The Nikkei closed at 8,963 down-18. The DAX index in Europe was at 5,889 up+92; the FTSE (UK) currently is 5,213 up+50. The early call for the open of key US indices is lower. The US 6-year backed up 10bp yesterday (2.32%) and is little changed in the O/N session.

US Treasuries prices fell as global equities rallied and a weekly jobs report showed initial jobless claims unexpectedly declined last week, damping demand for safe assets. Dealers also cheapened the back end of the curve as they prepared to take down the last of this week’s issue, $16b 30-year bond.

Treasuries have surged this month, pushing 10-year yields down more than -50bp, as the European sovereign debt crisis and a potential double-dip recession in the US sent pushed S&P’s down-13%.

It was a lousy 30-year sale. The auction was offered at 3.75%, +10bp higher than the level traded right before the issue, signaling weak demand. The bid-to-cover ratio was 2.08, compared to the average of 2.67 from the past four sales. The indirect bid took down +12.2%, compared with +39.1% from the past four sales. It was the lowest over all demand since 2008. The street owns them as the yields were not attractive enough for pension and insurance funds.

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August 10, 2011

Fed Lowers U.S. Outlook; Pledges Low Interest Rate to Continue

Filed under: OANDA News — Tags: , , , , , , , , , — admin @ 12:39 pm

After three days of wide-spread losses the Federal Reserve was left with little choice but to take to the airwaves in an attempt to calm jittery nerves. Reassurances given, markets responded positively. The Dow Jones Industrial Average closed the day with an advance of nearly 430 points or 3.9 percent. Unfortunately, Tuesday’s “relief rally” was short-lived and by 12:30 Wednesday afternoon the Dow had returned most of yesterday’s gains.

In Tuesday’s press release, Federal Reserve Chairman Ben Bernanke confirmed that the Fed will keep ultra low interest rates though to at least the middle of 2013. It’s one thing to pledge to follow a specific policy, but to include a precise time frame for the action is unusual – especially one that extends out nearly two years.

This is a telling commentary on the Fed’s long range outlook for the U.S. economy. The fact that the Fed feels a near-zero interest rate policy will be necessary so far into the future reveals the Fed’s belief that little improvement is likely before the end of next year at the earliest:

“The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the times of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased.”

In order to meet its “dual mandate” of ensuring full employment together with price stability the Fed noted that is has a “range of policy tools” at its disposal. This will include continuing to reinvest principal payments from the Fed’s security holdings back into the economy, but it also opens the door to further quantitative easing.

To date, the Fed has completed two rounds of quantitative easing. The first round added over a trillion dollars to the Fed’s balance sheet which was then placed into the financial system as “new” liquidity; the second round of QE spending wrapped up earlier this summer and reinvested a total of $600 billion. Faced now with a slowing U.S. economy and the debt crisis in Europe, odds are tipping in favor of the Fed introducing a third round of quantitative easing.

Growing Dissent Within the Fed

Noticeable in yesterday’s update is the fact that three of the twelve voting members voted against promising to hold interest rates for another two years. Dallas Reserve President Richard Fisher and Philadelphia Reserve President Charles Plosser both withheld their support. Given their reputations as interest rate “hawks” supporting higher interest rates, this does not come as a surprise.

However, when Narayana Kocherlakota, President of the Minneapolis Reserve Bank, opted to side with the hawks, this marked the first time more than two voting members have lined up against Bernanke. Even so, the statement was easily supported by a strong majority of the voting members but the possibility of growing dissent at the FOMC will be watched very closely in upcoming statements.

Do Not Upset the Swiss

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 4:25 am

Been there, seen that. It sums up the actions from both the Fed and Swiss authorities. The Fed’s pledges have left the CHF exposed to a market having the currency in its crosshairs. Unless the Fed is willing to intervene in the FX space and stop ‘this’ dollar slide, the Swiss acting alone has an near impossible task.

Investors desires for a safe heaven outside of the Euro-zone and US debt dramas is producing massive gains for CHF against other majors. Reason enough for authorities to step up their efforts to cool ‘the’ move. The SNB this morning announced that it would rapidly expand banks’ most readily available deposits from CHF80b to CHF120b, and would conduct FX swap transactions. Last week, the SNB cut its three-month Libor rate target to zero in another effort to curb the CHF appreciation.

Looking at the post price action, this ‘symbolic’ act by the SNB is having limited reaction. Their measures are a repeat of earlier actions. The fact that they have failed to intervene and sell francs is again giving the market the green light to proceed, but, with caution!

The US$ is mixed in the O/N trading session. Currently, it is lower against 11 of the 16 most actively traded currencies in a ‘subdued’ session.

Forex heatmap

Markets were probably looking for lies or half truth, instead, they got a Fed giving us the raw truth. Policy makers painted a dour picture of the US economy, going beyond the simple transient factors. Ben and company pledged for the first time to keep benchmark rates at a record low, at least through mid-2013, to revive a recovery that’s ‘considerably slower’ than anticipated. They were vocal about a range of policy tools in their armory to boost the economy and said it is ‘prepared to employ these tools as appropriate’. With these promises they stopped short of initiating a QE3 package of large-scale asset buying. Fed expect a ‘somewhat slower pace of recovery over the coming quarters and that downside risks to the economic outlook have increased’.

Interestingly the vote was 7-3. Dissent suggests that the Fed is still a long way off from providing ‘dramatic new support for an economy that even policymakers acknowledge has taken a turn for the worse’. However, in five months the dissenters become nonvoters at the Fed.

The dollar is lower against the EUR +0.06% and JPY +0.47% and higher against GBP -0.33% and CHF -0.25%. The commodity currencies are mixed this morning, CAD -0.47% and AUD +0.21%.

After printing parity in the previous session of panic liquidation, the loonie has found firmer footing, rising for the first time in eight days as an advance in ‘stateside’ equities reduced demand for a refuge in the greenback. Because of the stronger Canadian fundamentals, investors will want to divest away from the EUR and USD. Currently, there is an appetite from investors for a second tier reserve basket. Most commodity and interest rate sensitive currencies certainly belong to this basket.

Yesterday, Canadian housing starts climbed last month at the fastest pace in 15-months, proof that Canadian real estate remains buoyant as borrowing costs stay low. Work began on +205k units on a seasonally adjusted annual basis. Previously, the loonie has been trading on the back foot on concern slowing global economic growth will weigh on demand for raw materials and increase risk aversion trading strategies.

Last week’s historic S&P’s downgrade is creating a new financial and trading environment. For the time being in a while, the loonie will remain at the mercy of risk aversion trading strategies and commodity prices. In the O/N market, investors look to be better sellers of dollars on rallies (0.9810).

The wild ride for commodity currencies continues, with the AUD being the prime example. A matter of day’s ago, the market was happily singing its praises, witnessing the currency breach the 1.10 barrier, some weaker global data and a credit downgrade later and this growth and interest rate sensitive currency is bouncing back from the USD trading premium a couple of sessions ago.

Recent domestic data is providing little support. In the O/N session, the market witnessed Aussie consumer confidence deteriorating for a fourth consecutive month, to the lowest level in more than two years (-3.5% to 89.6) and with no expected turnaround soon.

Big picture, the currency continues to find the going tough, as concern that the global economy is slowing is sapping demand for higher-yielding assets. The US credit downgrade has been pressurizing commodities, which in turn is negative for all growth sensitive currencies. In one session, the currency breached all major key support levels that resulted in parity again being printed, first time in five month. This new range now depends on how the market is digesting yesterday’s FOMC statement. In current climate conditions, investors remain better sellers on upticks (1.0355).

Crude is higher in the O/N session ($82.17 up +$2.87c). The decline of crude prices took a breather before the Fed’s communique. They rebounded from their ten-month low as US equity indices stopped the bleeding and on the belief that the earlier price rout was excessive. The market expected that the Fed’s commitment to monetary stimulus would help fuel demand in the world’s largest economy, however, the new ‘raw’ Ben soon put a stop to that. The Fed stating that risks to the economic outlook have increased and stopping short of initiating QE3, again put the black stuff under pressure. Investors are now betting fuel demand will increase amid shrinking stockpiles.

OPEC cut its oil demand forecasts for the remainder of this year and next as the global economic recovery loses momentum. They have reduced global consumption estimate for this year by-150k barrels a day. The organization is obviously worried about the global economy and falling demand. To date, they do not have a specific price target that would trigger member action.

Today we get the weekly inventory number and analysts expect another small build in the EIA report midmorning. Last week, US gas stockpiles rose sharply and demand over the past four-weeks fell-3.6% compared with a year-ago, adding to concerns about tepid consumption in the midst of the peak summer demand period. Currently, crude is straddling strong support levels and is in danger of penetrating the psychological $75 barrier medium term.

Gold has surged to another new record high, breaking through key psychological barriers, after a US downgrade and on escalating concerns that global economies are losing momentum. The yellow metal continues to be a recipient of safe-haven flows. The metal’s price has more than doubled since the recession began in late 2007. This summer, its climb has accelerated because of the US Congress inability to stabilize the government’s ‘medium-term debt dynamics’, and on the back of Europe’s debt crisis threatening to spread to two of its biggest economies, Spain and Italy. The Fed’s efforts to drive interest rates lower to support lending are curtailing the dollar’s appeal as a safe haven.

With global bourses on the back foot, liquidation of the metal to cover margin calls in other asset classes could pare some of these sharp gains. Investors have bought more gold in the last month than in the prior six months according to CFTC data last week.

Year-to-date, the yellow metal has advanced +24.3%, heading for its eleventh consecutive annual gain. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on pullbacks until proven wrong. There remains a demand for the commodity for insurance purposes as alternative asset class. In this environment $2,000 is very much in the realms of possibility over the next six months ($1,759 +$59).

The Nikkei closed at 9,038 up+94. The DAX index in Europe was at 6,003 up+86; the FTSE (UK) currently is 5,199 up+34. The early call for the open of key US indices is lower. The US 10-year eased 28bp yesterday (2.27%) and is little changed in the O/N session.

Treasuries are rising, pushing 10’s and two-year note yields to an all-time low after Ben promised to keep benchmark rates at record lows for two more years in a bid to revive economic growth. Yesterday’s government sale of $32b three-year notes drew stronger-than-average demand in the first note sale since their debt rating downgrade. Demand for US debt has surged in the last few sessions, as plummeting global bourses boosted the demand for the safety of US product.

The notes drew a yield of +0.50% with a bid-to-cover ratio of 3.29, compared with an average of 3.15 for the past 10 sales. Indirect-bidders took down +47.9% of the notes, compared with an average of +33.9% for the past 10 sales. Direct-bidders received +11.1% of the notes compared with an average of +13.2% for the past 10 auctions.

Today dealers get to take down +$24b of 10’s and +$16b of 30-year bonds tomorrow. Yield is hard to find.

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August 5, 2011

Week in review July 31-Aug 5

Filed under: OANDA News — Tags: , , , , , , , — admin @ 12:07 pm

A week of stress and duress has the market seeing red. Five compact trading days that witnessed the US’s last minute signing off on a bill to avoid debt default, sidestepping the rating agencies, to ‘rogue’ Cbanks fruitless intervention efforts being trumped by risk adverse trading strategies, is setting the market up for an eventful end to the summer. The theme of August so far, slower US growth mixed with Euro sovereign credit is reducing everyone’s risk appetite.

Below are some of the highlights of the busy week:


EUROPE

  • Obama and Congressional leaders reached budget and debt ceiling deal. Both houses approved an increase in the US debt limit by at least +$2.1t and cut federal spending by -$2.4t over ten-years.
  • Italian and Spanish financing markets come under renewed selling pressure.
  • Italian PMI edged a touch above 50 while Polish PMI rose a healthy +1.7 points.
  • Greek PMI remained very depressed at 45.4, while Spanish PMI new orders fell to 43.4 from 46.6. Euro manufacturing PMI was left unrevised at 50.4, but with new orders index at a two-year low of 47.6, suggests an extended and more severe period of slowdown.
  • UK manufacturing PMI fell below 50 for the first time since the crisis, index dropped to 49.1 in July from 51.4 in June. The new orders component fell further to 47.5, points to very poor underlying momentum in the UK going into 3rd Q.
  • Norwegian PMI edged higher to 56.5 in July from a revised 56.4 in June, driven by a strong employment index.
  • Swiss PMI remained resilient at 53.5 from 53.4 in June, although, component-wise, new orders fell further to 45.6 from 48.8 – their weakest level since July 2009.
  • UK construction PMI was stronger than expected at 53.5, having moved sideways after 53.6 in June.
  • SNB announces easing measures to combat CHF strength. Warned that it considers ‘the Swiss franc to be massively overvalued, and that ‘the SNB will not tolerate a continual tightening of monetary conditions’. They have created negative interest rates on CHF deposits for foreign wholesale holders of francs. In essence, buyers of Swiss francs will incur a cost to hedge euro risk.
  • Italian services PMI surprised on the upside but remained below 50 for the second consecutive month, index rose to 48.6 from 47.4.
  • Spanish services PMI declined further to 46.1 in July, the lowest level since Dec 2010.
  • Euro-zone services PMI was revised a touch higher to 51.6 down from 57.8 in April. The fast pace of slowdown in core-countries and the contractions in the periphery are threatening the fiscal consolidation process.
  • UK services PMI rose to 55.4 in July from 53.9 in June, against consensus of 53.2. The resilient services sector should cool the QE debate in the UK. This suggests that the BoE will likely delay future tightening.
  • Moody’s reaffirmed its US AAA rating with a negative outlook after US President Obama signed the US debt ceiling bill into law.
  • German June factory orders came in firmer than expected, rising +1.8% against expectations of a +0.5% decline. The prior month’s +1.8% gain was revised down to +1.5%, but the y/y rate still beat consensus.
  • Spain auctioned EUR 1.1bn of 4-year bonds and EUR 2.2bn of 3-year bonds. Bid-to-cover ratios were relatively normal, at 2.1 for the 3-year (vs. 2.3 in July) and 2.4 for the 4-year.
  • As expected, the BoE left policy unchanged (+0.5%)
  • Turkey’s central bank cut its benchmark repo rate by -50bp to +5.75% at an emergency policy meeting.
  • ECB on hold and reactivated two of its most potent anti-crisis measures to prevent the debt crisis reaching Spain; unlimited six-month tender next week and reopening of the SMP or government bond buying.
  • ECB buys Irish and Portuguese bonds.
  • Trichet is to keep unlimited lending policy for MRO’s until year end.
  • German (-1.1%) and Italian (-0.6%) June industrial production came in weaker than expected.
  • Swiss inflation surprised weak for July at +0.5%, y/y vs. +0.7% consensus. It will keep the SNB cautious on emerging deflationary risk as monetary conditions have tightened sharply as a result of the franc’s strength.

Americas

  • US ISM manufacturing survey was weak last month and fell more than four points to a two-year low of 50.9 vs. 55.3.
  • US construction spending report increased +0.2% in June. There was a sizable upward revisions to April and May (May +0.3% from -0.6%). Results suggest that 2nd Q GDP should be revised higher.
  • US PCE report was weaker than expected. Core-price index for June was +0.1% vs. +0.25. The ‘miss’ was concentrated in the final month of the quarter.
  • ADP headline print recorded a small gain in services. A downward revision to the prior month (+145k from +157k) cancelled out the small upside surprise in the July print (+114k) to leave ADP roughly in line with expectations (+100k)
  • US non-manufacturing sector expanded at a very sluggish pace last month (52.7 vs. 53.3). Most respondents indicated that ‘business conditions were flattening out’.
  • US June factory orders straddled the negative expectations (-0.8%). However, the trend ex-volatile components (transport and oil) remained modestly positive (durable +0.4% and nondurable +0.8%).
  • US weekly claims stands at +401k, with the prior week revised higher by +3k to +401k.
  • NFP-modestly better than expected print on headline (+117k), revisions (+56k May and June) and details (unemployment rate at +9.1%).
  • Canadian jobs data is firmer (+7.1k and unemployment at +7.1%). Wage growth managed to decelerate again (-1.4%, y/y and is negative after adjusting for inflation) and should be a concern for future consumption.
  • CAN IVY PMI plummeted below expansion level of 50 to 45.4 from 61.5. Does not support growth in 3rd Q

ASIA

  • China’s July PMI was a higher-than-expected +50.5 and down only -0.2 points from June and suggest that Chinese growth is moderating and not seeing a ‘hard landing’. Monetary policy remains in a tightening mode.
  • Korea CPI rose to +4.7%, y/y in July from +4.4% (higher food and transport costs). Their trade surplus rose to a record-high $7.2b in July from $2.8b in June. Importantly, strong export growth of +27.3%, y/y, in July drove this rise, not import weakness. It’s suggested that the BoK will allow inflows to translate into ‘some’ won appreciation.
  • RBA kept rates unchanged at +4.75% as widely expected. Pricing for an RBA rate cut increased +15bp to +41bp over the next 12 months. Stevens pointed to downside risk to the global outlook and is concerned about Australia’s medium term inflation outlook.
  • China’s non-manufacturing PMI rose to 59.6 in July from 57.0 in June. This is largely in line with the typical seasonal gain of about +2.7 points. Currently, monetary policy remains in a tightening mode.
  • Australia’s retail sales fell for a second consecutive month, printing -0.1%, m/m in June.
  • China’s credit rating agency, Dagong Global, announced a downgrade of its US sovereign rating to A from A+. This is its second downgrade 2010.
  • Japan began intervention in the FX market (initial amount 20-40b), BOJ announced new easing measures, will increase its securities buying program from ¥10tn to ¥15tn through increased purchases of J-REITs and increase its lending program from ¥30tn to ¥35tn by boosting its six-month loan program.
  • RBA’s quarterly monetary policy report pushed up the bank’s inflation forecast for 2011 and 2012. They see underlying inflation at or above its +3% target for the rest of the year through 2013. They downgraded 2011 GDP growth to +2% from +3.25% in May but upgraded 2012 growth to +4.5% from +4.25%.

July 13, 2011

Is QE3 A Possibility?

Filed under: Forex News — Tags: , , , , , , , , , , , , , , — admin @ 7:13 am

That is the question that is being asked today after yesterday’s release of the most recent FOMC meeting minutes, where the possibility was raised for the first time. Bernanke’s semi-annual report to Congress later today may provide some clarity, and he may weigh in on the debate over raising the US debt ceiling and the potential effects of not getting the job done.

Across the pond, the Euro snapped back yesterday after 5 days of selling as rumors that the ECB was supporting both Spanish and Italian bonds provided some relief. However, Moody’s down-graded Ireland’s debt to junk yesterday citing potential problems accessing the private markets, essentially adding fuel to that fire.

One bullet dodged overnight was the release of Chinese GDP figures, which even though they came in at a 2-year low, was still robust at 9.5%. This has helped encourage some risk appetite this morning, as stocks are trading higher to start the morning.

In the forex market:

Aussie (AUD): The Aussie is mostly higher on risk appetite as Chinese GDP figures mean that there may be continued demand for Australian exports. However, a lower than expected consumer confidence reading may mean reduced spending, as fears over the Euro debt crisis and higher commodities prices derail demand.

Kiwi (NZD): The Kiwi is also higher for the same reason as the Aussie ahead of tonight’s GDP release which is expected to show that the economy grew at .3% last quarter. While not a world-beating figure, the bar is set pretty low even considering the earthquakes they experienced.

Loonie (CAD): The Loonie is mostly higher as oil prices are back in the $97 range despite the release of the SPR. There is no news expected for Canada for the rest of the week.

Euro (EUR): The Euro is trading mostly higher after yesterday’s rumor of the ECB providing a bid for Spanish and Italian bonds to halt their increases in yield. Yesterday’s downgrade of Ireland appears to have had little impact on the Euro zone as a whole.

Pound (GBP): The Pound is mixed to lower as jobless claims figures came in worse than expected, with 24.5K new claims vs. an expected 15K. While the unemployment rate remained steady at 7.7%, signs that government austerity may be affecting the economy are becoming more apparent. (Click chart to enlarge)

gbpusd0713.JPG

Swissie (CHF): The Swissie is slightly lower today as demand for safe haven assets is reduced with markets trading higher to start the day. Producer and Import prices came in lower than expected, most likely the result of a stronger franc.

Dollar (USD): Bernanke is set to deliver his semi-annual address to Congress today and the Q&A session may reveal further clues about monetary policy in the near future. Expect politicians to ask him to weigh in on the debt ceiling debate, and be mindful of any further discussion of the possibility of QE3.

Yen (JPY): The Yen spiked last night and strengthened to levels not seen in four months, prompting BOJ officials to try to jawbone the currency lower as a stronger Yen will affect exports. While industrial production figures were negative, they did come in better than expected. (Click chart to enlarge)

usdjpy0713.JPG

The minute released yesterday from the FOMC were very telling as even they admitted that it would be largely a fruitless endeavor, but let’s all remember that we have to consider the state of the economy at that time. What happens if the economy worsens?

Employment figures are moving in the wrong direction, Washington DC is a mess without a fiscal budget, and the markets are getting spooked about what could happen if the debt ceiling isn’t raised. And that’s just here in the US!

While Chinese growth continue to be on the north side of absurd, the Euro zone is experiencing a much different environment. With the looming debt crisis forcing action that may not be financially responsible, it is only a matter of time before the markets turn on the US if we don’t get our act together.

The only way I can fathom that we see QE3 is if the fiscal side of the ledger continues to be a mess and the reactionary Fed has to once again step in and do the job that our elected politicians are too weak-willed to do. While the “deadline” for this to occur is August 2nd, we will not default on our obligations even if they don’t strike a deal.

It is, however, unclear what type of damage it may do to the markets. So this is definitely one to watch for the rest of the summer!

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!

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June 24, 2011

Forex Week in Review June 19-24

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 11:12 am

This week has been a massive blow to risk trading, with investors being side swiped from all continents. Europe with is Greek austerity concerns, Australasia being hit by a think tank opining on China that authorities are concerned over growth, their ‘own‘ not just global and the Fed giving no signal of any policy changes soon. They did not even hint towards QE3. The market is concerned about holes in parts of the Greek austerity package that could put their own situation in further jeopardy. Next week, Greece’s governing PASOK party will try and ram through its austerity package through parliament while the country goes on a 48-hour strike. The world will be watching.

Below are some of the highlights of the busy week:


EUROPE

  • Italian industrial orders disappointed for April with a -6.4%, m/m, fall and larger than the -4.0% expected. The softer orders component suggests we could see some further weakening next month.
  • Moody’s warned that it was placing Italy’s long term rating on review for a potential downgrade pointing to structural challenges to growth and high debt levels.
  • German ZEW expectations fell sharply to -9, worse than the -3 expected, and dropped into negative territory for the first time in eight-months. Respondents expect the economic situation to deteriorate further.
  • IMF is diverting investors attention towards Spain, insisting that they must step up efforts to overhaul their Economy, ‘the repair of the economy is incomplete and risks are considerable’.
  • BoE MPC member Fisher expressed concern about deflation risk than temporary above target inflation and said that more QE remains a possibility.
  • Swiss M3 growth moderated to +5.6%, y/y, last month from +7.0%, its lowest level in 12-months. The mortgage growth rate also moderated to +4.5%, y/y, in April from +4.6%, supporting the SNB’s dovish tone.
  • Greek government survived a confidence vote with 155 votes. This does not guarantee complete party discipline in the vote next week on new austerity measures,
  • UK, the minutes of the June MPC meeting showed a 7-2 vote for rates on hold and a still very dovish BoE. Weale and Dale voted for a rate hike while Posen continued to vote for further QE. The new MPC member Ben Broadbent voted with the majority to keep rates on hold (+0.5%)
  • Sweden, the manufacturing confidence was unchanged at 11 this month. The survey showed a slowdown in foreign orders, surprisingly, expectations remained fairly optimistic.
  • Euro-zone manufacturing PMI declined to 52 last month from 54.6, its lowest level in 18-months. The new orders component fell below the 50 threshold level for the first time since July 2009, to 49.6 from 53.3. Exports orders were weak, down to 51.1 from 54.
  • Greece’s opposition leader vowed to vote against the government’s new fiscal austerity measures next week.
  • German Ifo headline beat consensus, rising to 114.5 from 114.2 vs. an expected decline to 113.4. Disappointingly, the expectations component fell to 106.3, the lowest level since the summer slowdown last year, although still consistent with very good growth.
  • IMF/EU teams agreed on Greece’s fiscal plan. The plan is to be voted on next week, followed by negotiations on the 2012 support plan the following weekend.
  • One MP of Greece’s governing PASOK party has indicated he has not decided yet whether to support the fiscal plan. The EU/ IMF continue to signal they want to see broad, cross-party support for the legislation.
  • IEA said its members would release crude from its strategic reserves. They intend to inject +60m barrels of government-held stocks in the global market, immediately increasing world supply by +2.5%. The spike in energy prices is being cited ‘as the reason for the economic slowdown and this is a reaction to that’.

Americas

  • US sales of previously occupied homes fell in May to its lowest level in six-months. Sales decreased -3.8% to a seasonally adjusted annual rate of +4.81m, the weakest showing since November
  • The Fed continues to look through weakness and is staying the course by keeping rates on hold. The FOMC statement was largely as expected yesterday, giving no signal of any policy changes soon. Policy makers acknowledges that the US economy is in a soft spot, but advised markets to look through the effects of supply shocks emanating from Japan and the demand destruction caused by previously higher commodity prices.
  • Governor Carney presented the BoC Financial system review this week and concluded that they see overall risks to financial stability has elevated in the last six-months.
  • US weekly claims came in somewhat higher than expected (+429k vs. +415k). Another weak print points to a soft NFP release in July, and another disappointing Chicago Fed index reading (-0.37 vs. -0.05) is signaling ongoing deterioration in US growth.
  • US new home sales fell last month, down -2.1% to +319k units, as weakness in prices and a sluggish economy continues to keep consumers on the sidelines.
  • The details of the durable goods report for May were stronger than expected, +1.9% vs. +1.6%, with capital goods providing the pleasant surprise.
  • US GDP was revised up only minimally to +1.9% vs. expectations of +2.2%. The bulk of the shortfall was in the estimate of investment in software.

ASIA

  • NZD’s Performance of Services Index rose to 52.8 in May from 52.6, the highest print in nine-months. Growth in manufacturing slowed to +1.9% for 1st Q from an upwardly revised +3.7% in 4th Q, obviously earthquake affected.
  • RBA board minutes for June reaffirm a non-committal. Policy makers cited growing concerns in Europe, downside surprises in US data and deterioration in non-mining related industries as giving them enough reason to remain on hold until further notice.
  • Market now thinks the RBA is unlikely to hike in August unless inflation and employment surprise on the upside, coupled with a powerful rebound in risk appetite.
  • NZD current account deficit narrowed by NZD-$1.1b to-$1.8b for the 2nd Q, driven by the fall in foreign investment income due to losses from foreign-owned insurance companies after the earthquake.
  • HSBC flash China PMI fell from 51.1 to 50.1 in June, with new orders and employment edging just below 50, suggesting that the official PMI will fall at least in line with seasonal patterns, if not more.
  • Singapore CPI inflation was unchanged at +4.5%, y/y, in May, higher than the consensus, who was looking for a moderation to +4.1%.
  • Taiwan industrial output rose to +7.8%, y/y in May from a upwardly revised +7.2%, well above the consensus forecast of +5.9%.
  • Chinese Premier Wen Jiabao wrote an open letter about China’s role in the global economy in FT. He asserts that China’s measures to control inflation have succeeded and that inflation will fall in the second half of this year. This puts pressure on the PBoC to succeed.
  • Korean consumer confidence fell -2 points to 102 in June, implying that domestic demand remains fairly ‘soft’. Market expects the BoK to be gradual in tightening.
  • Malaysia CPI inflation rose to +3.3%, y/y in May, should be sufficient for Bank Negara Malaysia to hike rates +25bp at its July 7th meeting.

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