Unusually Uncertain!
By Mike Conlon | July 22, 2010
Those were the comments that were made by Fed Chairman Bernanke at yesterday’s testimony to Congress in describing his current view of the economy. This sent the market into a bit of tizzy, causing a sell-off in stocks and creating Dollar strength.
However this morning the markets are riding higher on the back of good US corporate earnings and better than expected European economic data. While stocks have been volatile lately, investors are starting to come around to realize that stocks may be the only chance they have to see gains in their portfolios as bonds are paying next to nothing.
That is investors who are unaware of the forex market. Those of you who have been following this blog know that the currency market offers added protection against downside risk and allows you to diversify into the economic story of other countries.
In Europe, stronger than expected PMI and industrial new orders data have helped the Euro rebound from yesterday’s lows. This all adds up to risk-taking in the market ahead of tomorrow’s release of the results of the European bank stress tests.
In the UK, retail sales figures came in better than expected and US jobless claims are due out at 8:30 AM EST.
In the forex market:
Aussie (AUD): The Aussie is higher on risk-taking despite the fact that business confidence figures declined for the third straight month.
Kiwi (NZD): The Kiwi is higher much like the Aussie but has the added benefits of comments from the finance Minister who stated that he is seeing signs of economic rebalancing. The tradables sector expanded 3.4%, negating declining consumer confidence figures which were down 5.2%.
Loonie (CAD): The Loonie is somewhat mixed today as oil is higher following risk taking themes. However the market is a tad hesitant as concerns over US growth could affect Canada more than the other commodity currencies. This is evidenced by Euro strength vs. the Loonie. BOC Governor Carney is due to speak today and there is some speculation that he may back away from the dovish comments which accompanied the most recent rate hike.
Euro (EUR): The Euro is higher this morning as better than expected industrial orders and PMI data show signs of economic growth. This comes a day in advance of the bank stress tests, which is currently expected to project further Euro strength and not weakness. Something interesting to note is that China has been European debt despite the risks which shows that perhaps they favor the European plan of austerity over the US plan of extend and pretend.
Pound (GBP): The Pound is trading as would be expected on a risk taking day. In addition, household spending figures showed an increase of .7% vs. the expectation of .5%, and retail sales ex auto came in at 1% vs. an expectation of .6%. This may cause the BOE to re-think policy if inflation does not fall back below 3%.
Dollar (USD): The Dollar is the whipping boy today as Bernanke basically told the world that the US economy stinks in no uncertain terms. This morning, jobless claims came in higher than expected at 464K vs. and expectation of 445K. Existing home sales and the house price index are due out later this morning but I don’t expect those figures to be encouraging either.
Yen (JPY): The Yen is mostly lower though trading higher against the Dollar, despite the fact that the rhetoric is starting to pick up from various ministers who are concerned about Yen strength. The Japanese are known to intervene in their currency but at this point the market does not care as the US dollar is clearly the least desirable currency.
Well short of calling Bernanke “Captain Obvious”; no kidding that US economic prospects are “uncertain”. However I don’t know why he thinks it is “unusual”. Let’s face it, Bernanke is more of a history buff than forward-thinker, and perhaps his reliance on his study of the Great Depression has led him astray.
World economies couldn’t be more different today than they were some 70 years ago. To think that because the economy is not behaving like you thought it would based on interpretation of an event that occurred so long ago is borderline stupidity.
Here’s some certainty for ya Ben: encourage this administration to stop the profligate spending! Economies around the globe have decided to cut the fat and take their medicine; it’s a shame that US politicians don’t have the same political backbone.
This is akin to saying that it is unhealthy for a person to lose 50 pounds. While this would be true for a 100 pound woman, it most certainly would NOT be for a woman who weighed twice that amount.
And that is the problem that we have in the US today folks—that when politicians look in the mirror, they can’t recognize that we are obese! It’s like reverse economic anorexia!
It’s time to cut the fat here in the US, starting with our politicians and this administration. Trying to maintain an unhealthy weight is, well unhealthy.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
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Who’s Stressed?
By Mike Conlon | July 21, 2010
Well apparently it’s not the ECB. However the market is a bit more concerned about the results of the bank stress tests which are due out on Friday. The Euro is lower this morning as ECB President Trichet is having a “behind closed doors” meeting with the banks in question today, presumably to get everyone on the same page when the results are released.
This is causing a mild bout of risk-aversion, as there is some concern that perhaps they are working on how to “spin” the results, which may not be as rosy as they have been saying. Or it could just be much ado about nothing.
Earlier today, the Bank of England released the minutes of its policy rate policy meeting which showed a heightened concern about UK inflation. This provided the Pound with a bit of a bounce, but it gave back gains as the ECB meeting came more into focus.
Fed Chairman Bernanke is going to speak later today and is expected to maintain a dovish interest rate stance, which could put further pressure on USD/JPY as the Dollar weakens vs. the Yen.
In the forex market:
Aussie (AUD): The Aussie is mostly lower this morning as mild risk-aversion is causing some selling in all pairs but the Euro and Pound. CPI data due out will provide more clarity into whether or not the RBA will consider a rate hike next month, assuming the European banks “pass” the stress tests.
Kiwi (NZD): The Kiwi is actually sporting some strength this morning despite the mild risk aversion as year over year credit card spending increased for the third month in a row. While I’m not necessarily sure this is a good thing—the Kiwi is higher against USD.
Loonie (CAD): The Loonie is higher this morning after yesterday’s rate hike despite the dovish comments from the BOC which initially sent the Loonie lower yesterday. In addition, oil is higher to around 78.50, providing a bid to the Loonie.
Euro (EUR): The Euro is lower across the board in advance of the stress tests as today’s ECB meeting is causing some traders concern. Today’s meeting is most likely to just provide a unified response to the stress tests as they don’t want anyone going “rogue”. So while some might feel this is because the results may be less than desired, I feel it is more of a coordinated action plan which unfortunately is necessary as the slightest misconstrued comment could send the markets reeling.
Pound (GBP): The Pound is giving back some earlier gains and has gone mostly negative as the market is focused on the ECB meeting taking place. This is causing some risk-aversion to start the day despite the fact the BOE policy meeting minutes showed that there is a heightened concern for inflation. At this point, they are not sure how higher taxes and austerity measures are going to affect prices going forward, but a policy adjustment may be in order if CPI data remains above the target range.
Dollar (USD): The Dollar is mixed today in advance of Bernanke’s speech later today which is all but guaranteed to remain dovish regarding interest rate policy. The Dollar is catching a bit of a safe-haven bid; though it is lower vs. the Loonie and Kiwi as the birds are showing strength this morning.
Yen (JPY): The Yen is showing strength across the board going into the Euro bank stress tests as demand for carry trades has weakened.
We were bound to see some Euro weakness going into the stress tests as the market is unsure of what to expect. While all of the chatter leading up to the meeting has been positive, there is still reason for concern.
Today’s private meeting has led some in the market to believe that they are attempting to “spin” the news, however I think it’s probably more of forming a plan to provide one clear, concise message.
The Euro has seen good gains over the last 6 weeks as we no longer hear chatter about Euro-Dollar parity. It is no secret that A LOT of banks have problems, both in the Euro zone and elsewhere, so this really should be a non-event.
Nevertheless, in todays media-centric gotta have every detail every second society, these tests will picked over with a fine-tooth comb and a microscope.
So it will be interesting to see if both the Euro and Pound can turn it around today after the ECB meeting concludes (with no negative news releases). Stocks markets are higher across the board, and Bernanke will likely contribute to further Dollar weakness today.
Keep an eye on Japan for potential intervention as continued Dollar weakness vs. the Yen is highly undesirable.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
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Moderate Growth Ahead!
By Mike Conlon | June 24, 2010
Yesterday’s FOMC meeting came and went as expected, and Bernanke acknowledged that the pace of growth is going to be moderate going forward, backing off from last meeting’s stance that recovery was accelerating. Bernanke cited European debt conditions as being not supportive of growth, and of course he left interest rates unchanged as expected and kept the “extended period” language.
In addition to the FOMC news, US new home sales tanked and were off 33%, confirming the previous day’s data that the housing market is getting worse and not better.
Concerns over Greek debt are heating up as the cost to insure said debt is at an all-time high. Outside of general feelings about the global economy, I’m not certain what has changed in Greece to cause this rise.
What this adds up to is risk-aversion in the market, and Japanese yen and the Swiss Franc are benefiting.
Overnight, New Zealand released GDP that showed growth for a fourth straight quarter and matched analyst expectations. The Kiwi is lower, as the market may have been expecting a bigger number and had pushed the Kiwi too high, too fast.
So there’s no real earth-shattering news in the market today, but rather an overall feeling that economic conditions may be worsening and not getting better.
In the forex market:
Aussie (AUD): The Aussie is lower on risk aversion, but overnight a political coup took place where the Prime Minister Rudd stepped down after losing support of his colleagues. Julia Gillard became Australia’s first female Prime Minister as Rudd lost public opinion largely in part to the proposed mining tax he wanted to impose. Mining is a cash-cow for Australia, and this move was seen as anti-business.
Kiwi (NZD): The Kiwi is lower this morning despite the prospect of another rate hike in July as a result of seeing its fourth straight quarter of growth. The market was hoping the GDP figure would beat analyst expectations, but it “merely” came in as expected at .6%. The Kiwi was the biggest gainer yesterday, so this is a case of market anticipation falling flat. Nevertheless, this is still positive for the Kiwi.
Loonie (CAD): The Loonie is lower this morning as well, taking its cues from oil prices which have “retreated” to $76 and overall risk aversion in the market due to the notion that the pace of global economic recovery may be slowing.
Euro (EUR): Concerns over European debt are heating up as European stocks fall for the third day in a row. Perhaps the market is expecting the US to lead us to recovery, and yesterday’s FOMC statement made it pretty clear that may not be the case. I can’t see anything specific that would lead me to believe that anything today is different than last week. Then again, I don’t have insight into the inner-workings of European banks. The Swiss franc has been seeing massive inflows of capital as investors move out of the Euro, and it’s gotten to the point where it may be financially untenable for the SNB to try to intervene again.
Pound (GBP): The pound is higher against all but Yen, as the market “needs” somewhere to park its capital. This is a vote of confidence for the UK budget plans and BOE policy statement which show that the UK may be in the best position to tackle their debt and see growth at the same time. The Pound is back to 1.5 vs. USD.
Dollar (USD): Oh the dollar. It’s catching a bid from risk-aversion, but it’s clearly no beauty-prize winner either. Yesterday’s FOMC meeting and new home sales figures all but take a rate hike off the table for 2010. This morning, jobless claims are lower than the previous week, but still in ridiculously bad territory. Durable goods orders rose ex-transportation, but overall they shrank, though less than expected. Bottom line: the US economy is still weak. Until policies are instituted that will incent companies to create jobs, our slide into Japan-style stagflation is imminent.
Yen (JPY): The Yen is higher across the board on risk-aversion. Japanese stocks are lower as concerns over Europe may hurt Japanese exports, which have been driving economic recovery.
Unfortunately for the world, the US still rules the roost. We started the economic crisis, and now we’re pro-longing it. Yet bad behavior has been replaced by bad policy; and we are slowly sliding into the economic abyss as politicians compete for the next vote.
Meanwhile, banks have been bailed out, executives have paid themselves enormous bonuses, and they sit on the money and don’t lend for fear that regulatory and other economic factors will make it a losing proposition. Or they can’t lend, because they have too many toxic assets sitting on their books and are anticipating the next wave of deflation that will put more home-borrowers under water.
The “solution” to the housing crisis was the tax credit, and it’s just been reported that 14,000 unscrupulous folks bilked the government out of some $25 million, including 240 death row inmates. Government efficiency at its finest! What’s a few million anyway? We’re TRILLIONS in the hole already, and we’ll just keep spending.
Oh yeah, but at least we’re not the EU! Have treasury put that on the dollar bill!
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Ban The Shorts!
By Mike Conlon | June 9, 2010
Both France and Germany have called on the EU to ban short-selling on certain stocks and government bonds with the intention to curb speculation in the market. While I am never a fan of this type of regulation, there does need to be some sort of “fix” for the market as speculation has gotten a little out of hand.
However, there are always unintended consequences to this type of action, and this could end up hurting their ability to raise capital. This could also hurt the forex market, as Euro-related pairs lack the volume to trade orderly. Nevertheless, there still is a ton of risk related to the Euro, with sovereign debt defaults the primary driver.
In addition, ECB President Trichet helped push the Euro higher with comments on the state of the Euro. As I mentioned yesterday, expect the game of “show and tell” to pick up, with officials telling us how great everything is but showing us little.
Also today, the US Fed Beige Book report comes out, with Bernanke expected to echo his comments from the other night.
In the forex market:
Aussie (AUD): Consumer confidence fell for the 3rd straight month down under, nevertheless the Aussie is higher on risk appetite. Fears of a global slowdown (particularly in China) and the raising of interest rates have added to the sentiment that the economy will slow in Australia.
Loonie (CAD): The Loonie is also higher this morning as oil prices have bounced higher and equity futures are set to open higher on risk-taking in the market.
Kiwi (NZD): The Kiwi is higher ahead of its interest rate policy meeting tomorrow, where the market is anticipating a 75% chance that the RBNZ will raise rates 25bp to 2.75%. Put me in the camp that is betting against the rate hike, as I feel the NZ economy rides on the coattails of Australia, and that the risk in the market may be too great to warrant a hike just yet.
Euro (EUR): The Euro is mixed this morning, trading higher against the safe-haven currencies, but lower against the commodity currencies. Comments from the ECB have helped push the Euro higher slightly, but let’s not forget about the huge risk the Euro poses as they struggle to get their fiscal houses in order.
Pound (GBP): The Pound has a bid this morning after a 4-day decline as investors seems more confident in the UK’s ability to combat their fiscal woes, much more so than the EU. The UK trade balance missed estimates, but narrowed from last month’s reading.
Dollar (USD): Today we get “Fedspeak”, as Bernanke gives his beige book report to Congress. I do not expect any change in language from the Fed Chief, and at this point I’m guessing that we will not see a rate hike this year. The Dollar has been higher this year on the flight to safety trade, and at this point I believe that inflation is a non-issue.
Yen (JPY): The Yen is lower this morning as risk-taking inspired carry trades are taking place ahead of the New Zealand rate decision. Japan will report its own GDP figures tomorrow, which are expected to show moderate but steady growth. In addition, new Finance Minister Noda said he would like to see price gains above 1%, but didn’t make that an “official” inflation target. Japanese deflation has plagued its economy for some time.
As I mentioned yesterday, this is “cheer-leading” week for the various markets, as the lack of hard economic data is supplanted by discussions of various economic situations.
I am always skeptical when it comes to government announcements and prefer to analyze the hard data myself. But with that in mind, you have to pay attention to what they are saying.
As a trader, it is important to trade what you see and not what you think should happen. If Bernanke wants the market to go up, you should play along even if you think the fundamentals don’t match. However, be sure to exit quickly at the first sign of market sentiment change as the market is always right, regardless of what is said.
So pay close attention to the technicals as the various market participants digest the rhetoric.
Do you have a strong grasp of technical analysis?
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Big Ben Is Back!
By Mike Conlon | June 8, 2010
Just when you started wondering where are esteemed Fed Chairman has been, Bernanke gave a speech last evening that helped buoy the markets higher. Bernanke re-affirmed that indeed recovery is intact here in the US; though moderate given the depth of the recession. These comments helped send futures higher, and encouraged risk-taking in the forex market.
Across the pond, Fitch ratings agency came out with comments on the UK saying that the UK fiscal challenge is “formidable”. Perhaps this could be viewed as adding “fuel to the fire”, as these comments came a day after the new British PM said basically the same thing. There is speculation in the market that perhaps a UK credit downgrade is looming. The UK emergency budget is due out on June 22 and that should paint a clearer picture.
Meanwhile, the German trade surplus narrowed, though industrial output increased .9%, besting expectations.
In the forex market:
Aussie (AUD): The Aussie is higher on risk-taking, despite the fact that business confidence fell for the third straight month. Part of this can be attributed to the government’s proposed 40% tax on mining companies as well as Euro zone conditions.
Loonie (CAD): The Loonie is higher as well, catching a slight bid from higher oil prices, despite a housing starts number that came in worse than expected. The number came in at 189K vs. an expectation of 202K.
Kiwi (NZD): The Kiwi is higher ahead of tomorrow’s interest rate policy meeting which the market is expecting will bring at 25bp rate hike, raising the official cash rate to 2.75% from a record-low 2.5%. Inflation is expected to pick up which would outweigh any fallout from the Euro debt crisis. However, as mentioned yesterday, most every country is looking for a weaker currency to export their way to prosperity, so a rate hike may induce carry trades which would push the Kiwi higher.
Euro (EUR): The Euro is higher as there is some risk-taking in the market, though lower vs. the commodity currencies. At this point we all know about the conditions in the Euro zone, so any lack of market-moving news will allow the Euro to drift higher, though without conviction.
Pound (GBP): The Pound is lower this morning on the Fitch news, despite the fact that retail sales rose .8% compared to a decline of 2.3%. The UK emergency budget will be released on June 22nd, and will provide further clarity to extent of budget cuts the UK may be enacting.
Dollar (USD): The Dollar is mostly lower this morning, as risk appetite has picked up partly because of Bernanke’s comments last night. Tomorrow will bring the Fed’s Beige Book economic report which should be similar to the comments made last evening.
Yen (JPY): The Yen is lower as carry trades have increased due to heightened risk-appetite. In addition, new PM Kan takes over officially and his new cabinet is seen as one that favors budget cuts and a weaker Yen.
There’s not a lot of fundamental data out this week so much of the movement we’re going to see will be based on various comments coming from around the globe. As a result, the markets can move somewhat erratically, as officials attempt to jaw-bone their various currencies.
Most of the comments due out will not provide official numbers, so sometimes they need to be taken with a grain of salt.
However, you can see how comments from a ratings agency can affect a currency like the Pound, just like a quick speech at Washington event can improve markets as well.
Let’s face it, most of these government types are economic cheerleaders; however they all favor a lower currency to encourage exports. So I expect much of the “news” we hear to counter-balance each other out, and some sideways trading to occur as we go into the summer slowdown.
That is, until you hear something from the Euro zone. Because at this point, the less we hear from them, the better!
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
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Expand or Contract?
By Mike Conlon | May 13, 2010
Many countries and economies around the globe are facing record budget deficits and there is much debate as to whether it is better to expand or contract these deficits. On the one hand, reducing deficits improves balance sheets and makes debt easier to service, but on the other hand it brings fear of the dreaded “double-dip” recession.
Here in the US, the obvious tactic is to expand balance sheets as deficit reduction would potentially induce deflation, which could cause another run on the banks which are mired in this housing mess. However, abroad the central bank focus is more on combating inflation, and other banks are nearly as exposed to bad housing bets as are US banks.
While global banks do have their own issues, the general thought is that is that as economies promote fiscal responsibility, monetary policy needs to be more accommodative to attempt to prevent a slide back into double-dip territory.
And that’s what is happening in both the Euro and Pound as deficit reduction plans are starting to come together. So the market is starting to realize that accommodative policy will be necessary.
Job gains in Australia were better than expected, and initial jobless claims here in the US were slightly worse than expected. All of this is adding up to mild risk-aversion in the market as the Euro is now trading at a 1.25 handle.
In the forex market:
Aussie (AUD): Employment gains “Down Under” exceeded expectations prompting speculation that yet another RBA rate hike may be coming soon. The economy gained 33.7K jobs vs. an expectation of 22.5K. The threat of a potential China slowdown has been weighing on the Aussie, as has been general risk-aversion which is what is happening this morning.
Loonie (CAD): The Loonie is hanging in there but is lower as oil prices are off this morning. Speculation is still high that a rate hike may be coming in June, if the global market can dodge major risk events until then.
Kiwi (NZD): The Kiwi is also being weighed down by risk aversion even though a report showed that manufacturing activity expanded at the fastest pace in 5 years. Retail sales figures are due out tomorrow and are expected to show the fastest gains in nearly 9 months.
Euro (EUR): Yep, the Euro is lower again today, as the market is starting to catch on to the fact that austerity measures around the region may require more accommodative monetary policy to make up for the reduction in supply and demand. And while there is concern over the size of the bailout, let’s not forget that it’s not like all of this money is required at once, but rather it was established to help the countries in trouble get better borrowing rates and provide an emergency backstop. Investors are concerned that austerity measures won’t work… but only time will tell. For the record, the unemployment rate in Greece is only slightly higher than here in the US.
Pound (GBP): The new coalition government formed is wasting no time putting forth plans for budget deficit reduction with the blessings of BOE Governor King. As with the Euro, reductions in fiscal policy may require increases in accommodative monetary policy. Frankly, a weaker Pound helps UK exports which help bring capital to the region. They key is going to be reducing without inducing recession. They have their work cut out for them.
Dollar (USD): The Dollar is higher on risk aversion as initial jobless claims came in slightly worse than expected. Fed Chairman Bernanke is due to speak at 2:30 EST so be wary of any market volatility. Tomorrow we get retail sales figures and confidence numbers which could show a shift in sentiment regarding the US economy.
Yen (JPY): There is Yen strength this morning on risk aversion and a current account reading shows surpluses widening as demand for Japanese exports has increased. This bodes well for the economy though concerns about huge deficits still weigh heavily on rates.
There is more than one way to skin a cat, as the saying goes and the global market place is putting that saying to the test. While the US believes expanding deficits is the way to go in combating its economic woes, countries on the other side of the Atlantic are taking the opposite approach.
While the US is the world’s largest economy and is unique, it goes to show that there are different ways to accomplish the same thing. At the end of the day, accommodative monetary policy is going to be needed out of the “big 3”—EU, UK, US- so the race to the bottom is back en vogue again.
As I have outlined earlier in the week, a weaker Pound and Euro is not necessarily a bad thing for those countries. As long as the structural issues are kept intact and there are no defaults, then we can expect to see weakness from the contracting economies.
Meanwhile, the commodity currencies keep chugging along in much better shape economically, yet held hostage to the whims of risk themes.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
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Not Good Enough!
By Mike Conlon | April 30, 2010
US GDP figures came in this morning showing an advance of 3.2% annualized, just missing analyst expectations of 3.3%. While there is mild disappointment on the miss, GDP growth of any amount should be seen as positive at this juncture in time. Much of the advance in GDP growth came as a result of personal consumption numbers which were higher than expected, showing that a consumer-led recovery may be underway.
In other news, Canadian GDP figures came in as expected but the market is still concerned that the change in language used by the BOC in this week’s interest rate policy meeting could stall future rate hikes.
In an opposite turn of change of language, the New Zealand central bank Governor left himself “wriggle room”—I always say wiggle but whatever—as the market is increasing its bet that we’ll see a rate hike earlier than the July meeting as was previously forecast.
Meanwhile, deflation is still prevalent in Japan even though household spending and wages are up.
And lastly, Greece austerity measures are predictably causing unrest but it looks like bailout measures will soon be in place. The markets are in risk-taking mode this morning going into the weekend as the next round of news expected out of the EU is thought to be positive as the negative is already “priced in”.
In the forex market:
Aussie (AUD): The Aussie is higher this morning on increased risk-appetite as signs are pointing to a resolution for Greece. A survey of Australia’s trade businesses shows that there is an expectation for a rise in the Aussie dollar going into year end.
Loonie (CAD): The Loonie is lower this morning as the market is paring back expectations of a rate hike based on the backpedalling language that came from the BOC over the last few days. Canadian GDP figures came in as expected so there is some hesitation to push gains in the Loonie despite the risk appetite.
Kiwi (NZD): On the other hand, the RBNZ changed its language to leave “wriggle room” for a potential rate hike at the June meeting as opposed to the expectation of July. This is all incumbent of course on actually having the economic data to support a hike.
Euro (EUR): The Euro is higher this morning as the market is expecting a resolution to the Greek debt crisis to come in soon. Greece has agreed in principle on an austerity package that will satisfy lenders (Germany) and allow a bailout to take place. For those worried about contagion, Spain just officially announced unemployment rates in excess of 20%! Even if the Greece problem gets resolved, there are others lurking in the shadows. Don’t get too excited about the Euro’s prospects just yet.
Pound (GBP): Consumer confidence fell to a 3-month low in the UK heading into next week’s elections, as signs of a slower return to growth is all but expected.
Dollar (USD): The Dollar is lower on risk taking as GDP figures came in slightly less-than-expected but signs that consumer spending is improving is seen as positive. However, Bernanke all but said at the FOMC meeting that the Fed won’t move on rates until they see signs of employment gains, and we’re not quite there yet.
Yen (JPY): In the overnight session, reports have showed that economic recovery is not strong enough yet to fend off deflation, and the Bank of Japan has pledged to help banks lend in order to encourage spending. Consumer prices have fallen for 13 straight months. However, the good news is that spending and wages have increased so there is hope that it will help stimulate the economy. So expect a weaker Yen as BOJ monetary policy and risk-taking could bring about a further increase in carry trades.
So there is some light at the end of the tunnel as good economic figures are starting to pop around the globe. However, the amount of global debt in the marketplace is looming as there are MANY countries that have out of control debt.
So while Greece makes the headlines because they were first, the other PIIGS countries could be next to line up for a bailout. Not to mention the debt levels of the UK and the US. And Japan’s debt as a percentage of GDP is so large that it‘s no longer become a factor.
So you can see the obvious conflict between trying to grow economies and scale back debt to sustainable levels. How this is going to play out is anyone’s guess.
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Euro Trashed!
By Mike Conlon | April 28, 2010
I sometimes feel like a broken record when I go on and on about risk in the marketplace, but in my opinion this is the most important factor to consider. Many days worth of gains can be wiped out in one session, and that’s exactly what we saw happen yesterday.
It is no great secret that there are problems in the EU with regard to the Greek debt crisis. The mis-management of the situation by the EU has been particularly deplorable. And just yesterday, at roughly 11AM, S&P downgraded both Greek and Portuguese debt to junk status, adding further fuel to the fire. This sent the stock markets considerably lower, and the flight to safety trade strengthened the Dollar and Yen.
So while there are individual economic data that are reported for the various regions, this Euro crisis is clearly the elephant in the room. Today, the FOMC decision on interest rates is due out, but don’t expect any change to either the benchmark rate or the language surrounding it.
Today the market has seemed to have shaken off yesterday’s news and is bouncing higher, though gains may be short-lived as risk fears increase with every passing day of a Euro non-resolution.
In the forex market:
Aussie (AUD): The Aussie is higher this morning as inflation has picked up down under. The CPI figures show that prices climbed .9% last quarter, slightly higher than analyst expectations. The year-over year figure was also slightly higher to 2.9%, prompting analysts to increase their view that yet another rate hike may be forthcoming at next week’s policy meeting.
Loonie (CAD): The Loonie is also higher this morning on slight risk-taking and a rebound of commodity prices despite the fact that Bank of Canada Governor Carney said that “nothing is pre-ordained” with regard to a Canadian rate hike. This is a basic attempt to jaw-bone the Loonie lower, as a stronger currency poses a risk to economic recovery.
Kiwi (NZD): The Kiwi is higher on risk-taking ahead of the interest rate policy decision due out tomorrow in the overnight session. While rates are expected to remain stable, be aware of any clues that may signal a rate hike sooner than the market is currently expecting. In addition, NZ business confidence figures came in better than expected adding to Kiwi strength.
Euro (EUR): Oh the Euro! So the Euro breached 1.32 yesterday on the debt downgrades to junk status, and no resolution is in sight. The major impediment right now is that German delay tactics; and the market is pressuring action by selling the Euro and demanding higher yields to loan to troubled EU members. Part of the problem is that elections are taking place in Germany, and bailing out Greece would not be seen as popular. Meanwhile, the Greeks are striking to protest austerity measures which could slash salaries by 30-50%. Regardless of what happens in the near-term, this does not look good.
Pound (GBP): The Pound is lower this morning as a BOE policy-maker described the UK economy as being in a “fragile state”. This comes in advance of next week’s elections which frankly can’t get here soon enough. What was once thought of a strictly a battle between the Conservatives and the Labor Party has rapidly turned into a three horse race as the Liberal Democrats have charged onto the scene and are making the most headway. This all but guarantees a “hung Parliament”, but concerns over the UK budget deficit reduction plans and how it will affect economic recovery remain at the forefront.
Dollar (USD): Today’s FOMC meeting is expected to produce no change. Recent pockets of decent economic data show that the economy is improving, but at what rate? The pace of recovery is important because the longer it takes, the harder it is to gain the momentum necessary to grow and create jobs. Bernanke testified yesterday that the US has to do something about its budget deficit besides making phantom projections that we can grow our way out of it. The Goldman Sachs hearings yesterday only added to the view that elected officials are almost completely incompetent.
Yen (JPY): The Yen is weaker on the resumption of carry trades and that retail sales figures came in higher than expected, rising at the fastest pace in nearly 13 years. This is important because it shows signs that domestic demand may be improving in Japan, which had for years been known as a country of savers. This is just one data point that demonstrates that economic recovery may be taking place, after years of stagnation.
One of the great things about the forex market is that it is a relational market. By that I mean that regardless of how good or how bad a particular currency may seem, it will always trade with respect to other world currencies.
If the Euro were a stock right now, there’s a good chance it would be halted by the exchange to restore balance. If it was a commodity, it would probably be “limit down”. And yet here the Euro is, showing gains against the Dollar, Pound, and Yen despite all of the risk surrounding the region.
What this means is that there is good volatility which in turn means good opportunity. This can be seen day in and day out as the market vacillates between risk taking and risk aversion. It’s not that the market has forgotten about the risk related to the Euro, but rather knowing that a currency does not trade in a vacuum. In this regard there is money to be made from either point of view. The important things to remember are to be aware of the time frame you are trading in; and always use proven risk management techniques.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
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No Resolution!
By Mike Conlon | April 27, 2010
Hopes were dashed when the G-20 meeting ended without a resolution to the Greek crisis. While no one expected the G-20 to solve the problem, having all of these finance ministers in one place there was optimism that some good would come out of it. But alas, the drama continues, causing one analyst to claim, “Greece burns while Germany fiddles.”
What this has accomplished is not only causing the yield on Greek bonds to rise, but contagion is starting to spread to Portugal. As yields continue to rise, the cost of borrowing becomes more expensive for the issuer which in turn makes it less economically feasible to service debt. The longer this Greece thing plays out, the worse it may get for other members of the EU.
So clearly today is marked by risk aversion, despite signs that inflation may be picking up in Australia. German consumer confidence was higher, perhaps because Germans believe that they won’t bail out Greece so there is no problem! Not sure what they are thinking over there.
US consumer confidence figures are due out, and some housing data from the US and UK are adding to the risk aversion in the market today. World stock markets are lower, as are commodities.
In the forex market:
Aussie (AUD): Producer Prices advanced 1% from the fourth quarter marking the fastest rise in almost two years showing signs that inflation may be on the way. The Aussie is holding up remarkably well despite the risk-aversion in the market. It is higher vs. all but the Dollar and Yen. Tomorrow brings the CPI figures which are a truer gauge of inflation.
Loonie (CAD): The Loonie is lower on risk fears as well as oil prices which are down roughly 1% to 83.25. Oil inventories are expected to rise which could slow the demand for the “black gold” adding further downward pressure on the Loonie. There’s no real news for Canada until Friday when they announce GDP figures so expect the Loonie to trade on risk themes this week.
Kiwi (NZD): The Kiwi is lower on risk themes as well, and tomorrow the market will get the RBNZ interest rate decision. The market is expecting rates to remain unchanged, but there was speculation that they could signal a future hike based on recent good economic news. However, the problems with the Euro zone mean that there is too much risk in the market which may delay any signals.
Euro (EUR): Well consumer confidence was higher in Germany, yay! I’m not sure how anyone can be confident in the Euro situation unless you were sure that it wouldn’t affect you. Perhaps this is telling about Germany’s role in this crisis and how their hesitation to act may collapse the entire economic union. As bond yields continue to move higher for suspect countries, contagion may be so great that massive defaults occur. This Greece thing needs to be buttoned up FAST. Oh, and everyone’s corporate citizen of the year candidate, Goldman Sachs, decided to add fuel to the fire by claiming that bailout may be closer to $200 billion, more than three times the current deal. Someone check their Euro CDS positions please!
Pound (GBP): The Pound is lower this morning as home loans rose less-than expected in a sign that the housing market may not be rebounding as robustly as previously estimated. Hung parliament concerns are to the fore-front again, so expect the Pound to trade sideways going into the May elections unless global risk-aversion takes all markets lower.
Dollar (USD): US consumer confidence figures are due out later this morning and Fed Chairman Bernanke is set to speak this afternoon about financial reform. Tomorrow is the FOMC interest rate decision which is expected to leave rates unchanged. The Dollar is higher on risk-aversion against all but the Yen.
Yen (JPY): The Yen is up the most this morning as the un-wind of carry trades due to risk aversion is creating demand for Yen. Japanese companies have been reporting strong corporate earnings which have buoyed Japanese stocks.
As I mentioned yesterday, we are starting to see signs of inflation in the market despite that the fact that everyone sells stocks and commodities and runs to the US dollar when risk-aversion crops up.
Until the EU can get the Greece situation rectified and provide support for its members, there will be risk in the market. EU ministers have been out saying that global recovery is taking place at different speeds and recovery is not happening as fast for the EU. Noted.
There are a slew of CPI figures due out this week which will show how inflation is faring around the globe. While rates aren’t expected to rise in countries where economic recovery is tenuous, look to the price of gold to see where we are in the inflation spectrum.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
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US Dollar In Focus!
By Mike Conlon | April 14, 2010
This morning, all eyes are on the US economy as the Advance Retail Sales Figures and US CPI figures are due out. By the time I am finished with today’s piece, these numbers will have hit the market. In addition, Fed Chairman Bernanke is expected to speak at 10AM EST to the Joint Economic Committee and some in the market are predicting that a change in the “extended period” language could occur here ahead of the next FOMC meeting.
Speculation here in the US is that the economy is heating up and that the Fed may be ready to move on rates, however the commodity inflation and stock market gains that we have been seeing may not be an overall indicator of economic strength as unemployment still hovers around 10%.
The market is seeing some early risk-taking ahead of these figures as recent stock earnings have been a little bit better than expected.
In the forex market:
Aussie (AUD): Australian consumer confidence figures came in near 3-year highs as the Aussie economy keeps chugging along despite the recent rate hikes to help temper growth. The Aussie is also higher on risk-taking as both commodities and stock futures are higher to start the morning.
Loonie (CAD): The Loonie has now broken through parity to the US dollar and is worth more as the dollar is worth .997 Canadian dollars. Oil prices are higher this morning to just under $85 and the overall risk-taking sentiment is supporting the Loonie.
Kiwi (NZD): The Kiwi is mostly lower this morning as it benefits from the overall risk-taking themes, but is hampered by a disappointing retail sales figure that may show that economic recovery is not as strong in NZ as it is in other economies. Retail sales were down .6%, showing the second decline in 3 months.
Euro (EUR): The Euro is mixed this morning as industrial production came in better than expected and overall risk appetite is higher. However, the aftermath of the Greek debt offering is still lingering with comments from Germany’s Finance Ministry trying to re-assure the market that Greece will not need additional funds above and beyond the bailout package. Now eyes are starting to turn toward Portugal and the measures they must take. Stay tuned.
Pound (GBP): The pound is higher this morning with no major news on tap until next week’s release of the policy meeting minutes which are expected to show a dovish stance. As long as inflation stays within the targeted range, expect no change in interest rate policy. In addition, the elections are less than a month away so expect political polling to affect the Pound as we near May 6th.
Dollar (USD): As promised the CPI figures and Retail sales figures came out at 8:30 EST. Retail sales came in better than expected at an increase of 1.6% vs. the expectation of 1.2%. In addition, the CPI came in just slightly below expectations at 2.3% vs. an expectation of 2.4%. The Dollar has rebounded a bit paring back earlier losses and moving a bit higher going into Bernanke’s speech later this morning. Expect the market to take its direction from that speech as he could use it as an opportunity to prepare the markets for potential rate hikes down the road. If he leaves everything status-quo, then expect the market to resume risk-taking which would weaken the Dollar further.
Yen (JPY): Today the Japanese yen is just along for the ride as risk-taking on speculation that the global recovery is well under-way is causing Yen weakness as yield-seeking investors’ effect carry trades. The Yen is at 93.5 vs. USD and could re-test 95 very shortly with dovish comments from Bernanke.
So today it’s all about the Dollar and whether or not it’s going to remain game-on for risk-taking. Bernanke’s comments should set the tone for the rest of the day and I expect no change to the language regarding rates.
While economic figures may be improving both here and abroad, the major problem with the US economy is unemployment and the housing market. Higher interest rates would not bode well for either problem so I expect Bernanke to keep rates as low as possible for as long as possible.
However, if better than expected earnings keep up and companies begin hiring again, then he may have some wiggle room to move. I think he is definitely trying to encourage inflation; so it’s still too early to hike in my opinion. Keep an eye on commodity prices for clues as to how high inflation may get.
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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