Portugal Downgrade!
By Mike Conlon | July 13, 2010
In the European session, Moody’s ratings agency downgraded Portugal two notches to A1 but maintained a “stable” outlook while citing weak growth prospects. ECB President Trichet maintained that monetary policy is appropriate in an attempt to assuage the market. Meanwhile, investor confidence figures in Germany weakened, as did wholesale prices.
In the UK, higher than expected CPI figures showed that inflation may not be subsiding as the BOE had expected which halted the Pound’s 3-day decline as expectations for normalized monetary policy have picked up for the second half of 2010. In addition, home prices expanded to the highest reading since 2007, adding further support for the normalized monetary policy view.
Earnings season in US kicked off yesterday after the bell and generally speaking have been viewed as positive. Stock index futures are higher in the pre-market, so we are seeing some Dollar weakness generally in line with risk-taking.
In the forex market:
Aussie (AUD): Overnight, Australian business was unchanged as businesses reported improving sentiment. However, there is some pressure on the Aussie as concerns over a slowing Chinese economy have increased.
Kiwi (NZD): The Kiwi is rebounding from earlier lows due to Chinese slowdown concerns as the market is anticipating higher CPI data later this week.
Loonie (CAD): The Loonie is higher this morning as both US corporate earnings and commodities are higher. The Loonie will be in focus this week as Canada stands to benefit from good earnings in the US more so than the Aussie and Kiwi as the US is the largest importer of Canadian goods and services.
Euro (EUR): The Euro is lower this morning on the Portuguese debt downgrade, though Greece had a successful bond auction which has pared losses. Both German and Euro zone economic sentiment figures came in less than expected, showing a deteriorating outlook for the economy. Wholesale prices in Germany were also lower, with the index showing a decline of .2% for the month vs. an expectation of a .2% rise, also taking the year-over-year figure down to 5.1% from an expectation of 5.5%.
Pound (GBP): The UK reported CPI data showing a 3.2% gain, less than the BOE was hoping and still above its target limit of 3%. The BOE has a dual mandate to keep inflation in check and encourage employment, so it may have its hands full trying to balance economic growth and taming inflation. Nevertheless, the market sees this as reason to support the view that the BOE may return to normalized monetary policy in the second half of 2010. In addition, house prices rose 11% to the highest levels in almost 3 years.
Dollar (USD): The Dollar I slower this morning as corporate earnings season has started and the initial reports are positive for the economy. Stock futures and commodities are higher in the pre-market, and the inverse correlation of the Dollar to the equity markets appears to be intact this morning and risk appetite is increasing.
Yen (JPY): The Yen started the morning higher but is giving back gains as the US market becomes the focal point of the trading day. Risk due to the debt downgrade in Portugal had provided the Yen with a bid, but that appears to be reversing. This took the Nikkei lower, despite the fact that Japanese consumer confidence advance for the sixth straight month.
The two major themes in the world market right now are US corporate earnings and the continued EU debt crisis. While US earnings have started out on a positive note, the downgrade of Portuguese debt has counter-acted the positive sentiment.
It is important to note that certain news carries more weight in different market sessions. For example, the earnings news was initially viewed as positive in the overnight session….until the debt downgrade reversed sentiment in the European session. Now that the US session is about to begin, the market has returned its focus to the positive news in the US.
This is a familiar pattern that we see time and time again. Since the majority of the risk in the marketplace stems from the Euro session, there will be times when seemingly good news can be derailed by bad news only to be outweighed by the good news again as the US session begins.
This can provide traders with numerous opportunities to get into positions based on the opening of the US session! For those who prefer to hold trades overnight, you really need to be careful with stop placement as the potential for swings from risk taking to risk aversion are increased as each trading session opens.
So today will be interesting to see which news today is more favored by the market. My guess is the good news wins!
If you are not familiar with the different trading sessions and how they affect the forex market, be sure to check out our currency trading courses!
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O Canada!
By Mike Conlon | July 9, 2010
This morning, Canadian employment figures came in and showed a drop in the unemployment rate from 8.1% to 7.9% on strong jobs growth. The Canadian economy added 93K jobs vs. an expectation of 20K. This belies the good economic story going on in Canada despite the fact that they rely on the US to import their goods and services. Should the US economy slow down, it could affect Canadian GDP negatively.
In the European session, ECB President Trichet made the “we’re not out of the woods yet” comment, saying that there is still question over the health of the EU banking system and that serious changes need to be implemented to get better control over the deficits. The bank stress tests are due in about two weeks.
In the UK, PPI figures came in lower than expected, showing signs that the BOE may be correct in their assessment that inflation would be subside. The minutes from the rate policy meeting will be released on July 21st, and is expected to show a continued dovish stance.
Lastly, we’re seeing Dollar strength this morning despite the fact that risk-aversion is mild. This is probably more of a technical bounce and the function of traders not wanting to hold risk assets over the weekend. US stock earnings season kicks off on Monday.
In the forex market:
Aussie (AUD): The Aussie is lower this morning after posting its best week of gains in nearly 9 months. Bets that a further rate hike in 2010 have increased as a result of the best surge in employment they have seen in nearly 4 years.
Kiwi (NZD): The Kiwi is also lower, trading in sympathy with the Aussie.
Loonie (CAD): The Loonie is the best performer this morning as employment gains bested analyst expectations by a wide margin. There is a good growth story going on in Canada, as they benefit from commodity gains and as long as their largest trading partner to the south (US) keeps spending. In addition, housing starts came in largely in line with expectations.
Euro (EUR): The Euro is lower this morning as the market prepares for the bank stress tests. There is much speculation in the market about what the results will be, and what measures will need to be taken to insure financial health. One such solution would be that the banks may need to raise additional capital. German CPI figures came in as expected, showing signs of some price stability. There are also rumors floating about that the ECB may need to take a more dovish stance with the Euro, which could mean increased quantitative easing or possible rate cuts, though the latter seems unlikely at this point.
Pound (GBP): The Pound is lower as well, as PPI figures fell for the first time in nearly 2 years, easing inflation pressures in the economy. The UK had been seeing inflation outside of government targets, but it appears that it may be coming back to their preferred range. In addition, the UK trade deficit widened as a .2% gain in exports was negated by a 2.4% gain in imports.
Dollar (USD): The Dollar is higher against all but the Loonie, as the market moves toward the safe haven of the Dollar going into the weekend. In addition, the Dollar has been beaten up this week as risk-taking has been the primary driver. Reports are coming out that economists are paring back their expectations for growth in US, but see no signs of the dreaded double dip at this point despite the recent patch of negative economic news. US earnings season also kicks off on Monday, so this could be adding to market fears should corporate profits be down.
Yen (JPY): The Yen is starting out lower this morning, as the Nikkei was able to hold on to gains in the overnight session. There is some mild risk-aversion in the market today, and the Yen is higher than the European currencies.
So today is a bit of a mixed bag. Neither risk-taking nor risk-aversion can be seen as a dominant theme. Good news out of Canada has put the focus back on the N. American currencies, with the European ones lagging.
US corporate earnings will be the big story next week, and if those reports are positive, it could buoy market sentiment higher. While the stock market health does not equal overall economic health, it will act as a good economic barometer and could provide hope that the employment picture may be about to get better.
If those earnings reports are largely negative, then that may open a whole new can of worms as the market is already aware of the general state of the economy. In addition, if Washington DC policies continue to threaten business, then it could be a long time before companies begin to hire employees again, if they are reporting good gains.
Either way, there is still risk in the market. If we can successfully get through next week, the European bank stress tests will pose the next major threat.
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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Ban The Shorts!
By Mike Conlon | June 9, 2010
Both France and Germany have called on the EU to ban short-selling on certain stocks and government bonds with the intention to curb speculation in the market. While I am never a fan of this type of regulation, there does need to be some sort of “fix” for the market as speculation has gotten a little out of hand.
However, there are always unintended consequences to this type of action, and this could end up hurting their ability to raise capital. This could also hurt the forex market, as Euro-related pairs lack the volume to trade orderly. Nevertheless, there still is a ton of risk related to the Euro, with sovereign debt defaults the primary driver.
In addition, ECB President Trichet helped push the Euro higher with comments on the state of the Euro. As I mentioned yesterday, expect the game of “show and tell” to pick up, with officials telling us how great everything is but showing us little.
Also today, the US Fed Beige Book report comes out, with Bernanke expected to echo his comments from the other night.
In the forex market:
Aussie (AUD): Consumer confidence fell for the 3rd straight month down under, nevertheless the Aussie is higher on risk appetite. Fears of a global slowdown (particularly in China) and the raising of interest rates have added to the sentiment that the economy will slow in Australia.
Loonie (CAD): The Loonie is also higher this morning as oil prices have bounced higher and equity futures are set to open higher on risk-taking in the market.
Kiwi (NZD): The Kiwi is higher ahead of its interest rate policy meeting tomorrow, where the market is anticipating a 75% chance that the RBNZ will raise rates 25bp to 2.75%. Put me in the camp that is betting against the rate hike, as I feel the NZ economy rides on the coattails of Australia, and that the risk in the market may be too great to warrant a hike just yet.
Euro (EUR): The Euro is mixed this morning, trading higher against the safe-haven currencies, but lower against the commodity currencies. Comments from the ECB have helped push the Euro higher slightly, but let’s not forget about the huge risk the Euro poses as they struggle to get their fiscal houses in order.
Pound (GBP): The Pound has a bid this morning after a 4-day decline as investors seems more confident in the UK’s ability to combat their fiscal woes, much more so than the EU. The UK trade balance missed estimates, but narrowed from last month’s reading.
Dollar (USD): Today we get “Fedspeak”, as Bernanke gives his beige book report to Congress. I do not expect any change in language from the Fed Chief, and at this point I’m guessing that we will not see a rate hike this year. The Dollar has been higher this year on the flight to safety trade, and at this point I believe that inflation is a non-issue.
Yen (JPY): The Yen is lower this morning as risk-taking inspired carry trades are taking place ahead of the New Zealand rate decision. Japan will report its own GDP figures tomorrow, which are expected to show moderate but steady growth. In addition, new Finance Minister Noda said he would like to see price gains above 1%, but didn’t make that an “official” inflation target. Japanese deflation has plagued its economy for some time.
As I mentioned yesterday, this is “cheer-leading” week for the various markets, as the lack of hard economic data is supplanted by discussions of various economic situations.
I am always skeptical when it comes to government announcements and prefer to analyze the hard data myself. But with that in mind, you have to pay attention to what they are saying.
As a trader, it is important to trade what you see and not what you think should happen. If Bernanke wants the market to go up, you should play along even if you think the fundamentals don’t match. However, be sure to exit quickly at the first sign of market sentiment change as the market is always right, regardless of what is said.
So pay close attention to the technicals as the various market participants digest the rhetoric.
Do you have a strong grasp of technical analysis?
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Not So Fast, Canada!
By Mike Conlon | April 9, 2010
I admit it. My rose-colored glasses when it comes to the Loonie have perhaps soured me on the Kiwi and for that I am sorry. I have moved the Loonie higher in my “risk totem-pole” as my belief is that prospects for growth are better in Canada than in New Zealand.
Well today the market is saying otherwise. Canadian job growth came in less-than expected, prompting those in my camp to run back to the Kiwi.
In other news across the pond, both the Euro and the Pound are finding support after ECB President Trichet re-assured the market on Greece, and UK PPI figures came in higher than expected prompting inflation fears.
In general, the market has been positive toward risk-appetite for some time, though it is always interesting to see that one day of losses can wipe out two days of gains, etc.
In the forex market:
Aussie (AUD): The Aussie is higher on risk appetite, as well as a report that Australia’s jobs boom may stoke inflation sooner than had been predicted. The jobless rate now stands at 5.3%, which may indicate a shortage of skilled workers which would in turn cause prices for said workers to increase. Basic supply and demand. Wage growth is one of the top indicators of inflation and the RBA has been vigilant in attempting to stave off inflation so more rate hikes may be coming.
Loonie (CAD): Loonie, I won’t quit you! I’m leaving the Loonie ranked higher than the Kiwi despite what the market is saying today. Employment figures came in this morning and Canada “only” added 17.9K jobs vs. an expectation of 25K, thus leaving the unemployment rate at 8.2%. While this rate is still high by world standards, the Canadian economy is poised to show growth and I still think that outside of Australia, Canada will be the next to raise rates.
Kiwi (NZD): The Kiwi is the best performer this morning, punishing those who abandoned it for the Loonie like only a jilted lover could. The main reason behind this is the interest rate differential, with the Kiwi currently yielding 2.5% as opposed to .25% for the Loonie, making it a better destination for carry trades RIGHT NOW. However, because the forex market is forward looking, any further signs of inflation in Canada could change this sentiment. Today, however, the Kiwi is king.
Euro (EUR): The Euro is going from “zero to hero” overnight as ECB President Trichet re-assured the marketplace that Greece would not default, claiming it is “not an issue”. In addition, signs are that economic recovery may be taking place as the German account surplus came in better than expected as exports were higher. Also, French manufacturing production ticked higher, as both have undoubtedly gained from recent Euro weakness.
Pound (GBP): The Pound is higher as UK PPI figures came in hotter than expected, showing signs that economic recovery may be stoking inflation. Much of the recent Pound weakness has been from uncertainty over elections and concern over the UK debt. The pound has had 10 straight days of gains vs. the Euro.
Dollar (USD): The Dollar is giving back some of its recent gains as risk appetite is on the palate of investors. The Dollar is back above parity vs. the Loonie after the Canadian jobs report. No major news for USD today.
Yen (JPY): No demand for the Yen today is driving it lower as it is game on for carry trades and world stock markets and commodities are higher. As the primary funding currency for yield-seeking carry traders, world market gains are usually Japanese yen losses. And that’s just fine by the BOJ and Japanese government.
Sometimes it is interesting to see how the forex market can shift moods back and forth so easily. One day you are afraid that a major country may default on its debt thereby causing structural complications for one of the world’s major currencies; and the next day its pizza and ice cream because assurances are made and some good economic figures provide a respite from fear.
And that’s the beauty of the forex market. By understanding that forex trading is relational, one can benefit from short to medium term trading in addition to longer term time-frames.
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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Greek Tragedy, Act II!
By Mike Conlon | April 8, 2010
Credit spreads are at the widest levels since the inception of the Euro as skepticism over Greek austerity is causing borrowing costs to skyrocket to the point where they may become unworkable. This has greatly heightened fears of Greek default, which in turn has put pressure on the Euro this morning.
In addition, the ECB predictably left interest rates unchanged at 1% in the wake of yesterday’s stagnating GDP report. ECB Prez Trichet is going to speak later and whether or not he dodges the Greek issue will be interesting to see.
In the UK, the BOE left both its asset purchase plan and interest rate unchanged going into the May elections as economic recovery is still on shaky ground and fears of the “double dip” persist.
All of this adds up to risk-aversion this morning and the different currency pairs are behaving as expected.
In the forex market:
Aussie (AUD): Australia added 19.6 K jobs last month and its unemployment rate held steady at 5.3%, almost half that of the US and Europe, giving support to the RBA decision to raise interest rates earlier this week. The economy appears to be chugging along in Australia as exports have been rising due to Chinese demand and the fact that Australia was largely able to sidestep the economic problems which are plaguing other world markets. Nevertheless, the Aussie is lower vs. Yen and USD on risk aversion.
Loonie (CAD): The Loonie is lower this morning as oil prices are lower as risk aversion is the theme of the morning. The Loonie is above parity with USD but still hovering. Canada will report its unemployment change tomorrow which if better than expected, could push the Loonie back to parity regardless of risk themes.
Kiwi (NZD): The Kiwi is just kicking about, trading lower on risk themes and commodity prices. No news on the Kiwi.
Euro (EUR): I feel like this story had been beaten to death already and without any positive news regarding backstops for Greece, the Euro will trade lower. A lower Euro is obviously good for exports (Germany), but default would be a catastrophe for the Euro which may bring structural issues to the forefront.
Pound (GBP): UK manufacturing surged to its highest level in almost 2 years, besting estimates two-fold. This is a good sign for the UK economy, which undoubtedly has benefited from a lower Pound. Despite this good news, the pound is lower as the BOE left the interest rate and QE program unchanged, and additional polls are showing that the Labor Party is gaining on the Conservative Party, which could lead to neither party holding a majority. It’s interesting to see that it is BAD news in the UK to have political gridlock, while it is actually favored here in the US. Go figure.
Dollar (USD): “Initial jobless claims increase unexpectedly” (AP). True headline. I mean really, is this really unexpected? We have a situation here in the US where Congress is spending like drunken sailors, our President is constantly speaking about everything under the sun EXCEPT jobs, and landmines keep trickling out of this new healthcare bill which shows that it will cost employers more and not less to implement. And people are “surprised” that jobless claims are higher? The Dollar is higher on risk-aversion. Nuff said!
Yen (JPY): Japanese machine orders fell vs. an expectation that there would be a gain as a result of increased overseas demand for Japanese exports. The Japanese are typically more cautious in their spending habits, so it may not be surprising that they are waiting to see more recovery in other global economies. So Japanese stocks are down and the Yen is higher as demand for Yen is higher due to risk-aversion and the un-wind of carry trades.
One of the great advantages to the forex market is that certain economic themes can play out over the course of a few days, thereby creating excellent short-term trends which can be played until the theme changes. This typically occurs by the reporting of some contrary news which causes the theme to reverse.
So at times I may seem like a broken record when news like the problems in Greece or UK elections are still in effect; but what that effectively does is drive that currency in the same direction until a situation is changed or some equal and opposite news outweighs the original driver of that currency.
This is the main reason why the forex market tends to trend better than all other markets, as governments cannot typically “turn on a dime” to reverse an undesirable trend.
So what are you waiting for?
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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ECB Leaves Rates Unchanged!
By Mike Conlon | January 14, 2010
In what can only be described as “not surprising”, the ECB left their benchmark interest rate unchanged at 1%. As a result, the Euro (EUR) is down across the board today. Also weighing heavily on the Euro is German Chancellor Merkel’s remarks about the debt issue in Greece hurting the strength of the Euro.
As it turns out, Greek debt is more than 4 times the EU’s limit as a percentage of GDP. ECB President Trichet has repeatedly stated that the EU will not bail out individual countries that have been fiscally irresponsible. So all eyes are on the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain) to see if any further problems may arise. While its no secret that these countries are not in good shape, it will be interesting to see who can turn it around and how it impacts the Euro going forward.
The basic “tug-of war” on the Euro is between the structural problems of the Euro Zone countries, and the Euro’s status as the “anti-dollar”. If global stock and commodities markets continue to rise, then the Euro may benefit if the “normal” risk-taking plays continue despite their fiscal problems.
In the meantime, news out of Australia is that their employment figures were much better than expected, putting the possibility of a future rate-hike back on the table, contrary to earlier statements from the RBA. The Aussie (AUD) is showing strength this morning as a result.
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ECB Comments and Risk Taking!
By Mike Conlon | September 8, 2009
In a continuation of Friday’s move out of the US dollar as signs of improved economic conditions are improving, EUR/USD is experiencing a nice move to the upside. Positive comments from ECB President Trichet and the notes out of the G-20 meeting are giving investors confidence that recovery is underway and therefore investors are selling dollars.
The top gainers on the morning are the Swiss franc (+1.14%) and the Euro (+1.01%). Look for this uptrend to continue as risk takers seek higher-yielding currencies.
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ECB keeps rates at 1% (as expected). NFP & ECB Press Conference @ 8:30 am EST
By Sean Hyman | July 2, 2009
The ECB kept interest rates unchanged at 1% as expected. Now let’s see if Trichet provides anything revolutionary in his press conference at 8:30am EST. Also, the U.S. Non-Farm Payrolls will be coming out at the same time and the U.S. Unemployment rate. So lots to keep track of around 8:30 am EST today!
Tags: ECB, Hyman, interest, interest rate, interest rates, lot, NFP, payrolls, Sean, Sean Hyman, time, Trichet, U.S., unemployment
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