Canada Heating Up!
By Mike Conlon | March 19, 2010
I’ve been pounding the desk as of late telling anyone who will listen that the Loonie is the place to be. Hopefully, reader, you’ve taken that advice. This morning, the Loonie is higher as inflation in Canada came in higher than expected. Canadian CPI came in at 2.1% vs. an expectation of 1.7%, which may prompt the Bank of Canada to move sooner on rates than their June timetable.
On a morning devoid of economic figures except for Canada, the other news steering the market is Greece’s “race against time”. The Euro is lower this morning as fears of a Greek bond default have heightened.
In the currencies:
Aussie (AUD): The Aussie is mixed this morning in a case of “less bad is good”. While one would expect that today would be a risk-aversion kind of day, the truth of the matter is there really isn’t anything looking good right now, with the exception of the Loonie.
Kiwi (NZD): The Kiwi is down across the board, upholding the familiar risk aversion themes that the market has come to love. New Zealand is not quite Australia, so even though they have higher interest rates than most other currencies, the Kiwi will be the currency that is most sensitive to risk.
Loonie (CAD): The Loonie has been on fire as of late and could reach parity with USD by the end of today’s trading. The only thing that could prevent this at this point is overall risk aversion. Oil prices have drifted lower and the market is preparing for the expectation that a Canadian rate hike will be coming in the near future. The Loonie is up across the board.
Euro (EUR): The Euro could be in trouble. I briefly mentioned Greece’s “race against time” to secure financing to repay debt, but as I wrote yesterday, Germany is playing hard-ball. The Euro zone is split with regard to how Greece will be bailed out. Without German compliance, Greece will be forced to accept much higher interest rates as fear that they won’t be able to re-pay debt is running rampant. The marketplace wants assurances from Germany that they will help Greece if need be, but as of right now Germany appears to be dead set against this. Stay tuned for how this plays out. My guess is that Germany will eventually cave in, though the Euro could trade lower before that happens.
Pound (GBP): The ratings agencies and Jim Rogers, one of the all-time greats in currency trading, are putting pressure on the Pound this morning. Concerns over the UK budget deficit are starting to swell, and the possibility of changes in government at the next election all contribute to the selling.
Dollar (USD): The dollar is higher today against all but the Loonie as the flight to safety trade is in effect. Today is “triple witching” in the US market, with futures and options expiry taking place. This sometimes can mean that there is unusual market activity, however today is starting out as expected.
Yen (JPY): The Yen is lower this morning against all but the Euro and Pound as the Japanese economy is showing early signs of recovery. This tends to push bond yields higher as prices fall as demand for the safety of government bonds decreases.
So today is a good day if you own Loonies, not so much if you’re in Euros. Expect the drama to continue in the Euro zone for some time. By not being complicit, Germany can continue to benefit from a weaker Euro as this makes their exports more attractive abroad. I expect the Germans to eventually at least verbally “guarantee” to help Greece, though the help may never be needed if they had just said yes in the first place.
Have a great weekend!
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What is Chermany?
By Mike Conlon | March 18, 2010
Remember this word: Chermany. It is the new, hip lingo for speaking about China and Germany. What do these two have in common, you may ask? These are the top 2 largest exporters of manufactured goods in the world. As you might expect, this means that they have trade surpluses and thus are in positions of great strength on the world economic scene. Because of this, rightly or wrongly, Chermany feels like they can dictate terms to the rest of the world.
So it should come as no surprise that Germany is leading the charge to obstruct bailout plans to Greece in the drama that has been unfolding. In the latest act, Germany is saying Greece should seek economic aid from the IMF, and not the EU. This undermines previous efforts made to assure the marketplace that this situation is under control. As a result, mild risk aversion is the early-morning theme.
The other side to this new term is China. While I don’t focus on China too often as we can’t trade in their currency, their importance on the world stage cannot be understated. China has “pegged” their currency to the US dollar in an effort to keep it from floating freely in the market like almost every other currency out there. Many would say that this is blatant currency manipulation, and has been one of the major reasons why they have accrued such an economic surplus. Because they have been allowed to operate under these conditions for some time, their ill-gotten wealth has now emboldened them to continue with this policy, regardless of its impact on world economics. The US is now trying to turn up the heat on China, and whether or not anything comes of this remains to be seen. Stay tuned.
In currencies:
Aussie (AUD): The Aussie is lower this morning on risk aversion and on concerns that China will take steps to slow down their economy. Because China is a major importer of Australian raw materials, this could have an impact on the Aussie going forward.
Kiwi (NZD): The Kiwi is higher this morning, bucking risk aversion and quite frankly I’m not sure what’s going on here. They came out with Consumer Confidence figures in the overnight session, but I can’t get a good reading on whether or not those figures were significantly better or not. Regardless, the market seems to like the Kiwi, as it’s up across the board.
Loonie (CAD): The Loonie is slightly higher this morning, and near flat with Yen and the US dollar. They are down-playing concerns of Dollar/Loonie parity as this seems to be a foregone conclusion. There was some concern that the government may try to intervene, however this does not appear to be the case.
Euro (EUR): The Euro is lower today in response to German resistance to the Greek bailout. The rest of the EU thought they had measures in place, only to find out that Germany was not on board. Chancellor Merkel mentioned the other day that “expulsion” should be an option for countries that don’t comply with EU membership stipulations.
Pound (GBP): The Pound is lower this morning as good news that the budget deficit for February was less-than-expected was trumped by disappointing mortgage approvals. In addition, the political rhetoric is starting to heat up which is contributing to the fears of a “hung Parliament”.
Dollar (USD): The Dollar started the morning higher on risk aversion but now looks like it this may reverse after the CPI and initial jobless claims figures came out. As I mentioned yesterday with the PPI figures, today’s CPI figures show lower-than-expected gains which is basically buying time for the Fed to keep rates low for that “extended period” they love so much. As long as the Euro doesn’t implode, I expect risk-taking may occur by the end of the day.
Yen (JPY): Word today is that the measures the BOJ took yesterday in doubling the monetary easing program may have little effect on deflation. As I mentioned yesterday, just because the amount of money available for loan increases, does not mean it will be lent out. If demand decreases, then prices typically fall. We are seeing this exact same situation here in the US housing market.
The world economy is a cycle of “give and take”. What is starting to become apparent is that countries that benefit from low currency value whether through manipulation (China) or through inclusion in a monetary union (Germany) need to be wary that by effectively “cornering” the manufacturing market, they are setting up untenable situations that can only end badly.
It will be interesting to see if the market forces Chermany to take action, or if they try to “take their toys and go home”. Either way, world economic recovery hangs in the balance.
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Dis-Interested Economies!
By Mike Conlon | March 17, 2010
Fed Stays the Same!
At yesterday’s FOMC meeting, the Fed didn’t move on interest rates and maintained the “extended period” language that we have been hearing for, well, an extended period. So how long exactly is “an extended period”? Well unfortunately for the US, this could be a long time. Take a look at Japan, who did not move on interest rates (as expected) either, and have been experiencing deflation for well over 10 YEARS!
Economists and government people in the US claim it “can’t happen to us”, but as every day passes, the similarities become more frightening. A look at today’s PPI figure confirms that prices are declining and not advancing, giving credence to the position that deflation is winning in the inflation/deflation debate.
In the meantime, employment is picking up in the UK, which is positive for their economy going into elections. The threat of a “hung Parliament” has some investors nervous that there won’t be enough political conviction to tackle the UK debt crisis. Time will tell.
Today we are seeing an increase in risk appetite, as both the US and Japan held steady with interest rates. Commodities and stocks are higher this morning, with oil above 82.
In currencies:
Aussie (AUD): The Aussie is higher on risk-taking and commodity prices today; especially after Japan help steady on rates and is going to expand quantitative easing. The Aussie is fast approaching its 2010 highs.
Kiwi (NZD): Same deal today for the Kiwi, though it is faring slightly better than the Aussie as the market is betting that rate hikes will be slowing in Australia and potentially picking up in New Zealand. Carry trades are on today, with the yen as the primary funding currency.
Loonie (CAD): In classic risk-taking fashion, the Loonie is the third best performer as oil prices are above 82 and the market has an appetite for risk. The Loonie is fast approaching parity with USD and could get there with Friday’s retail sales figures and CPI.
Euro (EUR): The Euro is mixed this morning as doubts over how the PIIGS countries are going to control their budget deficits. This is coming from the EU which is basically saying that the measures being taken are based on “favorable” economic forecasts and therefore may not be realistic.
Pound (GBP): The Pound is higher today as Jobless Claims fell at the fastest pace in over 10 years. The expectation was that claims would increase by 6K; the reality was that they shrank by 32K. This is positive for the UK economy, as they have taken on a record deficit to stoke economic recovery. Whether or not this is enough to leave the majority in power in the upcoming elections remains to be seen.
Dollar (USD): Well it looks like Bernanke can breathe easy as today’s PPI figure dropped .6% vs. an expectation of a decline of .2%, the largest drop in 7 months. The Fed maintained the extended period language and as I mentioned above it could be a VERY long time before the economy expands to the point where higher rates may be needed. Of course that doesn’t mean that food and energy prices won’t go higher; which would affect everyone. This is starting to look more and more like stagflation as we are not seeing the rebound in the economy and job creation that one would think we should see after enacting the ginormous “stimulus” package. Just wait until the higher tax receipts expected to pay for this don’t come in. Voila! Hello Japan 2.0.
Yen (JPY): Speaking of Japan and stagflation, the Bank of Japan kept interest rates at .1% as expected, and caved in to the pressure from the government and doubled a lending program to $220 Billion to try to combat deflation. Good luck with that one. Psst Bernanke! Here’s a road map of what NOT to do!
As you can see, the money faucet just keeps flowing with both US and Japanese Interest rates at record lows. This means that all kinds of other assets (commodities and stocks particularly) are going to benefit and go higher. However, just because the money supply is expanded, does not mean that the velocity with which it circulates is increasing. What does that mean?
It means that while money is being created, it is not being lent out to ordinary folks who could use it. Frankly, if I were a bank, I wouldn’t be lending money for home purchases either, as nearly everyone is a credit risk in this economy. And so we trudge forward, with no end to this mess in sight. Keep an eye on the US-China currency story, as this could have a major impact on the world economy.
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Fed Day Fun!
By Mike Conlon | March 16, 2010
Today is the Federal Open Market Committee (FOMC) interest rate announcement and policy meeting that will set the tone for rate policy going forward. While virtually no one expects a rate hike at today’s meeting, once again the market will be listening for changes in the language that may foreshadow what the Fed intends to do. It’s a fine line and careful balancing game that the Fed must play in order to keep world markets stable. Frankly, I’m not expecting much.
On the other side of the pond, the Euro zone meeting of Finance Ministers produced a framework for how to bailout Greece should the situation become dire. This comes after this weekend’s insistence that no such action would take place. The Euro is higher on the news, marking today as mild risk-taking going into the FOMC meeting at 2:15 EST today.
In other currencies:
Aussie (AUD): The Aussie is slightly lower this morning, trying to win the tug of war between risk appetite and the news out of the RBA’s policy meeting that signaled that Australia may be finished with short-term rate hikes as their measures have been deemed “appropriate”. The Aussie is down across the board.
Kiwi (NZD): With the Aussie lower this morning, traders are turning to the Kiwi for both Pacific and higher interest rate exposure.
Loonie (CAD): The Loonie is higher this morning with oil trading around 80, and mild risk appetite as a result of the news out of the Euro zone. Additionally, Canadian Finance Minister Flaherty said in the recent speech that the Loonie would still allow Canada to be competitive if it reached parity with the US dollar. He also said that Canada would continue to try to stimulate the economy, giving slight pause to traders who see a rate hike as imminent.
Euro (EUR): In addition to the news about Greece, Euro zone Minister continued to re-iterate that Greece will not default and that the Euro is not in danger of failing. Also, Euro zone CPI figures came in as expected, showing neither signs of inflation nor deflation. And lastly, German Investor Confidence declined for the sixth month in a row, though not as bad as expected. All of this adds up to a higher Euro this morning, which is above 1.37 vs. USD.
Pound (GBP): The Pound is higher this morning as DCLG reported that UK home prices were up 6.2%, vs. and expectation of 3.5%. While the BOE has been attempting to maintain a dovish stance on rates, the economy may be further along than anticipated showing signs recovery may be happening. The Pound had been punished as of late so any decent news may help the Pound stay above 1.50 vs. USD.
Dollar (USD): The dollar is lower this morning in advance of the FOMC meeting. The Fed has some cover as they will be announcing the decision on rates prior to the market getting CPI and PPI data. So this could be interesting on Wed. and Thur. when that data is released. This morning, US housing starts came in worse than expected, giving further support for the Fed’s ZIRP policy.
Yen (JPY): Tomorrow, the Bank of Japan will be coming out with its interest rate decision and the market is expected further easing of monetary policy. It is no secret that deflation is the major problem in Japan so anything the BOJ can do to support exports and discourage deflation will be considered.
Yesterday I coined this week as “perception vs. reality” week in what is looking more and more like a game of show and tell. If the market can gain confidence that the Euro zone situation is stable, then I expect to see risk appetite return to the market. Any change in the language at today’s FOMC could encourage a flight to safety so trade carefully in advance of the meeting.
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The Week Ahead!
By Mike Conlon | March 15, 2010
Not much happening today except the Empire Manufacturing number and Euro zone employment figures. There is speculation in the market that the Greek Tragedy will not be voted on at the 2-day EU meeting, making today’s theme risk-aversion to start the day.
Tomorrow will be the wrap up of the second day of meetings of EU finance ministers as well as the US FOMC meeting in the afternoon. Euro zone CPI figures will be reported. Japan is also expected to announce their rate decision in the overnight session.
On Wednesday news will be dominated by the UK, as jobless claims and the unemployment rate figures are due. PPI figures in the US will also be reported, which could give a hint to how we are doing on the inflation front. Considering this comes a day AFTER the FOMC, I wouldn’t expect this to matter that much to the market.
Thursday, we get US CPI figures, which could have a major impact if the numbers are hotter than expected. Depending on what the FOMC says on Tuesday, these figures could be in direct opposition to policy and could increase the chatter for higher rates in the US. We’re also going to get initial jobless claims, which could add fuel to the fire.
On Friday, Canadian CPI figures and retail sales figures come out which could put increased pressure on the Bank of Canada to raise interest rates. The Canadian economy seems poised for the move as all signs are pointing to economic recovery.
In currencies this morning:
Aussie (AUD): There is no major news due out for the Aussie this week so expect it to trade on overall risk themes. Things are starting to heat up in the China-US currency situation so this could have an impact on global risk and Chinese exports. This could affect Aussie strength. And while nothing is expected to happen this week, traders may start positioning themselves accordingly.
Kiwi (NZD): Like its big brother the Aussie, expect the Kiki to trade on risk themes as well. We are going to get New Zealand’s Consumer Confidence figures on Wednesday which could show how the domestic economy is doing. Should a worse than expected reading come in, then we could see some Kiwi weakness.
Loonie (CAD): This is an important week for the Loonie as the CPI and retail sales figures are due out on Friday. There has been much speculation in the market that the BOC will need to move higher on rates then the July timeline put forth by Governor Carney. Should these figures coming in hotter (higher) than expected, look for market to push the Loonie closer to parity with the US dollar.
Euro (EUR): Overnight, Euro zone unemployment figures came in a little worse than expected and today marks the start of a 2-day meeting of EU finance ministers. Early word is that they will not be deciding on an aid package for Greece, which has increased the uncertainty and heightened risk in the market. CPI figures are expected tomorrow but I can’t foresee them being higher, so there should be minimal impact to the market.
Pound (GBP): The Pound is paring back gains from last week and sits just above 1.50 vs. USD as news is re-surfacing about the potential for a hung Parliament as a result of the next elections. On Wednesday we’ll get an idea of the economy is doing as jobless claims and the Bank of England policy meeting minutes will be revealed.
Dollar (USD): The Dollar is higher this morning, despite the fact that Moody’s rating agency is saying that the US and the UK are “moving closer to losing their AAA credit ratings”. I guess Moody’s doesn’t mind becoming the target of government investigations. Just kidding. This morning the Empire manufacturing numbers came in ever-so-slightly higher than the expectation, which is good news as the number is not worse. Tomorrow is the FOMC meeting, and while they are not expected to move on rates, listen for the change of “extended period” language. Wednesday is PPI figures, and Thursday is CPI figures. I would think it would make more sense to have those figures reported BEFORE the FOMC meeting, but what do I know. At this point, why should anyone think that the Fed would care about possible inflation!
Yen (JPY): Don’t look for Japan to tighten policy at this week’s meeting. In fact, look for just the opposite. The yen could weaken further against the Dollar if risk themes do not undermine BOJ resolve to further weaken the Yen to encourage exports.
So there’s a lot going on this week, and it will be interesting to see the difference between perception and reality. Perception is what the policy meetings attempt to tell us, reality is what the price index numbers tell us.
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Retail Sales Improve!
By Mike Conlon | March 12, 2010
All eyes were on the US retail sales figures, as the US consumer represents some two-thirds of US GDP. There was speculation that bad weather would affect this number, causing it to be lower than expected. Well, that hedge turned out to be unnecessary, as there was a negative expectation of -.2%. The number came in much better than expected, at + .3%, which is positive growth as opposed to a negative expectation. So expect stocks to rally higher, but be wary of the correlation of “stocks up, dollar down” as some in the market may feel that this could have a material impact on US interest rate policy.
In other news, Canadian employment figures came in better than expected and Japanese Finance Minister Kan used the dreaded “I” word—as in intervention, which readers of this blog know is not totally unexpected.
In currencies this morning:
Aussie (AUD): The Aussie is higher this morning as investors are seeking yield as economic conditions appear to be improving, particularly in the US. No real news but the Aussie has made one attempt at .92 vs. USD and could challenge 2010’s high of .932 in short order.
Kiwi (NZD): Retail sales figure came in at a better-than-expected .8%, showing signs that domestic demand in New Zealand is improving. This bodes well for their economic story but we shouldn’t expect any rate hikes until mid-year as the policy meeting told us earlier this week. However, should inflation start to pick up, we could see a surprise hike earlier than expected.
Loonie (CAD): Good news out of Canada as the jobless rate fell to a 10-month low, falling to 8.2%. The Loonie is higher across the board as hopes that economic recovery is taking hold. According to an RBC analyst, the Bank of Canada is, “running out of arguments against keeping rates low”. The Loonie currently buys 98.35 US cents, and the Loonie could be at parity with the Dollar for the first time since July 2008.
Euro (EUR): The Euro is mostly higher this morning, as European Industrial outputs expanded 1.7%, the largest gain in almost 20 years. The Euro challenged 1.38 vs. USD and EU President Junker argued that the Euro zone needs new tools to be able to combat future crises.
Pound (GBP): The Pound is higher this morning, extending yesterday’s rebound. Reports are that the sell-off in the Pound has been excessive, as house prices in the UK rose at the fastest pace in 7 years, showing that the economic recovery may be taking affect. The Pound is at 1.514 vs. USD.
Dollar (USD): The Dollar is lower vs. all but the Yen as retail sales figures came in MUCH better than expected, as I mentioned above. Consumer confidence figures are due out at 10AM EST, but don’t expect that to have a material impact on today’s action. Other reports are that President Obama wants to nominate Janet Yellen as Fed Vice Chair. Yellen is known to be dovish, meaning that she is not an inflation hawk. This could mean extended zero interest rate policy as the government attempts to inflate their way out of debt on the backs of consumers, who will be forced to pay higher prices for everything. Stay tuned.
Yen (JPY): As I’ve mentioned before, Japan is not adverse to using intervention as a tool to keep Yen from strengthening, and earlier today Finance Minister Kan confirmed this. It is likely that yen will weaken as the government hopes to stimulate exports to improve their economy. It will be interesting to see how this plays out and if the Bank of Japan has enough muscle to fend off risk-aversion plays should global economic recovery falter.
As you can see, there can be different market responses to good economic news. One could make a cogent argument for either Dollar strength or weakness based on today’s sales figures. Inflation hawks will claim this means that the Fed should be raising rates; while doves say the economy is still too fragile and investors should seek yield elsewhere.
Regardless of which way the Dollar moves and its affect on other currencies, this is good news for the US economy.
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Which Way to Go?
By Mike Conlon | March 11, 2010
As I mentioned yesterday, the currencies are now seemingly beginning to shed the risk on, risk off labels and are starting to trade more on individual fundamentals. While I don’t want to completely abandon risk themes, I’m not going to be so quick to dismiss market movement as risk-taking or risk-aversion.
That makes it a little easier when we have mornings such as today which are a bit of a mixed bag. I just watched the Aussie go from slightly positive to slightly negative; and the Pound and Euro are higher.
In news that is important to the global economy, inflation in China reached a 16-month high which should cause monetary tightening. This means that there could a decrease in global demand.
As I am typing this, the US Initial Jobless Claims numbers came out and while the news was expected to have a benign market impact; it has flipped the market into risk aversion mode. Maybe those fundamentals aren’t that important after all.
Let’s take a look at the individual currencies:
Aussie (AUD): The Aussie started the morning in positive territory but then slipped to negative as risk aversion is starting to steer the market action. There was “disappointing” news earlier as Australia reported the slowest amount of job gains in 6 months and unemployment stayed steady at 5.3%. This may give the RBA a little bit of wiggle room at the next interest rate meeting and they may not have to raise rates. I think it’s slightly amusing that this news can be viewed as negative, as just about every other economy would do anything to have such a “problem”.
Kiwi (NZD): The Kiwi on the other hand started the morning negative and has stayed there now that risk aversion has been added to the mix. The central bank left rates unchanged at 2.5% as was expected, but quashed hopes of a rate hike before mid-year. Apparently falling housing prices and weak consumer spending are contributing to a slower than expected economic recovery.
Loonie (CAD): The Loonie is down this morning on what I’m going to deem the “reverse Midas touch”. Apparently the Bank of Canada appointed a Ben Bernanke disciple as deputy governor to potentially change the way the central bank looks at interest rate policy. As of right now, the bank has a mandate which attempts to keep inflation at 2%, but they may want to change to a new system that targets prices rather than inflation. All the market is seeing at this point is that Canada may get wrapped up in the nonsense that is US interest rate policy and that doesn’t bode well for higher rates. Add that to lower oil prices, down slightly from yesterday’s move to above $82, and risk aversion.
Euro (EUR): The Euro is mixed this morning as Greek labor strikes (riots) are causing a backlash against austerity measures. In the meantime, the ECB maintains a cautious outlook and reiterated that interest rates are at appropriate levels.
Pound (GBP): The Pound is higher this morning halting a three-day slide and is trading back to 1.50 vs. USD. This much needed rest from selling came about as the Bank of England’s quarterly inflation attitudes survey showed that consumer price expectations rose to 2.5%, its highest reading since 2008.
Dollar (USD): The Dollar is higher this morning after the 8:30AM Initial Jobless Claims report which came in higher than the expectation. While the number 462K vs. the 460K expectation is not that significant, the market was clearly expecting a better figure and this provides pause to the notion that the US economy is in full recovery mode. Stocks in Europe sold off on this number as traders ran to the safety of dollar and yen.
Yen (JPY): Japanese GDP was revised lower to show growth rose at 3.8%, slower than the 4.6% reported in preliminary figures last month. The Yen is higher on, yep; you guessed it, risk aversion.
As you can see from today’s entry, things in the forex can change pretty quickly. That’s why is ultra-important to be aware of news events. I should have known better than to tempt the risk gods.
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Fundamentals Do Matter!
By Mike Conlon | March 10, 2010
Now that the fears of global collapse have abated—for now—the markets have returned to heavier scrutiny on the fundamental numbers being reported in various countries. It is times like these that remind traders that indeed the fundamentals do matter. The longer the global economy can sustain itself without Armageddon taking place, the more and more traders will focus on specific stories and not overall risk themes.
So, while one might look at this morning’s action and be inclined to say that today is risk-taking because commodity currencies are higher, a more appropriate reaction would be that are actually both good and bad stories out there which are driving individual currency pairs.
More specifically, in currencies:
Aussie (AUD): One of the good economic stories out there is coming out of Australia which has had good gains as of late. Tomorrow they will be reporting their employment figures, which are expected to gain for the sixth straight month. In fact, the economy is buzzing along so well there that there is no an expectation that they may raise the benchmark interest rate again next month. The Aussie is in a clear uptrend and I expect it to test 2010 highs very soon.
Kiwi (NZD): The Kiwi is also another good economic story, though not as strong as the Aussie. While the interest rate decision due out tomorrow is expected to be unchanged, overall Asian recovery will benefit the Kiwi. The most important take-away from the rate decision will be the language used to give a clue as to a timeframe for further hikes. And should they surprise the market with a rate hike (highly unlikely), then lookout above!
Loonie (CAD): The Loonie is just kind of hanging out today, with no real news on tap in Canada. Oil is higher so the Loonie is up; and also riding the coattails of the Aussie and Kiwi. The only anomaly is USD/CAD, as there is dollar strength this morning.
Euro (EUR): The Euro is mixed this morning. On the one hand, now that the risk of a Greek default is mitigated, the focus is back on the fundamentals in the Euro zone. On the other, news out of Germany is that German exports are down, but German CPI is up. Traders are using this opportunity to cover some EUR/USD shorts, but otherwise the Euro is down vs. the commodities and up vs. the rest. I expect EUR/USD to be range-bound for a bit.
Pound (GBP): Another tough day for the Pound, which would be down across the board if not for the Yen. The Industrial production figures and manufacturing came in negative, marking the first decline since last August. This is likely to keep rates low in the UK for an extended period. Meanwhile, the BOE’s Adam Posen stated that he hopes their bond purchase plan “has done it” with regard to stimulating the economy but he didn’t rule out further quantitative easing.
Dollar (USD): There’s a bit of optimism about the dollar this morning as economic recovery appears to be going faster in the US than in Europe and Japan. As risk of a global collapse is lessening, traders are looking more toward the fundamentals. So the expectation is that we may see a rate hike in the US sooner than in Europe or Japan. However, don’t be surprised to see Dollar weakness should commodity inflation pick up.
Yen (JPY): The Yen is down across the board this morning in advance of the Japanese GDP report due out tomorrow as fears of deflation are warranted. Combine this with good news from the commodity currencies, higher commodity prices, and “risk-taking” and you have a recipe for Yen weakness. Carry traders are gaining more confidence and the Yen is the funding currency of choice.
As you can see, when global economic conditions become more stable, market fundamentals return to center-stage. Under “normal” conditions, currencies from the best economies will flourish, while those not doing as well will be sold.
And that’s the basic idea behind forex trading; that you want to own the strong currencies and sell the weak ones, hopefully picking up interest along the way!
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!
Tags: account, AUD, Aussie, Australia, cad, canada, carry trade, commodities, commodity, course, currenc, currencies, currency, currency market, currency pairs, currency trading, decision, dollar, dow, economic, economy, EUR, Euro, Europe, fear, forex, forex trading, fundamental, fx, fxedu, gbp, Il, interest, interest rate, Japan, jpy, Kiwi, live, loonie, market, Mike Conlon, news, nzd, oil, pair, pound, practice, practice account, rate decision, short, ssi, time, trade, trader, trend, uptrend, USD, Yen
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Risky Business!
By Mike Conlon | March 9, 2010
From an outside perspective, some might be shocked at how quickly the market can flip-flop from market euphoria to fear on what seems almost like a daily occurrence. It’s like John Kerry on steroids! I kid, I kid. But on a more serious note, the market can wipe out days of gains in a single session as risk aversion can pop up for any number of reasons. Sometimes it’s justified; at other times it isn’t.
Case in point: this morning. The market had been moving along nicely then all of a sudden decides there’s too much risk in the world economy and then wham!—you get a market sell-off! What has changed so much from last Friday, to yesterday, to today?
Frankly, not much. You see, the financial markets are much like an expedition, venturing slowly into the unknown and then quick to retreat at the first sign of trouble. So what is that trouble today?
Damned if I know. Part of the role of market pundits is to “make sense of the chaos”. Most of the time I find these attempts to be lazy and disingenuous. So the top 5 I’ve heard this morning are (in no particular order): Greece, lower stock earnings, US healthcare legislation, the push for Chinese Yuan appreciation, and UK elections. And if you don’t believe any of these, I’ve got one of my own for you: it’s a technical pullback.
So be wary of attempting to try to “figure” the market out, and be sure to trade what you see and not what you think you know.
In currencies:
Aussie (AUD): The Aussie has pulled back from near its 2010 highs as risk aversion is dominating the morning market action today. However, the sell-off is not as bad as reports came in that Australian businesses are actively looking to hire and the business confidence index came in higher, prompting the market to believe that yet another rate hike may be coming next month.
Kiwi (NZD): The Kiwi isn’t faring as well as the Aussie, as yesterday’s big winner is now one of today’s bigger losers. Tomorrow’s rate decision and language may prove to be more exciting than previously expected, as the expectation is that it is the slimmest of slim chances that they will raise rates.
Loonie (CAD): The Loonie is lower this morning primarily on lower oil prices that are down roughly 1.5%. This snaps 7 days of gains, in what can be viewed as a welcome pause. This appears to be mild risk aversion so the Loonie is mixed.
Euro (EUR): The Euro is lower this morning across the board as stock earnings are lower and the ECB is saying that it potentially could accept lower rated bonds as collateral against new loans. Also the call for regulation on credit default swaps (CDS) and the news of the “lender of last resort” card being played all highlight the problems for the Euro zone. Notice I didn’t say Greece once—oops! Just did.
Pound (GBP): The Pound is lower this morning as reports came in that the UK housing market may be slowing as fewer price gains occurred than what was expected. This comes in advance of the UK GDP estimates due out tomorrow which could set the tone for UK rate policy going forward.
Dollar (USD): The Dollar is higher this morning on risk themes as stock market futures appear to set to open lower, though it not a certainty that they will remain that way all day. Look for some volatility as the markets trade back and forth, and definitely do not a rule out a reversal to the upside for equities which could be dollar-negative.
Yen (JPY): The yen is higher this morning on general risk themes and speculation that Japanese companies are repatriating profits before the end of the Japan fiscal year which is in April. This essentially means that demand for yen is higher as companies sell foreign currencies to buy yen, thereby increasing demand. This could be the reason why the market perceives that today is a risk-aversion day.
As you can see, there can be many reasons why currencies move outside of the normal risk themes which can disguise what may be really going on in the marketplace. When traders see these anomalies, they should be prepared to react. It would not surprise me today to see US dollar weakness, even though then yen may stay strong. Whether or not that is enough to push the US stock market and commodities higher remains to be seen.
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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France to the Rescue?
By Mike Conlon | March 8, 2010
Bet you never thought you’d hear that unless it was the punch-line to some joke. All kidding aside, this past weekend French President Sarkozy gave Greece his support and claimed that if Greece was allowed to fail, then the Euro would be “pointless”.
I’m not sure how this is going to sit with Germany, who I’m sure don’t appreciate France undermining its stance. For all the talk of Greece leaving the Euro zone, what if Germany was the one to up and go? I don’t see this as a likely scenario and see this as more of “good cop, bad cop” tag-team effort to keep the Euro from losing further value. At the end of the day, German banks have huge exposure to Greece so it is definitely not in their interests to see Greece fail. As of right now, for all the fear of monetary bailouts, the only thing on the table right now is allowing Greece to piggy-back on the good credit of Germany. Meanwhile the EU is working to create a lender of last resort and limit credit default swaps to help prevent another potential catastrophe.
This is a pretty light week for news, which usually puts me on edge to “expect the unexpected”. Barring any unexpected negative news, I expect to see a continuation of last Friday’s market action as moderate risk-taking should have the upper hand.
In the currencies:
Aussie (AUD): There is no real news for the Aussie this week until Thursday, when they report their unemployment figures. Right now the Aussie is still the dominant currency and destination for carry trades. We’ll get a better idea of how the Aussie is going to fare going into Thursday but for now I expect the Aussie to move higher on risk-taking themes and commodity prices. The Aussie should hold short-term support at .91 vs. USD.
Kiwi (NZD): The big news of the week for New Zealand is the interest rate decision due out on Wednesday. The Kiwi is higher this morning as home prices have advanced for the fifth straight month in what some traders may feel is the onset of inflation. Personally, I don’t see a rate hike coming at this meeting so we’ll have to see how the market reacts but for now I expect the Kiwi to trade higher into the meeting on expectations of a rate hike and moderate risk-taking with the potential for those gains to be erased if the hike doesn’t happen. Stay tuned.
Loonie (CAD): The Loonie continues to “receive love” from the market as more and more people are starting to catch on to the economic story in Canada. A report out this weekend claimed that the Loonie to could surpass the Aussie as the majority of options bets placed on the Aussie/Loonie pair are for the Loonie to strengthen. While the Loonie may do better in the short-run as traders begin to expect a series of rate hikes, don’t lose sight of the impact of the interest rate differentials, as the Aussie is currently yielding 4% and the Loonie is yielding .25%.
Euro (EUR): As mentioned the Euro got a boost from Sarkozy’s comments this weekend, but is trading marginally lower than the commodity currencies. Financial stability is the name of the game for the Euro and I expect it to trade sideways for a while as the drama unfolds. This is not the final word on Greece so I expect we’ll see it trade range-bound between 1.345 and 1.38 vs. USD depending on the “he said, she said” between Merkel and Sarkozy. Not to mention German CPI, which is due out on Wednesday.
Pound (GBP): The Pound is down against all but the Dollar and Yen, as mild-risk taking is the flavor of the morning. On Wednesday we’re going to get the estimate of Feb. GDP and the Industrial production and manufacturing figures. Should those numbers come in weaker than expected than we could see the Pound re-test last week’s lows.
Dollar (USD): The major thing to look at this week is going to be Friday’s retail sales figures. This is going to give a clue as to the behavior of the US Consumer, and well as the confidence figure due out the same day. The US consumer represents some 70% of GDP so if these numbers are better than expected than it could compel further risk-taking and dollar weakness. Leading up to those numbers, we have a couple of Fed speakers out to entertain us with their jaw-boning of the dollar. Remember, forget what they say, and watch what they do!
Yen (JPY): Japanese GDP is due out on Wednesday but frankly, the Yen is going to trade on risk themes this week. Still considered the top funding currency for carry trades, I can’t foresee a situation that would cause this to change barring an interest rate hike which is unthinkable.
So, for a week with surprisingly little news, it seems kind of busy. Watch out for the British GDP figures on Wednesday to be a key point, and this could be the week when the Loonie jumps the Kiwi on the risk scale.
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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