Retail Sales Improve!
By Mike Conlon | March 12, 2010
All eyes were on the US retail sales figures, as the US consumer represents some two-thirds of US GDP. There was speculation that bad weather would affect this number, causing it to be lower than expected. Well, that hedge turned out to be unnecessary, as there was a negative expectation of -.2%. The number came in much better than expected, at + .3%, which is positive growth as opposed to a negative expectation. So expect stocks to rally higher, but be wary of the correlation of “stocks up, dollar down” as some in the market may feel that this could have a material impact on US interest rate policy.
In other news, Canadian employment figures came in better than expected and Japanese Finance Minister Kan used the dreaded “I” word—as in intervention, which readers of this blog know is not totally unexpected.
In currencies this morning:
Aussie (AUD): The Aussie is higher this morning as investors are seeking yield as economic conditions appear to be improving, particularly in the US. No real news but the Aussie has made one attempt at .92 vs. USD and could challenge 2010’s high of .932 in short order.
Kiwi (NZD): Retail sales figure came in at a better-than-expected .8%, showing signs that domestic demand in New Zealand is improving. This bodes well for their economic story but we shouldn’t expect any rate hikes until mid-year as the policy meeting told us earlier this week. However, should inflation start to pick up, we could see a surprise hike earlier than expected.
Loonie (CAD): Good news out of Canada as the jobless rate fell to a 10-month low, falling to 8.2%. The Loonie is higher across the board as hopes that economic recovery is taking hold. According to an RBC analyst, the Bank of Canada is, “running out of arguments against keeping rates low”. The Loonie currently buys 98.35 US cents, and the Loonie could be at parity with the Dollar for the first time since July 2008.
Euro (EUR): The Euro is mostly higher this morning, as European Industrial outputs expanded 1.7%, the largest gain in almost 20 years. The Euro challenged 1.38 vs. USD and EU President Junker argued that the Euro zone needs new tools to be able to combat future crises.
Pound (GBP): The Pound is higher this morning, extending yesterday’s rebound. Reports are that the sell-off in the Pound has been excessive, as house prices in the UK rose at the fastest pace in 7 years, showing that the economic recovery may be taking affect. The Pound is at 1.514 vs. USD.
Dollar (USD): The Dollar is lower vs. all but the Yen as retail sales figures came in MUCH better than expected, as I mentioned above. Consumer confidence figures are due out at 10AM EST, but don’t expect that to have a material impact on today’s action. Other reports are that President Obama wants to nominate Janet Yellen as Fed Vice Chair. Yellen is known to be dovish, meaning that she is not an inflation hawk. This could mean extended zero interest rate policy as the government attempts to inflate their way out of debt on the backs of consumers, who will be forced to pay higher prices for everything. Stay tuned.
Yen (JPY): As I’ve mentioned before, Japan is not adverse to using intervention as a tool to keep Yen from strengthening, and earlier today Finance Minister Kan confirmed this. It is likely that yen will weaken as the government hopes to stimulate exports to improve their economy. It will be interesting to see how this plays out and if the Bank of Japan has enough muscle to fend off risk-aversion plays should global economic recovery falter.
As you can see, there can be different market responses to good economic news. One could make a cogent argument for either Dollar strength or weakness based on today’s sales figures. Inflation hawks will claim this means that the Fed should be raising rates; while doves say the economy is still too fragile and investors should seek yield elsewhere.
Regardless of which way the Dollar moves and its affect on other currencies, this is good news for the US economy.
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Top Performers!
By Mike Conlon | March 3, 2010
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Flip Flopping on Risk!
By Mike Conlon | February 23, 2010
This morning has seen some “flip-flopping” on risk themes as the overnight session was trading on risk aversion due in part to some economic figures out of the Euro zone. However, those themes had pulled back and we actually saw some risk-taking, only to set-up for risk-aversion again! Can you say volatile?
The back and forth nature of the forex market is what traders thrive on. As of right now, we are seeing some Japanese yen strength, but not all of the risk aversion plays one might expect to see. While the Kiwi is noticeably weak, the Aussie is holding up against all but the yen. This looks like its setting up to be a back and forth day, as the market attempts to re-align itself according to risk themes. I will probably play today short-term, and wait to see what the market reaction is to the US Consumer Confidence figures due out at 10 AM EST.
While I can’t imagine that they will be “good”, one never knows how the market will react. Also to note is that the US Housing Price Index will also be out a little earlier, giving a glimpse into the whole inflation/deflation debate. Combine that with the political landscape here in the US and the malaise surrounding it; and the market could be in for a wild ride today is this could be a recipe for disaster.
In currencies:
Aussie (AUD): The Aussie is holding up surprisingly well this morning despite the general risk-aversion themes we’ve seen this morning. This is more of a case of being “less-bad” than actually good. With problems in Europe (Aussie nearing 10-year highs vs. the Euro) and the UK, investors may start catching on to the fact that owning Aussie over Euro and Pound is LESS risky regardless of what the correlations say. In my opinion, the Aussie is THE place to be for both risk-taking (commodity plays) as well as risk-aversion. Now if the market would just begin to see it. In the meantime, I will continue to buy dips.
Kiwi (NZD): While lumped in with the Aussie and Loonie as commodity currencies and known as a “risk-taking” vehicle, the Kiwi is not nearly as strong as the Aussie yet sometimes benefits from Aussie strength. Until economic conditions improve in New Zealand or rate hikes seem imminent, the Kiwi will continue to trade on risk themes as it is not strong enough on its own to “buck trends”.
Loonie (CAD): I’ve been seeing a lot more of Canada lately (probably because my wife makes me watch ice-dancing in the Olympics) but I’m starting to come around to being positive on the Loonie. Despite record low interest rates and its close ties to the US, the Canadian economy is strong and recovering much faster than the US. Because of the Loonie’s tight correlation to oil, it will continue to trade as a proxy for the commodity as the market determines whether or not recovery will drive further demand for oil. The Loonie is lower this morning.
Euro (EUR): Is anyone surprised that Business Confidence figure in Germany are down this morning? No? Me neither. In fact, this prompted German Chancellor Merkel to lash out the banks that “created the problem” for speculating in the Euro—driving it lower naturally. It looks like she’s at stage 3 (anger) in the seven stages of grief. It’s starting to look more and more like the Euro zone actually knew about the derivatives that helped Greece obfuscate its debt to the point that it was allowed to gain entry to the Euro zone. In my eyes this is akin to going to a “jackets required” restaurant jacket-less, then taking off with the loaner they give you, rather than just being denied access in the first place. Any way you slice it, the trend for the Euro is clearly down.
Pound (GBP): The Pound is lower this morning as speculation abounds that the UK will continue its bond purchase program to help keep their currency lower to stimulate their economy. People forget that the UK is still an industrial power and a BOE Deputy Governor reminded the markets of that fact when he said that a “weaker currency will boost exports”. Should the current situation continue, the Pound could be near 1.50 vs. the US dollar in no time flat. This would also represent the 61.8% Fibonacci retracement that technical analysts love so much.
Dollar (USD): Home prices in the US are expected to rise for the seventh straight month, though incrementally and down over 3% from the previous year. Should the figures meet the expectation, then expect risk-taking to pick up as this would be a sign that inflation is nowhere to be found and confirming that interest rates will most probably remain unchanged for a long time. Consumer confidence is out at 10AM, if anyone is confident in this environment, then they need to have their head examined!
Yen (JPY): The Yen is higher on risk-aversion this morning despite the fact that the Japanese government and the Bank of Japan are in dispute over what is to be done to combat the deflation they are experiencing. Not surprisingly, government wants more liquidity to encourage inflation, and the BOJ wants fiscal discipline and reduced deficits. Sound familiar?
In overnight markets, the Nikkei was down while the Hang Seng was higher. In current trading, the European markets are lower though off of their lows. US stock futures are lower, and oil is down roughly 1.25% to 79.3, with gold following suit down to 1111 and change.
With the problems facing Europe, rampant deflation in Japan, and trouble in the UK, the markets may be re-assessing which currencies are actually “risky”. In fact, the reason why I introduce the currencies in this blog in the order that I do is based on the “hierarchy” of the risk themes. As the economic recovery picture becomes clearer, I would not be surprised to see this pecking order change in the not-so-distant future.
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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No Recovery in Sight!
By Mike Conlon | February 4, 2010
US Initial Jobless Claims came in worse than expected this morning, rising to 480K, the highest level seen in three weeks. Analysts were expecting a slight decrease, so that makes this number “unexpected”. (As a side note, how sick and tired are you of hearing about “unexpected“economic reports as reported by media outlets?) Also to note this morning is that both the UK and the Euro zone left rates unchanged, which was not “unexpected”. So needless to say, this morning is a risk-aversion day.
Here’s the rundown of world currencies:
Aussie (AUD): The Aussie is down this morning as expected. The major news for the Aussie will be made overnight as the RBA will come out with its quarterly monetary policy statement. There was a bit of new this morning that retail sales figures in Australia were down (MoM) to -.7%, showing a negative figure as consumers are starting to become more interest-rate sensitive.
Kiwi (NZD): The Kiwi is getting smacked this morning with the double whammy, losing value due to risk-aversion but also contributing was their unemployment report. Unemployment in New Zealand rose to 7.3%, the highest level in over 10 years, dampening hopes for any rate hikes in the near future.
Loonie (CAD): Building permits in Canada increased in December, showing signs that there may be hope for economic growth. However, the Loonie is down this morning, suffering from its correlation to oil and the general risk-aversion theme.
Euro (EUR): The Euro is down this morning against all but the Aussie and Kiwi, assuming its rightful place in the risk pecking order. The ECB voted to keep interest rates unchanged at a record low 1%, as concern about Greece stills weighs heavily on the common currency. There is a fine line the Euro zone countries are walking, attempting to encourage growth while at the same time reduce deficits and rein in budget shortfalls.
Pound (GBP): The BOE also kept rates unchanged at .5% and has also announced plans to not expand its bond purchase program (QE) for the first time since the program was initiated last march. The UK is trying to balance the threat of inflation at the expense of economic growth. It is also important to know that general elections are coming up in May and the “throw the bums out” mentality has made its way to the other side of the pond and is not only popular in the US. So the BOE is also taking potential political change into account.
Dollar (USD): I’ve already touched on the bad news about initial jobless claims, and tomorrow’s Non-Farm Payrolls Report (NFP) is weighing heavily on the US economy. Readers of this blog know that of course that means the dollar is up, as the flight to safety trade takes hold. Lost in the mix are pretty decent earnings reports coming out of the stock market, though as a most likely result of cost-cutting and firing workers. See the irony here?
Yen (JPY): Lastly, the Japanese yen is the big winner this morning, benefiting from the risk-aversion trade. Because of its status as the reserve currency for the carry trades, when risk aversion takes place, demand for yen goes up as traders flee riskier currencies.
As I scan the different news wires, I can’t help but notice that I haven’t seen one piece of encouraging news out there that would lead me to believe that economic recovery is gaining traction. The only silver lining I found, decent corporate earnings, is a joke compared to what’s going on out there.
At the US market open, stocks are down. Europe is down currently and Asia closed down overnight. Not to be Debbie Downer here but today could be ugly with a capital ‘U’. Oil is down to 76 and change, and gold is down testing 1100.
Remember, in order to benefit from a strengthening dollar, you have to sell a different currency and buy dollars to make gains! Just having dollars in your bank account does you no good except potentially influence your purchasing power. The only way to take advantage of these moves is through the forex market. When you’re sitting there looking at a red screen (because everything is down) and have no idea where to put your money, the forex market can give you a safe haven.
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US Jobless Claims Rise!
By Mike Conlon | January 21, 2010
I don’t know why I even bother to express surprise anymore when every economic figure that comes out is “unexpected”. Trying to peg certain figures by using analyst expectations can be a fool’s folly. Let’s take today’s US Jobless claims figures which showed a rise of 36K more claims, as opposed to the analyst expectation of a small decrease.
As a result, the equity markets did an about face and proceeded to sell despite the fact the Goldman Sachs reported “record earnings”. Don’t lose sight of the fact that this comes on the back of the US taxpayer, but what’s a few billion dollars among friends?
So now that the stock market is down considerably, we have switched from mild risk-taking to risk aversion. This means that both the US dollar and Japanese yen are now the favored currencies of the day. Let’s take a look at a chart of the Aussie/Yen (AUD/JPY) to show the extreme volatility of this move. (click chart to enlarge)
As you can see, the market is still VERY skittish regarding any bad economic numbers that will show the recovery is not moving along as may have been previously thought. In markets as volatile as these, it’s important to keep tight stops and to look for reversals. As the new year is just starting, the markets are trying to find some sort of direction in what can only be described as “rudder-less ship trading”. In other words, extreme volatility.
As a quick aside, this AUD/JPY pair is down another 30 pips to 82.35 in just the time its taken me to put up this post. Wow. If you own stocks, today might be an ugly day.
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More Problems for the Euro!
By Mike Conlon | January 19, 2010
The Euro (EUR) is down again today against the US dollar (USD) and looks ready to test support at 1.42. The problems in Greece may have a carry-over effect which will diminish the Euro as a viable alternative to the US dollar.
The problem in the Euro Zone is two-fold: either the other Euro nations come to Greece’s aid and bail them out which will in turn send the wrong message to the other PIIGS countries, or they allow Greece to exit and risk possible defaults as credit spreads widen because of the increased risk. Either way, the solution for the Euro is not easily rectified and how this plays out will be interesting to say the least.
In either event, I expect continued Euro weakness and if the Euro breaks psychological support at 1.42, then the next stop could be 1.382, back to its 50% retracement levels against the US dollar.
Because of the lack of viable alternatives to the Euro, the British pound (GBP) is seeing some strength today, up across the board against all other currencies.
Until clarity emerges from the Euro situation, the pound appears to be ready to strengthen against the Euro.
Let’s look at 2 quick charts: (click charts to enlarge)
The first chart is of EUR/USD and illustrates the different Fibonacci levels which can act as support or resistance within larger trends. When trends reverse, these levels an act as “magnets”– pushing the prices toward those levels. So if the problems with the Euro persist, then keep an eye on these levels.
The second chart is of EUR/GBP and it shows the current action of the Pound vs. the Euro. The pound provides a viable alternative to the Euro, so even though the UK has their own set of problems, the market may deem the Euro’s to be worse so I’m expecting continued pound strength against the Euro. I’m looking for a move down to .85 for this pair.
To learn more about how you can use Fibonacci numbers or other technical analysis to enhance your trading, be sure to check out our currency trading courses!
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Pound Gains!
By Mike Conlon | January 13, 2010
The British pound (GBP) is trading higher after a BOE policy maker stated that interest rates in the UK may need to rise this year. This could signal the end to the Quantitative Easing (QE) policy the UK had undertaken to stimulate its economy.
So what’s left to do?
Sit back and wait.
This is a refreshing stance in world where instant and immediate gratification need to happen to keep the public at bay. What this policy-maker is essentially saying is that its OK to let market forces happen and to see how the policies they put in place will work out. All too often governments are quick to react to any negative news regarding their economic situation and are always trying to “tinker’ with policy, rates, statements, intervention, etc.
I’m not certain where they dig up some of these people charged with setting policy, but its almost as if they have completely forgotten that economies move in cycles. What goes up, must come down. Basic laws of gravity. The fable of the Ant and the Grasshopper. I could go on and on.
So kudos to Andrew Sentance, BOE policy maker for keeping it real. While the UK is not yet back on firm ground economically, the “wait and see” approach is better than the overkill that we see here in the US.
So let’s take a quick look at a chart of the British pound vs. the US dollar (GBP/USD): (click chart to enlarge)
As you can see from the chart, the pound has been up for the last four days in a row for the first time since last November since we’ve seen dollar strength in December. 1.59 is a good support level. As this pair has broken through the 38.2% fibo retracement level, it looks like the next stop could be 1.636 at the 50% retracement level. This could happen sooner than later as the US CPI numbers come out on Friday. If this figure comes in lower than expected, then that could send this pair higher on dollar weakness. So I expect we will be at the 1.64 level in short time.
If we should breach that 50% fibo level, then I would move my stop up to the 23.6% fibo level at 1.612 for those who are long this pair. While it is important to find trades that look like they are at the start of a trend or in a trend, it is equally important to know how to manage trades and place stops to limit losses.
Happy Trading to all!
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Euro Gains on Weak Dollar, Oil!
By Mike Conlon | January 11, 2010
The Euro is up today across the board and is at a 3-week high against the US dollar as dollar weakness is back on the table. In lieu of Friday’s NFP report, investors are betting that US interest rate hikes have now been pushed out even further, and world stock indexes and commodities are up on the morning.
The Euro, otherwise known as the “anti-dollar”, should strengthen unless sovereign default issues come back into play. Not to mention the strength in oil, which has shown a strong positive correlation to the Euro. This also benefits the commodity currencies (Aussie, Kiwi, and Loonie) in that order due to the interest rate differentials.
So, it appears to be back to a “risk-taking” day with the dollar down, everything else up. Look for this theme to continue well into the first half of this year. The only way this gets derailed is if the Fed makes a move on interest rates or if there is some sort of global crisis.
So the million dollar question is what is going to cause the Fed to act? Normally, I’d be inclined to say that an improving employment picture or the threat of inflation would be the catalysts, but I’m not even sure that these will be enough. With the catastrophe that is US national debt, Bernanke is begging for any type of inflation to help mitigate this, so it could be some time before we see rate hikes. Economists are now looking at mid-year as the most realistic chance of this occurring, but if then employment picture and by proxy demand doesn’t pick up, then this could be entirely off of the table.
Also to note today is the employment figures coming out of Canada, which showed a small loss vs. a gain in the month of November. The Canadian dollar (CAD) is down across the board. While the Loonie benefits from commodity gains, it should lad both the Aussie and the Kiwi due to lower interest rate differentials. The Loonie is also somewhat dependent on US recovery as the US is the largest recipient of Canadian exports.
If US dollar weakness continues to be a theme well into 2010, then we are going to see MAJOR commodity inflation.
This means that if you hold US dollars you could see a MAJOR reduction in your purchasing power. There are ways to protect yourself from this happening, but you have to know what you’re doing. And that’s why we offer our currency trading courses! They are affordable, convenient, and could help you save your nest egg from dollar destruction!
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Non-Farm Payrolls Disappoint!
By Mike Conlon | January 8, 2010
The US Non-Farm Payrolls Report (NFP) is usually one of the biggest market moving numbers in the currency markets. Today’s number is no exception. The report came in for December at -85K, a very disappointing figure. Estimates were expecting this number to be flat, that we neither gained or lost jobs for the month. Although I had seen some pretty wild numbers tossed around, anywhere from +/- 200K. The revisions for the prior two months showed a net loss of 1K jobs, a negligible but encouraging figure.
So what does this all mean? Well in a word: trouble.
The US economy is not adding jobs nearly as quickly as the government had hoped. With all of the enormous amounts of stimulus spending, we have little to show for it. As a result of this figure, the US dollar reversed course and immediately began to weaken. If anyone had any delusions about a US rate hike in the first quarter of the year, they can pretty much forget about it as its now off of the table. Unless the dollar tanks so badly that Bernanke HAS to do something.
My guess is that we’re going to be looking at Japan 2.0 here in the US, our own version of their “lost decade”.
Just to illustrate the volatility that can occur around this figure, take a look at this chart of EUR/USD: (click chart to enlarge)
Close to 100 pips in a few minutes!
This could make an interesting year for the US dollar. There are 2 basic ways that we will see dollar strength this year; either through interest rate hikes or risk aversion plays. So while this logic may be a bit counter-intuitive to some, it’s going to be very important to take our clues from the other markets to see which theme is playing out.
And of course don’t forget that the dollar can continue to weaken well into this year, the question is going to be that if things don’t get better on the employment front, at what point does that filter through to the other markets?
Only time will tell.
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January Effect, Risk-Taking Driving World Markets!
By Mike Conlon | January 4, 2010
Sometimes, image is everything. While appearances are always important, this couldn’t be more true than in world markets. As a result, it looks like the market is starting 2010 like gang-busters, projecting confidence and bravado in the face of nebulous economic conditions.
Gold and oil are up some 2.5% this morning, and US stock markets have all opened up near 1.00% higher. This is a classic risk-taking scenario. So where would you expect the US dollar (USD) to be?
Well, if you follow this blog, you would know that the dollar is down today and you would also know that the commodity currencies– the Aussie, Kiwi, and Loonie- are up. So investors are seeking out higher-yielding currencies as their outlook is “positive”, at least in the near-term.
Some of this can be attributed to the “January Effect” in the markets– that is that investors are putting capital to work in the new year as they’ve sold all of their losers last year in December in order to offset some capital gains. At least that’s the conventional interpretation.
Only last year wasn’t very conventional at all. In fact, I would go out on a limb (not really) to say that last year was a more UN-conventional year than we’ve seen in a long time. Except for 2008. Well, you get the idea.
My point is that as I’m not 100% percent ready to buy into the party line so to speak, and that I’m still going to be watching the stock market closely for clues as to what might happen with the currencies. I’m still not convinced that we won’t have a major sell-off as investors look to take some gains from 2009 and push their tax liability forward to April 2011.
So if we do see some selling, we could move back to the risk-taking/ risk-aversion type of trading in the currency market that we saw for most of last year. Also to note is that what the US Fed decides to do with interest rates will be of major importance to set the tone for the first half of the year.
We may also see some shuffling of the “ranking” of currencies in the risk scenario, as the fundamental economic conditions of different regions become more transparent and we see which economies seem to be doing better than others.
So much like the end of last year, I’m going to keep my trading short-term as I wait for some fundamental news to set the tone. This Friday’s US employment report could be just that.
To learn more about how the markets are inter-related, be sure to check out our currency trading courses!
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