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.
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Japanese Intervention?
By Mike Conlon | July 20, 2010
This morning, the Japanese yen is lower despite the fact that US corporate earnings are lower this morning, sending stock futures lower. Under a “normal” risk-aversion scenario, we would be seeing Yen strength, however there is some speculation in the marketplace that Japan is getting ready to intervene in its currency as recent Yen strength has been an impediment to exports and thus economic growth.
US corporate earnings are starting to show declining revenues, which is not a positive sign for economic growth. While stock investors may be mesmerized by profit beating estimates, one must consider that profit is being driven by cost-cutting and not expansion. This does not bode well for jobs growth.
The Aussie and Kiwi are higher as Chinese stocks were higher overnight. There is also speculation that China will relax tightening measures.
The Euro is mostly lower to start the US session, as is the Pound. German Producer Prices came in higher than expected, yet the ECB will maintain its asset purchase program as a “security measure”. The results of the bank stress tests are due on Friday.
Lastly, the Canadian rate decision is due out later this morning. The market is expecting a 25 bp hike to .75%, though recent global economic weakness could cause a retreat from a hawkish stance.
In the forex market:
Aussie (AUD): Minutes from the RBA board meeting showed that the Central Bank will wait for the results of the European Bank stress test as well as inflation data to determine whether or not to raise rates at the next meeting. The Aussie is higher this morning despite the risk aversion in the market this morning.
Kiwi (NZD): The Kiwi is higher as Chinese stocks were also higher overnight as there is increased chatter that the Chinese will back off the tightening measures which were intended to slow the rate of growth. If this should occur, then demand for NZ good will increase. However, the commodity currencies are giving back some gains as risk-aversion is apparent to start the US session.
Loonie (CAD): The Loonie is mixed this morning as the BOC rate decision came in with a 25 bp rate hike to .75%, as expected. However it looks like the initial reaction was somewhat negative to the news, as a potential dovish stance going forward may be weighing on investors.
Euro (EUR): The Euro is lower across the board as German PPI figures came in hotter than expected at a .6% monthly increase vs. an expectation of .2%. The results of the bank stress tests are due out on Friday so the market may be jittery despite the positive comments the ECB has been providing. I’m always a skeptic by nature, so put me in the camp that thinks this might not be as rosy as we are being led to believe.
Pound (GBP): Mortgage approvals fell last month as tighter lending standards have discouraged demand as consumer confidence plummeted last month. In addition, CBI business optimism figures came in less than expected as the UK gets ready for announced cut-backs to deal with the ballooning deficit.
Dollar (USD): The Dollar is also mixed today as it is seeing strength vs. all but the Kiwi and Aussie. US housing starts came in less than expected showing a decline of 5% vs. an expected decline of 2.7%. The Dollar is higher against the Yen as speculation of a BOJ intervention is starting to pick up.
Yen (JPY): The Yen is showing some weakness this morning as speculation is that Japanese authorities will attempt to weaken the Yen after it climbed to 7-month highs. A stronger Yen hurts Japanese exports as goods become more expensive. The Japanese have been known to intervene in the past, though they may want to proceed with caution as the market has been driving Yen close to all-time highs.
This morning is a bit of a mixed bad as we see the different pairs trading by region and not necessarily on risk themes.
There is clear weakness today in the Europe, as both the Euro and Pound are lower. The Aussie and Kiwi are higher on higher Chinese stocks and the possibility of weakening policy.
The Dollar is trading somewhat higher, as it is trading inversely to stock markets futures which are lower due to declining corporate revenues.
So at the end of the day, we are definitely in for a global economic slow-down. Results of the European banks stress tests will guide policy around the globe as systemic risk will out-weigh economic conditions in the near-term.
However going forward, some countries may be in better shape to weather any potential economic storms.
So I will continue to remain cautious until Friday and keep my trading short-term.
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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“Slowing” Growth!
By Mike Conlon | July 15, 2010
Overnight, the Chinese reported less than expected GDP figures; however before you worry about the Chinese economy, note that growth slowed to 10.3%. That’s right, growth above 10%. By contrast, most other global economies are struggling to reach 3% growth.
In addition, in Japan the BOJ left rates unchanged at .1%, citing forecasts that growth will slow as fiscal stimulus is removed worldwide, thereby affecting global demand.
Across the pond, both the Euro and Pound are trading higher vs. the Dollar as dollar weakness due to continued positive corporate earnings led by JP Morgan are reducing demand for the greenback. In addition, better than expected demand for a Spanish debt issue and lack of bad news has buoyed the Euro to 1.285.
The Aussie and the Kiwi are also lower this morning, as fears of a Chinese slowdown reduce expectations for exports. However, 10% growth still looks pretty good to me.
Lastly, the Fed statement yesterday here in the US showed a commitment to maintain rates for as long as is deemed necessary. This is reducing demand for the Dollar ahead of US PPI and CPI figures which are due out today and tomorrow respectively.
In the forex market:
Aussie (AUD): The Aussie is lower on fears that a Chinese slowdown may soften demand for Australian commodities, despite the fact that demand for safe haven currencies has subsided.
Kiwi (NZD): The Kiwi is also lower for the same reason as the Aussie; however the NZ manufacturing index expanded at a faster than expected pace. Tomorrow NZ will report CPI data which will show whether inflation is tame or not and may influence the market’s expectation of a rate hike.
Loonie (CAD): The Loonie is lower on concerns about demand for commodities, despite the fact that oil is trading marginally higher. The BOC rate decision is due out next Wednesday, which may bring a rate hike should policy makers fear that inflation may come in higher.
Euro (EUR): The Euro is higher across the board, as the lack of bad news has emboldened traders as a series of successful debt auctions have provided confidence to the marketplace. In addition, the ECB maintained that interest rates are appropriate and they expect to see moderate growth.
Pound (GBP): The Pound is also mostly higher this morning and reached a high of 1.537 vs. USD as Chancellor Osborne said he does not expect banks to need additional support and cited austerity measures as a main reason. However, the BOE has still maintained a dovish outlook for future policy.
Dollar (USD): The Dollar is lower today as PPI figures came in at -.5% vs. an expectation of -.1%. This shows that prices are declining faster and may, in conjunction with tomorrow’s CPI data, show that deflation is firmly in hand. Initial jobless claims came in less than expected, with 429K new claims vs. an expectation of 450K. Corporate earnings have been good so far, but may not be enough to hold up stocks as the futures are giving back earlier gains.
Yen (JPY): The Yen is surprisingly strong this morning as it looks like US data may be moving the market toward risk-aversion. The BOJ policy meeting still showed a cautious outlook and recent Yen strength could pose a threat to Japanese exports, the leading driver of economic growth.
While Chinese growth may be “slowing”, it is hard to argue that 10% is nothing short of remarkable. However, when one considers that it is Chinese growth that is driving the world economy right now, there is concern that a lack of global demand could cause further reductions.
In the US, it looks like deflation is winning the battle as the government’s attempts to maintain higher prices may have been misguided. While deflation is a problem, let’s consider for a moment that Japan has been experiencing it for the last 20 years.
While I am hoping that policy-makers can avoid a Japan-style economic malaise, I have my doubts currently. The government is just about out of magic bullets to help maintain prices as interest rates cannot get much lower.
The problem with the economy right now is not that there is a lack of demand, but rather an over-supply of homes, goods, and services. As the economy reached the asset bubble that became known as the Great Recession, government policy to attempt to keep prices high only served to help bank balance sheets. While this may have prevented a total collapse of the financial system (still up for debate), now is the time to pursue pro-business policies that will help bring new money to the US economy to increase demand as supply clears.
On the plus side, at least it was “only” 429K losing jobs last time, it could have been much worse. So let’s just hope that China will continue to grow, as it looks like the US may be done for a while. Dollar weakness is evidence of this.
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Chinese Slowdown To Derail Recovery?
By Mike Conlon | July 1, 2010
Overnight, manufacturing growth slowed in China more than expected as the Chinese look to curtail inflation and their housing market. While the market views this as negative, China has been expanding at a break-neck pace and my opinion that slower, more sustainable growth should be welcome.
However, this spotlights the reduction in world demand as economies pare back to combat deficits and economic uncertainty and lack of confidence is causing consumers to reduce consumption.
In the UK, industrial production figures show a slight drop from the previous month, however in Japan, the Tankan manufacturing confidence figures fell less than expected.
Retail sales figures were lower in both Australia and Germany, though German manufacturing numbers were in line with expectations.
In the Euro zone, a successful bond auction from Spain countered yesterday’s news that Moody’s ratings agency was putting Spain’s AAA credit rating under review.
And lastly, in the US, initial jobless claims came in higher than expected, showing 472K vs. an expectation of 460K. This does not bode well for tomorrow’s Non Farm Payrolls report, though it could be setting us up for a surprise to the upside.
So this morning we are seeing US dollar weakness, and Euro and Yen strength.
In the forex market:
Aussie (AUD): The Aussie is lower this morning as retail sales figures and building permits declined giving investors’ reason to believe that Australia may be finished with rate hikes for the rest of the year.
Kiwi (NZD): The Kiwi is lower this morning as the global slowdown and the news out of China is putting pressure on the currency.
Loonie (CAD): The Loonie is lower as oil is down, but it is trading higher vs. the Dollar. Yesterday’s GDP figures caused selling in the Loonie and today Dollar weakness is paring some of those losses.
Euro (EUR): The Euro is higher across the board as a successful bond auction in Spain is giving the market confidence that the banking situation may not be as bad as expected. In about three weeks’ time, the results of the bank stress tests will be in and that will show the true health of Euro zone banks.
Pound (GBP): The pound is mixed this morning, trading back over 1.50 vs. USD despite the fact that manufacturing figures came in slightly lower than last month but in line with expectations. At this point, there is more confidence in the measures the UK is taking with regard to its finances than what is happening in the US, and this is reflected in recent Pound strength vs. the Dollar.
Dollar (USD): The Dollar is lower across the board as jobless claims came in higher than expected showing that the employment picture is not getting better. In addition, uncertainty over the financial regulation bill is causing trepidation, but overall the economy is still moving forward despite the employment picture. According to Alan Greenspan, our former Fed chief, this is a “normal slowdown” within the greater context of recovery.
Yen (JPY): The Yen is showing strength this morning though giving back some earlier gains. The Nikkei was down 2% last night, providing the Yen with a bid. The Chinese slowdown as caused the un-wind of carry trades, and the Yen is trading at a 6-month high vs. the Dollar.
As I mentioned yesterday, the only thing that matters here in the US is jobs. The employment picture is not improving and tomorrow’s Non Farm Payrolls report had better be decent or we could see a sell-off going into the long 4th of July holiday weekend.
I hate to continue to harp on policy here in the US, but there is a distinct divide in the economy. To put it bluntly, you have those that receive government hand-outs and those that eventually pay for it. One group is productive, the other isn’t.
Congressional plans to extend unemployment benefits are one such problem. While I feel badly for those unable to find work, at some point you have to lower your expectations and regroup. Because unemployment benefits are essentially equal to minimum wage, there is a disincentive to get off of the couch and work.
In addition, the financial regulation bill (which in my opinion is absolutely needed), has missed the mark. Two major problems that caused the financial mess have gone largely untouched (Fannie Mae and Freddie Mac).
Instead we’re going to get a bunch of rules and a business climate that is deemed unfriendly to business, which will help perpetuate the cycle of unemployment. Add future tax hikes to the mix and you can see where this is going. When it comes time for investors to decide where to invest their money, are they going to choose countries that are making an effort to return to fiscal responsibility, or the country with a blatant disregard for it?
I know what I would do. Hopefully, you do too!
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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The Party’s Over!
By Mike Conlon | June 29, 2010
This morning we are seeing a slew of consumer confidence figures coming out around the globe which are lower but largely in line with expectations. The Euro zone debt crisis is continuing to weigh heavily on the markets, and a leading economic index in China had its smallest gain in nearly 5 months, signaling that the Chinese economy may be slowing down.
Later this morning we are expecting consumer confidence figures here in the US as well as housing price figures. These are expected to come in lower as well, as the removal of the home buying tax credit has caused demand to wane.
Overnight in New Zealand, building permits were lower, and the Japanese jobless rate increased to 5.2%, higher than expected.
This has all contributed to lower equities markets, with US stocks and commodities set to open lower as well. As a result, we are in risk-aversion mode this morning. Keep an eye out for the 10AM numbers, as they may be the stock market’s only chance to recover.
Aussie (AUD): The Aussie is lower as risk aversion is reducing demand for carry trades due to global slowdown concerns, particularly from China. In addition, the market is looking for the new PM to move quickly on the proposed mining tax, which is seen as “anti-business” and bad for the economy.
Kiwi (NZD): In addition to risk aversion, the Kiwi is lower as building permits declined 9.6%, the second decline in 3 months. The Chinese leading index decline is also affecting NZ, as a number of exports go to China as well.
Loonie (CAD): The Loonie is also lower on a classic risk-aversion day, as oil prices retreat on fears of a global slowdown. Tomorrow will bring the Canadian GDP figures which will show how solid recovery is north of the border.
Euro (EUR): The Euro is lower this morning, though higher against the commodity currencies. Fears of the debt crisis have resurfaced, and bank stress tests are to include bank exposure to sovereign debt risk. This is sure to uncover a land mine or two, and the market is fearful of the size and the scope. However, business confidence came in higher than expected as a lower valued Euro should encourage exports.
Pound (GBP): The Pound is lower as well on risk aversion, though it is still above 1.50 vs. USD. Mortgage approvals came in slightly lower than expected, but expect the Pound to fare better than the Euro as GDP figures are due out tomorrow.
Dollar (USD): The Dollar is catching a bid from risk-aversion and is higher against all but the Yen. Consumer confidence figures are due out at 10AM EST and they may be the stock market’s last hope for a turn-around today if the numbers are better than expected. Home price figures came in slightly better than expected, most likely due to the tax credit. Today looks ugly for stocks, which should mean continued dollar strength.
Yen (JPY): The Yen is higher as the rapid unwind of carry trades is driving demand for the Japanese currency despite the fact that industrial production and household spending fell. In addition, unemployment ticked higher to 5.2% vs. an expectation of 5% in a sign that recovery is clearly slowing down.
Well, we knew it was only a matter of time before this global charade was exposed as unsustainable and now the market is starting to realize that it may be time to pay the piper. Obama’s pleas at the G-20 fell on deaf ears, and governments outside of the US have decided that it’s better to cut bait than to try to continue to fish.
In other words, countries are trying to cut their losses and get back to economic health. The only way to do this by taking the “medicine” of financial austerity and debt reduction. This is going to be one heck of a hangover, as now the party may be finally over.
However, all is not lost and I am not trying to be a doomsday forecaster. There are definitely pockets of strength in our economy, including corporate America. All of the lay-offs of the past have allowed corporations to increase profitability, and many are trading at low multiples.
However, it is definitely time for people to wake up. The eventual fallout and backlash against our big-spending government will only bring about better policy in the future. Government, no matter what type of social engineering they try, CAN NOT control economic cycles. The longer they try to pro-long an unnatural order, the worse the pain will be.
Usually the “summer slowdown” takes effect, though this time it may be different. I expect there to be heightened volatility as the world navigates the treacherous waters of the global economy. Expect there to be highs and lows, as well as gains and set-backs.
There is no better time than RIGHT NOW to protect yourself from global economic conditions through the forex market! Don’t be one of the ones left standing when the music stops!
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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Be Careful What You Wish For!
By Mike Conlon | June 25, 2010
Overnight, the US Congress unexpectedly came to a deal and has agreed on bill regarding financial reform and regulation. The uncertainty surrounding this bill has been weighing on the markets, as it was unclear what the outcome might be.
As news trickles out of the 2000+ page document and what it means for the banks and the market in general, at least the uncertainty has been removed. Uncertainty= volatility. Now, whether or not this bill will actually accomplish what it is intended to remains to be seen. What my experience tells me is that no matter what is in the bill; Wall St. has already prepared for likely scenarios and has already devised ways to circumvent regulation. In addition, enacting legislation of this magnitude always comes at a cost, and the brunt of that cost is likely to be paid for by consumers, and not the banks themselves. Banks will simply pass through the new cost so that executives can still buy beach houses. If you don’t believe this will happen, take a look at bank stocks that are trading higher in the pre-market.
This comes ahead of this weekend’s G-20 meeting, where the US will push other nations to consider enacting similar reform.
Economic data is out showing that US GDP grew 2.7%, vs. an expectation of 3% and personal consumption figures were at 3% vs. an expectation of 3.5%. This falls in line with what the Fed said the other day that we are seeing growth, albeit moderate.
Overnight, Japanese CPI figures came in at -.9% vs. -1.1% showing signs that deflation may be subsiding.
The market started out in risk taking mode, but it appears that may be reversing.
In the forex market:
Aussie (AUD): New Australian PM Gillard has backed away from the mining tax that was the eventual downfall of her predecessor and is open to discussion and negotiation. The tax was largely seen as anti-investment in one of Australia’s biggest industries.
Kiwi (NZD): The Kiwi is lower despite a widening trade balance surplus but the market is concerned about a potential Chinese slowdown which could hamper demand for exports. However, this figure fell short of expectations (814M vs. 850M).
Loonie (CAD): The Loonie is higher this morning as its major trading partner (the US) appears to be the only country not entertaining the idea of reduced spending. Unlike the other commodity currencies which are more tied to China, expect the Loonie to benefit as long as the US maintains its spending spree.
Euro (EUR): The Euro is lower continuing the trend of heightened fear from the debt crisis. Today marks the fourth day in a row that European stocks are lower as we head into the G-20 weekend.
Pound (GBP): The Pound is mixed this morning and it will be interesting to see what (if anything) comes out of the G-20 meeting. The UK “tax and axe” strategy is diametrically opposed to the US strategy of “spend, extend, and pretend”.
Dollar (USD): The Dollar is somewhat mixed today as the market figures out exactly what this new financial regulation means. In addition, GDP figures were lower than expectations, but showed that growth, while moderate, is occurring.
Yen (JPY): The Yen is higher this morning, as CPI data showed that deflation came in less than expected. In addition, minutes from the rate policy meeting showed that there was actually talk of inflation. The Nikkei was down overnight, and speculation that the G-20 will not come to a consensus over global economic policy has strengthened demand for the safe-haven of the Yen.
All of my years on Wall St. have taught me one thing: that politicians in Washington DC cannot compete with the brainpower of Wall St. Today, champagne is flowing as the uncertainty over the worst-case scenario from financial regulation has been lifted. True, this isn’t a “home-run” for Wall St.; but I can tell you that they have been prepared for EVERY possible scenario to come out of this and already have plans in place to line their pockets at the expense of the general public.
While regulation is good in theory, it always brings about unintended consequences and in the end it is always the consumer that gets hurt. Now that this is out of the way, the G-20 meeting will be the focus of the weekend but don’t expect anything of substance to come out of it.
The major problem here in the US is jobs. Period. Next week’s Non-Farm Payrolls report will show if we are gaining any jobs in the private sector. If this is a bad number, look out below.
So there is potential for risk over the weekend, but my guess is the G-20 will be a non-event.
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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BOE Not Unanimous!
By Mike Conlon | June 23, 2010
Minutes released from the Bank of England’s rate policy meeting showed that the vote was not unanimous to keep rates unchanged at .5%, for the first time in nearly 7 months. Inflation concerns were the cause of the dissenting vote, as CPI figures in the UK have been above targets. While the BOE expects inflation to subside in the ensuing months, that may not necessarily be the case.
This comes a day after the emergency budget which was announced yesterday, calling for a reduction in spending and an increase in taxes.
In the US, the FOMC rate decision is due out later today, so expect to see some volatility in dollar-related pairs. It is widely held that there will not be a change in policy, but some market participants are betting that we may see a change in the language regarding policy. This would give credence to the rising sentiment that the Fed may raise rates later this year. Personally, I don’t see this happening and I think the Fed will be on hold for the remainder of the year.
Yesterday’s abysmal housing data confirmed that deflationary forces in the housing market may be the start of another leg down.
In the Euro zone, German consumer confidence came in slightly better than expected and PMI figures were largely in line. However, concerns over Greek debt have perked up again.
Overnight, the Yen was higher as the Nikkei was down taking its cues from yesterday’s sell-off in the US stock market.
This morning will bring US new home sales figures as well as Canadian retail sales figures. Any major deviations could send the respective currencies lower.
But expect volatility going into the FOMC announcement at 2:15 EST.
In the forex market:
Aussie (AUD): The Aussie is lower as stocks sold-off in the overnight session but it is gaining back some ground heading into the US session. Risk aversion has driven the Aussie lower, and there is some concern that Chinese demand for metals and energy is causing a rift in the Australian economy.
Kiwi (NZD): The Kiwi is higher this morning in anticipation of GDP figures which are due out later tonight. The expectation of .5% growth will likely be exceeded as demand from China for raw materials has the NZ economy picking up steam. Should the number best expectations, then the likelihood of a rate increase at July’s policy meeting will increase.
Loonie (CAD): The Loonie is lower this morning as oil prices are pulling back from the $78 level, and retail sales figures came in worse than expected. Analysts were expecting a decline of .4% and the figure showed a decline of 2.2%, a big miss. Canada is to the US what Australia and New Zealand are to China. If recovery here in the US is floundering, then it may not bode well for the Loonie and the Canadian economy in general.
Euro (EUR): The Euro is a mixed bag this morning, as it is up against the North American currencies but down against the rest. The EU is considering a bond levy on countries that don’t adhere to debt-to-GDP guidelines which of course brings the Greek debt crisis back to center stage. In addition, business confidence was down in France, though consumer confidence was higher in Germany. Go figure.
Pound (GBP): The Pound is higher across the board, giving a vote of confidence to both the government for their budget and the BOE. The lone dissenter in the rate policy meeting is concerned about inflation, as growth targets may exceed expectations. That’s a “nice” problem to have, considering the economic condition of the US.
Dollar (USD): The Dollar is mostly lower prior to today’s FOMC meeting. Yesterday’s poor housing data sent stocks lower, and today’s new home sales aren’t expected to be much better. This should be enough to keep the Fed unchanged in both language and policy, and the market is starting to catch on to the fact that the smoke and mirrors of government spending may not be enough to stoke the economy. Go back and take a look at my discussion of biflation from a few days ago.
Yen (JPY): The Yen is mixed as well, trading higher vs. USD and CAD (both showing weakness) and the Euro (debt concerns) but lower vs. GBP, AUD, and NZD. So today can neither be classified as risk-taking or risk-aversion, but much of the yen strength was derived from weakness in the Nikkei, which sold off following the US stock market decline.
I think today really shows the difference to how the market reacts to different policy pursuits from around the globe heading into this weekend’s G-20 meeting. On the one hand, you have the EU and the UK who are committed to reducing deficits and trying not to raise taxes too much to discourage business (in fact the corporate tax rate was lowered in the UK), and the policies taken by the US.
The US is going the other way, expanding deficits and throwing good money after bad at our financial problems which can only result in higher taxes when it comes time to pay the piper. President Obama was rebuffed by Chancellor Merkel of Germany with regard to how to best combat the global financial crisis, and it appears as though the market agrees with the EU.
Weak housing data here in the US show that the stimulative effects of government spending may have slowed a decline in the economy, but have not fixed the problem. Now taxpayers (and their children and grandchildren) face an enormous burden for what adds up to temporary conditions.
The change people voted for was for less government spending and indeed we’re seeing change—even more and more spending! Hopefully this course can be reversed before it’s too late. I never thought I’d say this but now is the time we should be taking our economic cues from Europe, and not their prior policies that landed them in this mess.
Those who don’t learn from the past are doomed to repeat it.
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Budget Cuts!
By Mike Conlon | June 22, 2010
The British pound is lower this morning as the UK budget showed a commitment to a balanced budget and a reduction in spending of close to 30 billion pounds annually. This should come as no surprise to the market, yet the Pound is lower as the UK attempts to cut its deficit.
This coincides with some concerns in the market over European bank funding problems which are causing some risk aversion in the market this morning. In addition, yesterday’s enthusiastic response to the Chinese announcement to allow the Yuan to float was short-lived as the US stock market finished the session lower, and futures are pointing to a lower open this morning as well.
Consumer prices were higher in Canada, and there was a note out this morning saying that central banks around the globe are starting to diversify away from the Euro and into the Aussie and Loonie. This could potentially affect their status as “risk assets” as the market is starting to realize that these are strong economies.
So we could see some mixed trading going forward, as the risk-on, risk-off mentality works its way out of the market and these currencies begin to trade on their own fundamentals. Japanese yen will still see gains during risky times as it is still the primary funder of carry-trades, but it will be interesting to see if traders actually unwind the carry trades or add to them going forward.
In the forex market:
Aussie (AUD): The Aussie is mixed this morning on risk-aversion, though it appears to be bouncing off its lows from the Euro session. Demand for the Aussie is higher because of the news from its largest trading partner, China. In addition, the news about central banks diversifying away from the Euro to the Aussie have slightly out-weighed risk themes.
Kiwi (NZD): The Kiwi is affected more by risk aversion this morning than the Aussie, as the NZ economy is not deemed large or strong enough to receive diversified funds from central banks that are moving out of Euros.
Loonie (CAD): The Loonie is higher across the board as CPI figures came in .1% higher than expected to 1.4%. This shows that Canadian economy is still chugging along and that the potential for rate hikes is still on the table. This makes the Loonie a destination for funds from central banks diversifying away from the Euro, with the added benefit of potential rate hikes.
Euro (EUR): The Euro is lower this morning despite the fact that German business confidence was higher. An ECB council member said that some banks are facing funding problems. This comes in advance of the European bank stress tests which are due out sometime next month and could be the next landmine that sends the Euro lower. Banks in Spain may borrow 10 billion euro from its bank-rescue fund.
Pound (GBP): The Pound is also lower as the UK announced its emergency budget which showed a commitment to deficit reduction by reducing spending and setting the table for tax hikes down the road. This has heightened the fear of double-dip recession in the UK, but these announced measures have likely saved the UK top-credit rating from downgrades, which would make it more expensive for them to borrow.
Dollar (USD): The Dollar is mostly lower this morning despite some of the risk in the market. The Chinese decision to allow the Yuan to float more freely and be tied to a basket of currencies and not the US dollar alone is likely causing some selling. Existing home sales are due out later this morning and could provide a snapshot of the housing market ahead of the FOMC meeting.
Yen (JPY): The Yen is higher on risk aversion due largely in part to the Euro debt crisis. In addition, Prime Minister Kan pledged to balance the Japanese budget in 10 years and to reduce bond sales to gain investor confidence. This is quite the task as Japan has the world’s largest budget deficit, so reduced spending and tax changes may be seen as welcome by the markets.
Just when things start to quiet down, the Euro debt crisis comes screaming back into the room and reminds investors that the EU problems have not been solved. Bank funding problems and the upcoming stress tests may show an ugly picture of the financial health of the Euro zone.
Meanwhile, while everyone yesterday lauded the Chinese announcement to allow the Yuan to float more freely, the realization that they now want to use a basket of currencies to peg to (including the potentially sinking ship Euro) is just another way to manipulate their currency to attempt to keep it low.
Canada and Australia could be major beneficiaries of both the Chinese and Euro zone news. Commodity prices have pulled back this morning, but both of these countries have strong economies and that is reflected in their currency gains this morning.
Stay tuned, this may not be a lazy summer after all!
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Yuan Gone!
By Mike Conlon | June 21, 2010
In a move that the market was anticipating and hoping for, the Chinese government announced that they would loosen the peg on its currency and allowing it to float more freely. This hopefully will allow for greater balance in the global economy and help China curb inflation.
However, expectations for Yuan gains fall anywhere in the 3-5% range, as any appreciation will be gradual. This news sent stocks and commodities higher, as this is seen as a vote of confidence by the Chinese. But there is still much work to be done, as China needs to increase domestic demand to support balanced growth.
China has always been the “X factor” in the forex marketplace, as their currency peg and government intervention have created imbalances and uncertainties and have essentially impacted every financial market. There has been increasing pressure on China to make this move, and perhaps recent dollar strength vs. the Euro has encouraged this change.
So this news is very welcome by the markets, and risk appetite is the theme of the morning. Oil is higher this morning to $78.25 and gold reached a 1260 handle earlier. The commodity currencies are higher as a stronger Yuan will increase Chinese purchasing power.
This week is pretty light for news, with the FOMC meeting and the UK budget report due out ahead of this weekend’s G-20 meeting. The timing of the Chinese announcement is somewhat conspicuous, as it was expected that Yuan valuation was to be a major topic of discussion.
In the forex market:
Aussie (AUD): The Aussie is higher on risk appetite, as the Chinese news has the market betting that Australia will be a major beneficiary of a stronger Yuan. There’s no real news for the Aussie this week, so expect it to trade on risk themes this week.
Kiwi (NZD): The Kiwi is higher for the same reasons as the Aussie, though we are going to get some economic data from NZ this week. The current account balance and GDP figures are due out mid-week, which should reveal how the economy is faring and what the RBNZ may be thinking with regard to interest rates.
Loonie (CAD): The Loonie is moving closer to parity with USD, as higher oil prices and risk-taking are drivers behind gains. There is data due out from Canada this week, with CPI and retail sales figures expected to show the state of the economy. In addition, Canada hosts the G-20 meeting this weekend.
Euro (EUR): The Euro is lower this morning against all but Japanese yen, as potential benefits from the Chinese news is out-weighed by the austerity measures to be enacted to deal with the debt crisis. European banks have agreed to publish the results of bank stress tests in July, which may or may not be a good thing.
Pound (GBP): The Pound is mixed this morning trading lower vs. the commodity currencies and USD but higher vs. Euro and Yen. This comes in advance of the emergency budget report due out tomorrow, which is causing increased volatility as the “fear factor” of measures to be enacted leaves the market both hopeful and concerned.
Dollar (USD): The Dollar is lower on risk taking, as equity futures are up big time this morning and stocks are going to open higher. This week’s FOMC meeting is expected to yield no change, but GDP data due out on Friday with other data could tell a different story.
Yen (JPY): Yen is trading lower as selling in order to buy higher yielding assets is taking place. In addition, the Nikkei was up some 2.5%. The Yuan news is widely expected to be positive for Asian countries as a stronger Yuan should benefit other Pac-Rim exports.
I cannot underscore how big this news out of China is. The market has been begging for this for some time to help re-balance the global economy. However, the actual effect of this announcement and how it will play out is highly uncertain.
While it is widely expected that the Yuan will appreciate, I’m hearing rumblings that some analysts thing it could depreciate because of Euro zone issues. While I think this is highly unlikely, the Yuan has been gaining ground as dollar strength due to the Euro debt crisis has lifted its relative value higher.
In addition, the timing of this announcement ahead of the G-20 meeting has bought China time and shifted the focus of the meeting back onto Europe. How and when this actually occurs remains to be seen.
But this could end up being a case of “be careful what you wish for”, as unexpected outcomes could cause market uncertainty and increased volatility. So don’t break out the Champagne just yet; as this move is both necessary and desired, but still a long way away from fixing the global economy.
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Consumers Disappoint!
By Mike Conlon | June 11, 2010
Well so much for that. US retail sales figures disappointed this morning, coming in at a loss of 1.2% vs. an expected gain of .2%. While these numbers show that economic recovery is still fragile here in the US, much of this can be attributed to the lack of hiring by businesses. In addition, this also shows that households are saving more which may not be a bad thing, and much of the decline was in big ticket items as the economy prepares for the retraction of stimulus measures.
Across the pond, the UK reported worse than expected industrial production figures, sending the Pound lower across the board. This further adds to the fears that the UK may be facing a protracted slowdown as they attempt to control their budget deficits.
On a somewhat related note, US Treasury Secretary Geithner has turned up the heat on China. He has come out and said that the Chinese exchange-rate policy (and Yuan peg to the dollar) is preventing a balanced global recovery and causing inflation in China. Official reports showed an increase of 3.1% in consumer prices, the fastest rise in 19 months. In addition, Chinese workers are striking demanding higher wages as inflation heats up.
So this morning we are seeing some mild risk-aversion, as the Friday “unwind” occurs as traders are still hesitant to go into the weekend holding risk assets, with potential Euro landmines the primary fear driver.
In the forex market:
Aussie (AUD): The Aussie is lower this morning on risk aversion and a technical pullback after yesterday’s good economic news from the Pac Rim countries. Uncertainty over whether or not China will do anything to cool inflation has contributed to Aussie selling.
Loonie (CAD): The Loonie is lower on risk aversion, despite the fact that industrial capacity showed the largest increase on record. The Loonie has been higher lately as oil has been higher, though it is pulling back from $75 this morning. Oil will be a major factor going forward, as a potential moratorium on drilling offshore in the US is in the works due to the political backlash of the BP oil spill.
Kiwi (NZD): Despite the risk in the market, the Kiwi is higher across the board due to yesterday’s rate hike, though that could change by session end. Digestion of the economic reports show that NZ could be in for a series of rate hikes through the rest of the year as accelerating growth could push inflation much higher.
Euro (EUR): The Euro is lower also on risk themes, and the “Friday unwind” may be still be causing investors to ditch Euros over the weekend as risk fears still permeate the market. However, policy-makers in Germany raised their economic outlook for GDP higher. Still the looming threat of debt problems keeps investor cautious for now.
Pound (GBP): The pound is lower across the board as manufacturing weakened in the UK and fears that the economy may not be on sound enough footing to handle expected government fiscal belt-tightening. This comes even as a UK survey of consumer’s inflation expectations reached its highest levels in over 6 months. This may be a case of, “the consumer is not always right”.
Dollar (USD): Disappointing US retail sales figures have sent the dollar higher as risk aversion has picked up going into the weekend. However, the decrease wasn’t broad-based. The largest decreases were in building materials stores and auto sales. This comes ahead of the end of the home buyer tax credit, so it probably should have been expected. Households are saving more as the employment picture is still grim, and unless the government does something to encourage private business to start hiring, the retraction may continue.
Yen (JPY): Good gains in the Asian stock markets overnight pushed the Yen lower, though it is rebounding and has gained strength due to the unwind of carry trades as traders dump their risk assets for the weekend in favor of the safe haven the Yen provides. The Dollar and Yen are just about flat today vs. one another.
Today is an example of how bad government policy can distort economic figures and get everyone “drinking the Kool-Aid”. It should come as no surprise that retail sales are down as government stimulus measures are retracted, yet they fall for it every time.
The bottom line is jobs. Period. Not temporary census workers, not more bloated government bureaucracy, but jobs from the private sector. American consumers have finally woken up to the fact that you shouldn’t be spending money you don’t have, especially if you can’t get a job to afford stuff.
That game had gone on for way too long, and it is amazing to me to see some the debt levels people carry.
So what does the government do to help create jobs? Nothing. They hand out government cheese to keep the masses at bay and create a hostile environment for business through the threat of increased regulation and higher taxes. If you were an employer, would you be hiring?
Heck no!!!
And until hiring picks up again, expect the economy to drift downward as consumers lose faith in the recovery. And if consumers, who represent some 70% of US GDP, continue to save and not spend, then we could see a potential deflationary spiral as demand dries up.
This could lead to the dreaded “double-dip”. Not a pretty picture in my eyes. The only double-dip I want to see is in an ice cream cone!
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