Growth By Contraction!
By Mike Conlon | September 2, 2010
In what seemingly is a contradiction, Europe is proving that you can grow by shrinking. If you don’t believe that’s possible, look no further than the EU GDP figures reported this morning. GDP figures came in showing growth of 1.9% vs. an expectation of 1.7%. But wait a second, isn’t the EU enacting austerity measures?
Yes, they are enacting austerity measures but they are not experiencing the crisis of confidence that we have here in the US. This allows for more active participation in the economy, as fears have been removed about the future of policy. In other words, they are taking their medicine. In addition, the ECB left rates unchanged at 1% which was no surprise to anyone and will most likely remain in “crisis mode” until next year.
Conversely, here in the US companies are still afraid to hire employees as they are fearful over the economy and government policy. With no end to the spending in sight, the “extend and pretend” policies and looming deficits and taxes and regulation and healthcare (oh my) make even the boldest of businessmen appear more scared than the cowardly lion!
As a result, Initial Jobless Claims came in slightly better than expected, showing new claims of 472K vs. an expectation of 475K. Home sales figures are due out later this morning and my guess is that this figure is not going to be encouraging either.
In the UK, housing prices came in lower than expected which may help inflation come back down and allow the BOE to maintain accommodative policy measures throughout the austerity measures.
So this morning’s currency market action is a bit of a mixed bag, as the market can’t decide if the fundamentals support risk-taking.
In the forex market:
Aussie (AUD): The Aussie is lower this morning as the trade balance figures came in worse than expected. The Australian trade surplus shrank to A$ 1.89B vs. an expectation of A$3.1B. This comes a day after better than expected GDP figures were reported yesterday.
Kiwi (NZD): The Kiwi is actually higher this morning on—ready for it—higher powdered milk prices!! If I had any sort of journalistic integrity I wouldn’t even mention this but the higher Kiwi seems like an anomaly to me so I’m going to go with it. If I had to guess what is going on, I would blame stealth Chinese currency diversification. (Click chart to enlarge)
Loonie (CAD): The Loonie is lower as crude oil prices have pulled back to 73.25 and the market prepares for tomorrow’s US Non-Farm Payrolls report. Canada is particularly sensitive to US economic data as the US is its largest trading partner.
Euro (EUR): The Euro is mixed this morning as the GDP figures and steady monetary policy are encouraging despite the known debt problems and commitment to austerity. Just goes to show sound economic policy goes a long way to helping in recovery. (Click chart to enlarge)
Pound (GBP): The Pound is mostly lower as home prices fell signaling that inflation may again fall below the BOE upper band of 3%. This may allow the BOE to maintain accommodative policy as austerity measures help tackle the deficit.
Dollar (USD): I’m starting to sound like a broken record here so I’m not even going to say it. I’m just waiting for tomorrow’s NFP figures which they market will use as a true gauge of whether or not jobs are being added to the economy. Government models and proclamations of jobs “created or saved” ring hollow. The proof is in the pudding, as they say.
Yen (JPY): The Yen is showing strength again, as the market is going to test Japanese policy-makers over intervention. The Nikkei was higher overnight so the inverse correlation of Yen to the Nikkei is not holding up today. As the rhetoric heats up, what will Japan do? (Click chart to enlarge)
It is becoming more and more apparent that things in the US are not getting better. While they may not be getting worse (yet), I think we may be in a holding pattern until the November elections where hopefully the “bums get thrown out”.
There has been much talk recently that a lot of the damage has already been done and that political gridlock may not be seen by the market as a good thing. My guess is that any change in leadership at this point is going to be viewed as positive, and if we can actually change the collision course our economy is on people might actually be able to get back to work and help the economy grow again.
Until then, expect fear to rule the markets and tomorrow’s NFP number could be the continuation of last month’s fear driven market action.
I never thought I’d say this as an American but perhaps we should be taking economic direction from the Europeans! For their realistic assessment of how to recover while not popular is the right thing to do.
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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Hello September!
By Mike Conlon | September 1, 2010
The markets this morning are clearly relieved to be done with the month of August which was a doozy for equities and commodities. On this first day of September, risk appetite has returned to the market as US stock futures are higher on the heels of Asian and European stock market gains.
Much of the catalyst for this is due to Australian GDP figures which came in better than expected, and Chinese PMI figures which showed gains for the first time in 3 months. This shows that China still has upward growth, though it is moderating. This also bodes well for Australia, who supplies China with the raw materials it needs to sustain its growth.
In the Euro zone PMI figures showed slight gains, while in the UK, PMI figures came in worse than expected as austerity takes hold.
In the US, the ADP Employment change showed a loss of 10K jobs vs. an expectation of a gain of 15K. This caused a slight sell-off on the news announcement, but the market has quickly blown off this reading and is awaiting the US ISM manufacturing figures which are expected to show a decline from last month.
Nevertheless, the market is in classic risk-taking mode, led by the commodity currencies and marked by Yen and Dollar weakness.
In the forex market:
Aussie (AUD): Overnight, Australian GDP figures showed that the economy rose at the fastest pace in nearly 3 years, reporting growth of 1.2% vs. vs. an expectation of .9%, and YoY growth of 3.3% vs. an expectation of 2.8%. Adding to Aussie strength was the Chinese PMI report which showed a return to manufacturing growth. (Click chart to enlarge)
Kiwi (NZD): The Kiwi is following the Aussie higher as risk appetite and yield-seeking money flows provide demand. There is no major news out for the Kiwi for the rest of the week so expect it trade on risk themes.
Loonie (CAD): Crude oil is higher this morning as risk appetite is driving higher commodity and stock market prices and the Loonie is along for the ride. However, traders are paring back bets of a further rate hike as GDP figures reported yesterday came in worse than expected.
Euro (EUR): The Euro is higher this morning as PMI figures came is slightly better than expected showing that there is still some life in the EU economy. However, retail sales figures in Germany came in lower than expected but this is not enough to cause a change in sentiment this morning. In addition, Portugal had another successful debt offering, as demand hasn’t waned. (Click chart to enlarge)
Pound (GBP): The Pound is mixed this morning as is usual under risk-taking scenarios. However, PMI figures came in worse than expected, missing analyst expectations and showing a decline from last month. Austerity measures in the UK may contribute to further Pound weakness going forward. (Click chart to enlarge)
Dollar (USD): The Dollar is weaker across the board as demand for the Greenback is low due to risk taking in the market and the ADP jobs report. US ISM manufacturing figures are due out at 10AM EST and a decline is expected. The ADP figure is the first of the 3 jobs reports due out this week, with initial jobless claims out tomorrow, and the all-important Non-Farm Payrolls report due out on Friday.
Yen (JPY): The Yen is mostly lower this morning as risk appetite has encouraged yield seeking through carry trades. However, the Yen is still showing strength against the Dollar, returning very close to the 15-year high put in last week. It appears as though the market is going to test the resolve of the Japanese policy makers to see if intervention is really in the cards.
As is indicative this morning, it’s not always about the US economy. While the numbers here look pretty bleak, there are pockets of strength around the globe. Right now, the only thing keeping the Dollar afloat is risk aversion, and most of the “bad news” is from US self-inflicted wounds.
Yesterday’s Fed Minutes showed that further quantitative easing may be off the table for now, which the market views as a good thing. As other economies around the globe work to slash deficits, adding to the US deficit would be seen as negative and could have had the opposite effect.
This week is important for the US economy as it’s all about jobs. I can’t harp on this enough. And this goes hand-in-hand with US government policies. A report yesterday showed that banks have eased lending standards yet demand for new loans was weak. This is all because of the uncertainty surrounding current policy and the likely affects of more regulation, taxes, and the healthcare overhaul.
Meanwhile those that can’t find work are left out to dry, with their only hope that more government cheese will keep them afloat. If this isn’t a recipe for disaster, I don’t know what is.
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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A Japanese Conundrum!
By Mike Conlon | August 31, 2010
In the overnight markets, the Nikkei average fell some 3.6% to close at its lowest level in more than a year. This came as a result of the emergency Japanese monetary policy meeting that failed to produce measures that would cause Yen weakening. There has been much speculation over intervention in the currency, which hasn’t been done since 2004.
Part of the reason why intervention seems so daunting a task is that the Japanese may not have enough monetary muscle to intervene in the currency and the recent lessons learned from the Swiss attempt to intervene (which resulted in big losses) may be fresh in their mind.
But today I’m going to bring up an alternative idea, one that I haven’t heard discussed very often. What if Yen appreciation turned out to be a good thing for Japan? Now before you parrot the usual rhetoric about Japan being an export-based economy and a strong currency makes their exports less competitive (both true statements), maybe it’s time for a policy shift.
Japan has been mired in the “Lost Decade” with rampant deflation which has left the economy floundering for some time. There have been periods where there has been a weak Yen, yet the same condition persisted. Part of the problem in Japan is that there is very little domestic demand, as its citizens’ savings rates are among the highest in the world. Unemployment is surprisingly low (5.2%) given the economic conditions, yet the consumer spending is not there.
What if a stronger Yen encouraged Japanese business to out-source some its labor to lesser developed countries to maintain corporate profitability? This would undoubtedly cause higher unemployment in Japan, but could spark further innovation and new industry which could potentially take care of the employment gap. With ridiculously low interest rates, start up businesses could have a leg up in the global economy by being able to borrow more cheaply.
This could also encourage spending by Japanese consumers, as their new found “wealth” allows them to buy goods and services more cheaply. With stronger Yen chasing more goods and services, this could actually help cause inflation which would be a welcome condition.
While the outsourcing of labor has clearly been one of the issues that has plagued the US, the Japanese could use the lessons from the errors made here in the US to create policies that will help them reduce deficits and maintain growth. An overhaul of tax policy to encourage spending could restore economic balance and make Japan’s economy less reliant on other world economies ability to consume.
For if the rest of the sensible world is pursuing austerity measures to reduce deficits (and the only non-sensible one, the US, is forced to reluctantly change its spending habits), then the Japanese economy would be able to better withstand threats to its economy by having domestic demand return.
Because what it is certain is that the policies of the past have not helped the Japanese economy improve. Maybe it is time for some new thinking. While these changes wouldn’t happen overnight, the shift in sentiment could be seen as a step in the right direction.
Or they could maintain current policy which invariably will lead to currency intervention, which could be too much for them to handle alone. While they may be looking for “coordinated action”, no other economy is going to willingly contribute to weaken the Yen at the expense of their own currency. Particularly the US. And China.
This could induce major losses contributing to further debt and hastening the pace that the Yen strengthens, in direct opposition to their intentions.
If they want the Yen to weaken, I would advise them to say the opposite. “A strong Yen is desirable by the Japanese economy as we are shifting economic policy to encourage domestic demand and spending.”
Then watch the massive sell-off begin!
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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Risk Appetite Returns- For Now!
By Mike Conlon | August 26, 2010
This morning global stock markets are higher, rebounding from 7-week lows. This has encouraged a bit of risk taking, but the question remains: how long will it last?
US weekly initial jobless claims came in at 473K, besting analyst expectations of 485K and better than last week’s reading of 504K. While one week does not make a trend, the fact that this figure was not worse than expected is seen as positive.
In the UK, CBI reported sales figures came in at 35, handily beating the expectation of 18 and showing signs that the UK is economy is still on solid ground.
In the Euro zone, Ireland issued short term debt at rates lower than their last offering, shrugging off the S&P debt downgrade from 2 days ago and bolstering the view that the market has not given up hope of recovery. The offering was over-subscribed, showing high demand for the debt issuance.
So this morning we are seeing some risk appetite return to the market, with commodities and stocks higher on a day that is light on news.
In the forex market:
Aussie (AUD): The Aussie is higher this morning on risk appetite despite the fact that private investment declined 4% vs. an expected gain of 2.3%. The elections appear to be dead-locked at this time, which many are viewing as a positive for stocks, especially the miner who may avoid the mining tax as a result. (Click chart to enlarge)
Kiwi (NZD): The Kiwi is the biggest gainer this morning as oversold conditions due to the inflation report may have been overblown. The Kiwi has sold off the most in recent trading.
Loonie (CAD): The Loonie is also higher due to risk taking as oil prices have rebounded to 73.50. In addition, if US jobless claims continue to improve, then a more positive outlook for the US economy would be positive for the Loonie.
Euro (EUR): The Euro is also higher has Irish debt costs actually were lower despite S&P’s best efforts to push them higher. In addition, loan growth in the EU is picking up at the fastest pace in nearly a year in a sign that both households and business may be feeling more confident.
Pound (GBP): The Pound is also higher on the back of the CBI sales figures and going into tomorrow’s GDP report. The UK economy appears to be rebounding, yet sentiment surrounding the UK austerity measures has left the market confused about economic prospects going forward. (Click chart to enlarge)
Dollar (USD): The Dollar is weaker this morning against all but the Yen in a classic risk taking scenario. Stock futures are higher as initial jobless claims figures came in better than expected. There is a slew of data out for the US tomorrow, and provided the data doesn’t come in way worse than the already lowered expectations, should continue to bring about some risk appetite.
Yen (JPY): The Yen is lower across the board and rebounding some after the intervention talk has begun to heat up. Today’s risk taking and higher Nikkei has provided relief for the safe haven of the Yen. CPI data is due out tomorrow and expected to show continued deflation, which shouldn’t have much of an impact on the market one way or another. (Click chart to enlarge)
Today is a welcome respite from the selling that has occurred earlier this week. With very little market moving news out today, risk appetite has increased. However, we’re not out of the woods yet. As the market becomes accustomed to slower growth, we’re going to experience these swings between risk taking and risk aversion.
Today feels like a slow day, as perhaps traders are finally going to take some time away to enjoy what’s left of the summer. So “no news is good news” and that appears to be the theme for the day.
Just remember to be cautious, as one day does not a trend make.
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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Here We Go Again?
By Mike Conlon | August 25, 2010
Yesterday, S&P downgraded Ireland’s sovereign debt which sent bond yields higher for the troubled Euro zone nation. However, German business confidence figures came in better than expected which has counter-balanced the regions prospects and is providing a bid for the Euro.
Here in the US, Durable goods orders came in worse than expected and yesterday’s dismal existing home sales figures shows signs that the US economy may be floundering. This has caused speculation of further Fed quantitative easing to heat up as policy makers attempt to revive the US economy.
In Japan, the official jaw-boning has begun as Prime Minister Noda said he was prepared to take “appropriate action” to combat “one-sided” currency fluctuation.
Overnight, equity markets are lower, and the US stock futures are lower going into the open. Oil has retreated to 71.50, and gold is higher as investors seek safe haven assets.
In the forex market:
Aussie (AUD): The Aussie is higher this morning despite the uncertainty surrounding the elections Down Under. As the votes are being tabulated, right now it appears to be a dead heat. Yen weakness has provided the Aussie with a bid, and completed construction work figures came in better than expected.
Kiwi (NZD): The Kiwi is lower on risk aversion following yesterday’s reduction in the expectation for inflation, despite overall Yen weakness.
Loonie (CAD): The Loonie is also lower as its high correlation to oil prices has reduced demand and general risk aversion and US economic weakness reduces its prospects for economic growth. Yesterday’s retail sales figures are still in the back of trader’s minds.
Euro (EUR): The Euro is mostly higher to start the US session despite the Irish debt downgrade. German business confidence figures came in better than expected to its highest reading since 2007. This has caused yield spreads between German bonds and those of the PIIGS nations to rise. While the PIIGS haven’t had trouble with debt offerings, higher yields could impact their ability to service that debt. (Click chart to enlarge)
Pound (GBP): The Pound is mostly higher with no news on the docket to affect it one way or another. UK Treasury Minister Hoban defended the government’s austerity measures in a BBC interview, and today’s price action could be a technical bounce after 3 days of declines. (Click chart to enlarge)
Dollar (USD): The Dollar is trading higher vs. the commodity currencies and Yen as the US economy appears to be weakening. Durable goods orders came in at -3.8% vs. an expectation of .5% which highlights the effect of the withdrawal of the “stimulus” funds on the economy.
Yen (JPY): The Yen is lower as the jawboning has increased in Japan. Speculation of intervention in the currency has increased as the Yen pulls back from 15-year highs. In addition, export growth slowed as a result of the combination of reduced world demand and the higher Yen, yet it came in slightly higher than expectations. Keep your eyes on this one!
It looks like extend and pretend may be coming to an end. As the US “stimulus” plan comes to end, the economic data is starting to show that private demand is just not there. This is mostly likely a result of government “crowding out” private business as the money came from government coffers.
However, because policy is not in place to encourage private business, unemployment remains high which reduces consumer demand which in turn causes economic growth to stagnate. Uncertainty over financial regulation, tax policy, and health care has left business content to drive profits through reduction and not expansion.
So one would think that it’s time to change these policies, right? Wrong. The answer that is being talked about is either additional stimulus or further quantitative easing! Talk about making a bad situation worse.
It is going to be interesting to see how this plays out and whether the elections here in the US bring about change in policy. Until then, be prepared for the pain.
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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Race to the Bottom, 2.0
By Mike Conlon | August 24, 2010
Risk aversion is clearly the theme this morning in the markets as heightened fears of economic slowdown are weighing heavily on world markets. While economic data as of late hasn’t been horrible, it is the constant fear-mongering from government and banking types that keep the markets on edge.
Case in point: Some British policy-maker (who I’ve never heard of before) came out and stated that the UK faces a “real risk” of a second recession. Really? Any more so than any other region around the globe? Or is this a case of someone, somewhere that wants to see a lower Pound to encourage exports?
Let’s face it; wouldn’t every region around the globe prefer to see their currency lower to encourage exports? Thus we are nearing the “race to the bottom, 2.0.” This morning’s risk aversion has pushed the Japanese yen to 15-year highs, and the rhetoric about intervention is now coming directly from the horse’s mouth. Japanese PM Kan stated that “steep currency moves are undesirable” and is looking for joint action from the G-7. It is becoming more apparent that Japan may not have the ability to effectively intervene in their currency alone, as the Swiss National Bank found out recently.
Meanwhile, in New Zealand, 2 –year inflation expectations came in lower for the first time in over a year, prompting expectations that the RBNZ will not raise rates again at the September meeting.
In the Euro zone, the German economy showed it expanded at a 2.2% pace as final 2Q GDP figures were released. The German economy is almost single-handedly keeping the Euro zone economy afloat.
In the forex market:
Aussie (AUD): The Aussie is lower on risk aversion this morning as global market selling has caused the un-wind of carry trades as investors flee yield in favor of safe haven assets.
Kiwi (NZD): The Kiwi is lower on risk-aversion and also because they reported a decrease in the 2-year inflation expectation for the first time in almost a year. The figure showed an expectation of 2.6%, down from the previous reading of 2.8%. It is now highly doubtful that the RBNZ will raise rates in September, especially in light of recent global market fears.
Loonie (CAD): The Loonie is the worst performer this morning, as it has been hit with the triple-whammy of lower oil prices (around 72), bad retail sales figures, and overall risk aversion. Retail sales figures came in at .1% vs. an expectation of .4% showing signs that the Canadian economy is slowing. It doesn’t help that Canada is so reliant upon the US to import from them. (Click chart to enlarge)
Euro (EUR): The Euro is mostly lower on risk aversion, despite the fact that the German economy reported final 2Q GDP figures showing growth of 2.2%. While under normal circumstances this would be considered very good; today is looking more and more like an ugly day overall.
Pound (GBP): Thank you Mr. No Name policy guy for jaw-boning the Pound lower, thereby causing further fear in the markets. The Pound is at 1-month lows to the Dollar, trading just under 1.54. (Click chart to enlarge)
Dollar (USD): The Dollar is higher due to the flight to safety trade and look for it to continue to gain after the existing home sales figures come in which are bound to be dismal. I’m sure the spin cycle will be on high, but make no mistake economic conditions here in the US are deteriorating.
Yen (JPY): The Yen is trading at 15-year highs against the Dollar, as risk aversion is causing the un-wind of carry trades. The jaw-boning is picking up in Japan, but is this going to be a case of too little, too late? Questions abound over whether or not the BOJ can do anything about Yen strength as risk themes may be too large for them to go it alone. This shows the fragile shape of the Japanese economy, and PM Kan’s call for joint action from the G-7 nations may be the final nail in the coffin. (Click chart to enlarge)
It is no secret that everyone would like to have a lower currency value to help their exports which encourages manufacturing and provides employment. The reality is that it is not possible. Thus we see the “race to the bottom, 2.0”, as various reports cause fear-mongering.
As risk aversion picks up steam, it is becoming harder and harder for Japan to slow down the Yen’s ascent. While intervention may have worked in the past, in today’s market it is not as easy to accomplish. They may need to sit through some pain and wait until the world regains confidence in the global economy.
While it is no secret that the global economy will be slowing as governments remove stimulus, the crisis we are in right now is one of confidence. Financial and government types, while out to further their own interests; should be more cognizant of the impact of their rhetoric globally.
While fears of a global double-dip recession are heightened, this is nowhere near as bad as the banking crisis of 2008. When there is fear in the markets, there is also opportunity. For those who know what they’re doing.
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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China Surpasses Japan!
By Mike Conlon | August 16, 2010
Overnight, Japan reported less-than expected GDP figures which allowed China to leap-frog into second place in global economic strength. Japanese GDP came in at .4% vs. an expectation of 2.3%, which was a major disappointment. This sent the Nikkei lower and the Yen higher, as risk aversion is mild but continuing from last week.
In the EU, CPI figures came in mostly in line with expectations, with July CPI falling .3% vs. an expectation of a .4% decline, and the headline figure matched expectations at an increase of 1.7% annualized.
Home prices in the UK fell 1.7% this month according to Rightmove, and the market is waiting for Wednesday’s minutes from the rate policy meeting which may show that the BOE is prepared to continue with accommodative policy to support the economy.
In the US, the Empire Manufacturing figures came in less-than expected, but higher than last month. This months’ reading was at 7.10 vs. an expectation of 8.0, but higher than last month’s 5.08.
Dollar weakness is the theme of the morning, as recent reports that China has been favoring the Euro may be behind the move higher from its June lows. As the world’s second largest economy, China will have a major impact on the global recovery.
In the forex market:
Aussie (AUD): The Aussie is mixed this morning, trading higher among the other commodity currencies and the Dollar, but lower vs. Yen, Euro, and Pound. Tomorrow the RBA will release the minutes from its rate policy meeting which will provide further insight into the health of the Australian economy. (Click chart to enlarge)
Kiwi (NZD): The Performance of Services Index fell to 50.5 vs. the previous month’s reading of 55.1, showing that the sector was expanding at its slowest pace in nearly 10 months. The Kiwi is lower as a result, also feeling the effects of Yen strength and mild risk aversion.
Loonie (CAD): This is a light week for news out of Canada, with Friday’s CPI data to be the headliner. Expect the Loonie to trade on oil prices and US sentiment this week, as a slowing US economy will affect Canadian exports and thus economic growth.
Euro (EUR): Euro zone CPI data came in this morning mostly as expected, and shows signs that the economy while slowing is still moving forward. Recent Euro strength from the June lows is being attributed to Chinese demand and general displeasure with the US dollar. (Click chart to enlarge)
Pound (GBP): The pound is mixed this morning as home prices came in lower, and the minutes from the rate policy meeting are due out on Wednesday. In addition, CPI data and retail sales figures will be out tomorrow which will contribute to Pound sentiment surrounding BOE monetary policy.
Dollar (USD): The Dollar is weaker this morning as US economic status is coming under fire from abroad. Concerns over massive deficits have led China to invest more heavily in Europe, and the viability of the path the US is following is being questioned.
Yen (JPY): The yen is higher across the board, as GDP figures came in worse than expected. The intervention chatter is starting to heat up as Yen strength vs. the US dollar is returning toward last week’s 15-year highs; however it is questionable as to how effective this would be. A higher Yen will affect demand for Japanese exports, which could negatively impact stock prices going forward. (Click chart to enlarge)
It should come as no surprise that the global economy is beginning to falter as little by little, policy makers are removing the stimulative measures designed to stabilize their economies. Falling GDP in Japan is just one of these signs.
Announced austerity measures in the UK and Euro zone have been met with market approval, which the US policy of “extend and pretend” continues to garner criticism. And when I talk about market approval, I really mean China.
The Chinese have amassed huge currency reserves due to their peg to the US dollar, among other factors which have tilted the global economic balance in their favor. Rightly or wrongly, China has established itself as the major player going forward.
As various data points come in around the globe, remember to follow the money. That is, do what China does. If they are not enamored with US policy, then you shouldn’t be either. As the newly-minted No. 2 economy on the planet, it will only be a matter of time before they really begin to flex their muscle.
So the US had better take notice, if they haven’t already. Because the new No. 2 won’t be satisfied until they become No.1, using whatever means necessary.
Of course it doesn’t help that current US policy re-enforces the Chinese position.
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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Markets Still On Edge!
By Mike Conlon | August 12, 2010
Overnight, the Asian equity markets fell, following yesterday’s 2%+ declines in US equities. This has brought about some continued risk aversion, and US stock futures are lower to start the morning. European stocks have held up modestly, though revised growth projections from the ECB and lower than expected industrial production figures have put some pressure on the Euro.
In Australia, the economy added more jobs than expected, but the unemployment rate ticked higher as more people entered the workforce.
Meanwhile here in the US, jobless claims increased to their highest levels in nearly 5 months, coming in worse than expected and lending more credence to the Fed’s forecast of slower growth.
Speculation is heating up in Japan over currency intervention as the Yen advanced to 15-year highs vs. the Dollar, but it is paring back gains after Finance Minister Noda refused to comment on possible actions.
So we are seeing some mild risk aversion in the currencies, led by Dollar strength due to its safe haven status.
In the forex market:
Aussie (AUD): The Australian economy added 23.5K jobs last month, beating an expectation of 20K, but the unemployment rate ticked higher to 5.3% vs. and expectation of 5.1% as more people entered the workforce. This has lead to the sentiment by some that the RBA raised rates too far, too fast. This will likely bring about a pause in hikes in the near-term, as signs that the global economy is cooling off are prevalent. (Click chart to expand)
Kiwi (NZD): The Kiwi is lower on risk aversion in addition to a private report that showed that manufacturing in NZ declined for the first time in nearly a year. Calls for reduced government spending from Finance Minister English to rebalance the “lop-sided” economy are adding fuel to the fire.
Loonie (CAD): The Loonie is holding up well considering the risk aversion in the market and the fact that oil is trading lower to 76.75. The Loonie is faring better than the other commodity currencies as Dollar strength vs. the rest is seen as more positive despite the economic woes in the US.
Euro (EUR): The Euro is lower as industrial production figures fell .1% vs. and expectation of a gain of .6%, showing economic weakness. Meanwhile, rumblings from both Greece and Spain over their slowing economies have returned focus to the Euro zone, and ECB has lowered its growth forecasts.
Pound (GBP): The Pound is mostly lower except vs. the commodity currencies as perhaps the gains that the Pound made recently were over-extended. Next week, the BOE will release its policy meeting minutes which should provide more clarity into the BOE’s line of thinking. (Click chart to expand)
Dollar (USD): The Dollar is showing strength again today, as risk aversion is the continued theme this morning. Initial jobless claims came in worse than expected at 484K vs. an expectation of 465K. This clearly shows that the economic picture in the US is worsening and not getting better, and if the world’s largest economy continues to slow, it could bring down the whole kit and caboodle.
Yen (JPY): The Yen is seeing strength again today as carry trades are unwound, though it is weaker against the Dollar. Speculation is rising about possible intervention in the currency, as it bounced off of 15-year highs vs. the Dollar. (Click chart to expand)
Talk of a double-dip recession is beginning to heat up again, led by the US government’s failure to inspire confidence in both consumers and business alike. The Fed statement from Tuesday echoed these thoughts, and many believe that more accommodative monetary policy is not the answer.
Some have said that Bernanke is “pushing on a string”, meaning he’s getting nowhere. Jobless claims and home foreclosures continue to rise, and will most likely continue until the REAL problem is addressed.
And what is the real problem, you may be asking yourself?
The problem is that the business climate in the US is so negative right now, that companies will actually do better by contracting and not expanding. Not only does this mean that they are not hiring workers, but potential downsizing to cut costs to meet profits is the new corporate mantra.
So our government threatens more regulation and tax hikes while vilifying those that create jobs! Do you think the CEO of XYZ corp. is concerned that people are unemployed? Not really, he’s chillin’ at his beach house somewhere ready to ride out the storm!
Meanwhile the disconnect between Main St. and Wall St. grows wider as populist policies by politicians further erode both business and consumer confidence. Without confidence, both business and consumers are reluctant to spend which creates further downward pressure on the economy!
Recent polls by the Wall St. Journal show that Main St. is just as fed up with Washington DC as it is with Wall St. It’s no wonder the “throw the bums out” sentiment is starting to gain traction. I just hope it’s not too late!
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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Is the UK OK?
By Mike Conlon | August 11, 2010
Earlier this morning, the BOE came out with their quarterly inflation report and predicted that inflation will slow below the bank’s target rate. They also said that they are expecting slower growth and that they are prepared to add further stimulus if necessary.
Meanwhile, the UK economy reported that it added jobs at the fastest pace in over 21 years, handily beating jobless claim estimates. In addition, average weekly earnings came in slightly higher than expected.
So it’s the UK economy is questionable right now, as data is not supportive of the weaker view of the economy, but the BOE may be hedging its bets in the event they experience a major downturn.
So far this morning we are seeing major risk aversion, with world stock markets lower, US equity futures lower, and both Dollar and Yen strength. This comes on the heels of the FOMC meeting yesterday, which the market initially read as positive as it pared losses and finished down marginally after having been much lower.
But as I said yesterday, it would be difficult to predict the market reaction to the Fed announcement, with competing views jockeying for position. So while yesterday appeared to be favorable, today is showing just the opposite. Global growth is slowing, and more negative economic forecasts from Central Bankers could induce a further round of risk aversion.
Adding to the mix was a report that Chinese industrial growth slowed even further, and inflation spiked to its highest levels this year.
In the forex market:
Aussie (AUD): The Aussie is lower on risk aversion and slower Chinese growth despite the fact that consumer confidence figures came in at 7-month highs. The sentiment index gained 5.4% after the RBA left rates unchanged as inflation remains in check. The Australian employment report comes out tomorrow.
Kiwi (NZD): The Kiwi is lower on risk aversion as well, with no major news on the docket until Thursday’s housing price index and retail sales figures.
Loonie (CAD): The Loonie is also lower this morning, being hit by the double whammy of risk aversion and lower oil prices, breaking the 80 dollar mark down to 79.50. In addition, the trade deficit widened as exports declined, most probably a function of a slowing economy here in the US.
Euro (EUR): The Euro is also lower as its status as the “anti-dollar” is in full force this morning. There is no major news on the docket today for the Euro; however Friday will bring the Euro zone GDP report which will show the status of the economy. (Click chart to enlarge)
Pound (GBP): The Pound is mixed this morning trading as would be expected in a full blown risk aversion scenario. The BOE cut growth forecasts, but employment figures came in better than expected. (Click chart to enlarge)
Dollar (USD): The Dollar is enjoying its status as the world’s reserve currency this morning, showing strength despite the fact that world markets have reacted negatively to yesterday’s Fed announcement. US trade balance figures came in worse than expected, but that should come as no surprise.
Yen (JPY): The Yen is the big winner this morning as is typical under risk aversion scenarios. The USD/JPY pair broke the “line in the sand” of 85, and it will be interesting to see if the BOJ does anything to halt Yen strength. We did get comments from the Japanese Finance Minister, who said that they would closely monitor “one-sided” yen moves. (Click chart to enlarge)
It what may seem like a cruel irony to some, the US reports a slowing economy and potential further easing, and the Dollar is “rewarded”. While additional liquidity may make its way into the economy, overall negative sentiment may not turn around.
I mentioned yesterday that we could be looking at “Japan 2.0” which is now looking more and more like a reality. As everyone around the globe scrambles to act in their own best interests, there are going to be clear winners and losers. However, as forex traders we must be prepared to follow the market regardless of how things look.
Things can change quickly very quickly in financial markets, so it is important to keep an open mind and trade what you see and not what you think you know.
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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What’s Ahead for the Fed?
By Mike Conlon | August 10, 2010
All eyes today are going to be glued on the FOMC policy meeting today where the Fed is expected to keep rates at .25% for an “extended period”. However, more attention will be paid to the policy statement which is expected to show concern about a decline in the economy.
There is an expectation in the marketplace that the Fed will announce that they are going to reinvest proceeds from mortgage bond holdings into new securities. Further asset purchase plans could also be announced, which would be further quantitative easing designed to stimulate the US economy.
Thus there is discrepancy in the market as to whether or not this would be received as positive or negative for the Dollar. The market is starting the morning in risk-aversion mode, with Dollar strength across the board. Further quantitative easing has been dubbed as “QE2”, could send the markets higher and increase risk appetite as the prevailing thought is that looser money will make its way into other areas of the economy. However, this would also signal that economic recovery is very fragile, which would be seen as a negative and could induce further risk aversion.
One of the problems seen in the US economy is a lack of demand, so there is some concern that monetary easing may not be enough to combat the problem. The idea is that if money is cheap enough people will want to borrow, and potentially use that money to fund major asset purchases (such as housing). However, consumer psychology is very fragile as concerns about employment have trumped the desire to spend. All of the easing in the world won’t fix this situation. So if the Fed does ease further, look for stocks and commodities to move higher, as home prices and other assets continue to fall.
In the forex market:
Aussie (AUD): The Aussie is lower on risk aversion. Business confidence figures came in at a 1-year low. Tomorrow Australia reports consumer confidence figures and on Thursday unemployment figures. There is also concern in the market about a potential Chinese slowdown, as the Chinese reported lower exports and slower property price gains. (Click chart to enlarge)
Kiwi (NZD): The Kiwi is also lower for many of the same reasons as the Aussie, but slightly more so because the NZ economy is not as robust as Australia.
Loonie (CAD): The Loonie is also lower as oil prices have slipped back to the 80 mark on signs that the global economy is slowing. In addition, the new housing price index came in slightly lower and housing starts fell to a 7-month low, though slightly better than expectations.
Euro (EUR): The Euro is mixed this morning trading higher against the Pound and risk currencies. CPI figures in Germany came in as expected, though French industrial production and manufacturing figures were lower.
Pound (GBP): The pound is lower as a UK housing gauge showed its first price drop in a year as demand for housing weakened. This comes ahead of the BOE inflation report due out tomorrow, which would support the idea that inflation is going to fall back to the target range, which could reduce the likelihood of a return to normalized monetary policy. (Click chart to enlarge)
Dollar (USD): Dollar strength this morning is coming about for two reasons: risk aversion prior to the FOMC statement, and because the market has actually reduced speculation about quantitative easing. There is one thing we can be certain of; that there will be major volatility surrounding the statement, which is due out at 2:15 EST.
Yen (JPY): Then is showing strength today as both risk aversion and a lower Nikkei has increased demand. In addition, the Bank of Japan left interest rates unchanged and the government assessment of the economy was that it was improving despite a higher Yen. As a result, speculation over monetary easing or intervention has lessened. (Click chart to enlarge)
Today could be a very important day for both the US and global economy as the results of the FOMC could set the course for future growth going forward. Part of the fear in the market is that we are facing deflation; and Bernanke the student of the Great Depression is going to do everything he can to try to combat it.
The problem is, all the easing in the world may not encourage demand if people are fearful about the path the US economy is on. Many consider this to be “Japan 2.0”. The Japanese have been battling deflation for years and all of the money that they pumped into their banking system never made it out the door as there was little demand and no confidence to spend.
There is going to be MAJOR volatility surrounding the Fed announcement, so traders should be careful and wait for the dust to settle before getting into position. I personally will be out of the market until after the decision, as I prefer to see what is going to happen rather than try to guess.
My advice is that you should do the same.
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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