Greek Junk!
By Mike Conlon | June 15, 2010
Yesterday, Moody’s ratings agency cut Greece’s credit rating from investment grade to junk, citing the economic risks the nation is facing. This derailed yesterday’s rally, and reversed some of the gains just as the Euro session closed. However, defenders are quick to point out that this news has already been factored in by the market and that conditions in Greece have improved since the data used to make the downgrade.
So it looks like the Euro has dodged a bullet—for now. In addition, German economic sentiment came in well below expectations showing signs that the picture is not as rosy as today’s market would have you believe. However, the Euro is higher vs. the Dollar and European stock markets are higher despite what some would consider heightened risk.
In the UK, CPI data declined for the first time in 3 months though housing prices ticked higher showing mixed results in the inflation picture.
Overnight at the Japanese rate policy meeting, BOJ officials unveiled a 33 billion stimulus program despite the comments that the export-led recovery is starting to spread to private domestic demand.
So this morning is a bit of a mixed bag, with stock markets higher, USD lower, but Yen and Euro higher. It will be interesting to see if these markets fall back in line with their usual correlations, or continue on their own path.
In the forex market:
Aussie (AUD): Overnight, minutes from the Australian central bank showed that concern over the European debt crisis may cause the bank to pause from future rate hikes. The RBA has “flexibility”, as previous rate hikes have appeared to have quelled inflation. In addition, in what some may view as counter-intuitive, an RBA Governor said that he would welcome slower Chinese growth, as it would allow the Australian economy to grow at a more moderate pace.
Loonie (CAD): The Loonie is higher this morning as oil has gained to $75.75 due to an increase in demand and a potential supply shock due to the gulf oil spill. In addition, there is a report out that corporations are diversifying away from the Euro and are issue bonds in Loonies, which could be a driver of demand.
Kiwi (NZD): From the not-so-fast department, the Kiwi is lower across the board after 4 days of gains following its rate hike. Overnight, home prices came in lower than expected, falling 1.4%. This may give the RBNZ a reason to pause rate hikes and to move slowly. The RBNZ would like to see a weaker Kiwi to help exports, and this housing figure may be a harbinger that inflation is tame in NZ.
Euro (EUR): So it looks like the Euro is brushing off the Greek credit downgrade as it is trading higher this morning. In addition to the downgrade, German business sentiment came in way below expectations, yet the Euro is higher. There are rumblings around the market of other potential downgrades and measures that other countries should be taking. In my mind this is heightened risk, but the market isn’t seeing that way. Remember to trade what you see and not what you think you know!
Pound (GBP): The Pound is mixed this morning as inflation data slowed for the first time in 3 months. CPI figures came in at 3.4% vs. an expectation of 3.5%. This is higher than the government target figures of 3%, though economists are predicting a decline back below the upper band of the range by mid-year. However, housing prices also rose as demand picked up the most since January. While there is a lot of talk that inflation in the UK is “contained”, only time will tell if this is the case.
Dollar (USD): Stock markets appear to be driving the forex market today, as higher equities prices are reducing the demand for dollars. Empire manufacturing figures came in slightly less than expected but showing growth nevertheless, and import prices came in lower, probably due to recent dollar strength.
Yen (JPY): The Yen is surprisingly strong this morning as risk appetite appears to be happening this morning. Perhaps there is hesitation that carry trades may not be due to advance due to interest rate pauses in Australia and New Zealand. In addition, the BOJ signaled they would be instituting a $33 billion stimulus program to encourage business lending.
So today is kind of an “odd” day, as the currencies are trading more on their own fundamentals and not so much on risk themes. Today is seemingly a risk-taking day, though the demand for carry trades has been reduced due to Yen strength and possible interest rate pauses from the commodity currencies.
The Loonie is catching a bid as oil trades higher and Canada becomes a destination for capital-raising as an alternative to the Euro zone.
The UK is telling us there is no inflation, but the market may be thinking otherwise.
And lastly, the Euro is defying gravity and shrugging off credit downgrades. Perhaps these credit ratings agencies are losing their own credibility, or the market needs to see more from a risk perspective in order to sell-off the Euro. Either way, there is still risk in the market and the market may want to “see” problems occur than “hear” about them.
So don’t fall for the game of “show and tell”—and trade what you see and not what everyone wants you to 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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Sell in May, Go Away!
By Mike Conlon | May 5, 2010
“Sell in May, Go Away” is an old Wall St. adage that seems to be proving why it has become a popular investing strategy over the course of time. I can’t think of a time when it has been more prescient; in light of the market sell-offs taking place. Yesterday, world stock markets sold off big time, as did commodities prompting the flight to safety trade and the safe haven dash for the US dollar.
There is a lot of risk and fear in the markets right now, as the Euro zone debt crisis is not inspiring confidence. Notice that this crisis is no longer just about Greece, as contagion appears to be ready to complicate matters in the EU.
In addition, China’s intentional slowing of its economy may be a major drag on world demand, which is not good for growth world-wide. This is having a negative impact on commodity prices, which is generally a positive for businesses and consumers alike, but it is taking down the commodity currencies in the process and causing the unwinding of carry trades as investor rush for the door.
On a positive note, the UK elections will be over tomorrow and that may take one risk element out of the equation.
World stock markets are lower again this morning, as are US stock futures and commodities heading into the market open. At this point there is very little that can be done to change the market mood from risk-aversion, and this could be the sell-off that many doomsday economists have been predicting.
So today is an obvious risk aversion day.
In the forex market:
Aussie (AUD): The Aussie has gotten clobbered over the past few days and is rapid approaching .90 vs. USD. Despite good economic prospects at the moment, a reduction in Chinese demand would hurt the Australian economy the most. Despite the doom and gloom, building approvals came in much higher than expected, showing signs that the Australian economy may be more resilient than the market expects. A government pledge to tax mining companies at 40% isn’t seen as positive for business, however. This is one of Australia’s most profitable sectors.
Loonie (CAD): The loonie is lower as expected as well. The Loonie’s high correlation to oil prices has helped drag it lower, as oil has fallen from above 86 to start the week to 81.5 today. No news out of Canada until this Friday’s employment reports, which if not improved, could give the BOC reason to delay their expected rate hike.
Kiwi (NZD): The Kiwi is also lower, as China is New Zealand second largest market for exports. Tomorrow’s employment reports will show whether or not the economy is improving despite the risk-aversion in the markets.
Euro (EUR): I have never in my life seen a bigger mis-management of a crisis than what is taking place in the EU. Sovereign debt is obviously a major problem world-wide, and the inability of individual countries to debase their currency to help themselves is reflective of MAJOR structural problems with the Euro. When a unified government reacts to a crisis swiftly and with confidence, speculators back off as it is usually a fruitless endeavor to try to bet against a government. When a government fails to inspire confidence, the market smells blood in the water which then makes it much harder to deal with the original problem in the first place. This all comes before the German meeting to decide on the Greek bailout which could send the Euro over a cliff if this thing is not dealt with properly and with confidence. Much, much more to come. The Euro is at 1.28 and change and falling like a rock.
Pound (GBP): The Pound is actually showing some life and is positive against all but USD and Yen as risk themes are too much to overcome. The most recent polls suggest that the Conservative Party will be the victor in tomorrow’s elections and that they will be able to put together a coalition government which will avoid the dreaded “hung Parliament”. The Conservative Party has vowed to reduce the deficit more than the other two parties, and this could be a sign of the new paradigm taking place world-wide. Reckless spending has to be reigned in, and I hope that our idiots in Washington DC take note if indeed the Conservatives win.
Dollar (USD): The Dollar is higher on the flight to safety trade, and pending home sales were higher yesterday showing signs that the economy is recovering. What is Europe’s loss may be the US’s gain, as the Dollar is known as the “anti-dollar”.
Yen (JPY): Japan is still closed for the Golden Week holiday, but that hasn’t stopped Yen appreciation as carry trades are being unwound at breakneck speed. They could be in for a very rude awaking when their stock market reopens, especially if the EU doesn’t combat its debt crisis in a meaningful way.
Wow. All I can say is wow. Right now, the confluence of events taking place in the world is adding up to the perfect storm. There is virtually no leadership in politics anymore, and this couldn’t be more true than what’s happening in Europe.
I would not be surprised at all to see a break-up of the Euro going forward. The structural flaws are too many, and populist revolts are preventing politicians from showing some spine. Riots in Greece are typical and not unexpected, and already the streets are being filled with tear gas.
It’s ugly out there. Very ugly. I’m not certain what the EU can do now to prevent a death spiral. The inability to act may have damaged the Euro irreparably.
If you are still in stocks, I’d advise you to use serious risk management, including protective stops.
And if you’re not in the forex market yet, I implore you to get involved. Buying the Dollar could hedge your other investments against potential catastrophic losses.
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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Rate Hike!
By Mike Conlon | May 4, 2010
The RBA increased the interest rate in Australia as expected to 4.5%. However, dovish language for future hikes has sent the Aussie lower as rate hikes were fully priced in. Risk aversion is compounding the Aussie’s decline as continued fears out of the Euro zone have sent markets lower.
The Euro has breached the 1.31 level and hit its lowest point vs. the US dollar in nearly a year. Fear of contagion to the other PIIGS regions is increasing as the market is cautiously waiting for a plan in the event that there is another crisis. Now that the EU has gone down “bailout road”, the expectation is that the Greece will not be the last straw.
European equity markets are lower, as are commodities and US stock futures giving strength to the Dollar and Yen. In addition, an expected slow-down in China is expected to decrease world demand as China attempts to slow down inflation by doing anything BUT allowing its Yuan to appreciate.
In the meantime, Japan remains closed for the week and will be sitting this one out as the Golden Week holidays are celebrated.
In the forex market:
Aussie (AUD): The RBA raised rates as was expected, yet in the policy meeting signaled that they will likely pause next month. Inflation is expected to rise to the higher end of the “band” that they attempt to target, but the market has detected no sense of urgency. In addition, the Chinese PMI report came out showing that Chinese manufacturing was at its lowest in six months sending the Shanghai Composite to six-month lows as well. This could reduce demand for Aussie products and thus affect the economy.
Loonie (CAD): The Loonie is lower this morning as risk-aversion is prevalent and oil is back to trading below 85. With no news on tap until Friday’s employment reports, expect the Loonie to closely mirror oil prices and trade on risk themes.
Kiwi (NZD): The Kiwi is lower for the same reasons that the Aussie is, but in addition, wage inflation occurred at its slowest pace in nearly 9 years. China is New Zealand’s second largest export market, so a slowdown in China would be detrimental to NZ exports.
Euro (EUR): The Euro is below 1.31 for the first time in nearly a year as fears over the debt crisis have heightened. Part of the problem is the “band-aid” approach the EU has taken, and the market is concerned about future debt problems in the region. When you think about it, this makes sense. With all of the back and forth and negotiating that has taken place over Greece, what happens if Spain needs a bailout? They are a much larger economy than Greece and a much greater risk to the Euro. If the market senses that there is no solution in place, expect yields in Spain to rise until the ECB needs to step in and do something. Say what you want about Hank Paulson’s “bazooka” when dealing with our bank bailouts; I’m sure the EU would love to have such a weapon to combat their debt crises rather than quibbling over pea-shooters.
Pound (GBP): The May 6th elections are two days away and the Pound is weaker as the fear of “hung Parliament” is increasing. In addition, UK stocks are lower led by British Petroleum who has a major disaster on its hands due to the Gulf oil spill. In addition PMI came in slightly better than expected, though mortgage lending was slightly less.
Dollar (USD): The Dollar is higher on risk aversion as its safe harbor status is driving demand. Yesterday, US ISM manufacturing figures came in better than expected showing signs that the US economy may be improving. Pending home sales are due out later this morning which could add to Dollar strength if they come in better than expected.
Yen (JPY): Japan is closed for Golden Week so business activity is light so expect the Yen to trade on risk themes.
As I’m sure you are aware by now, the forex market is a “relational” market in that what happens in one area affects all others. Not only can a currency be driven by its own fundamental strength, but also by others’ weakness.
With the uncertainty surround the UK elections and the Euro debt crises, there is certainly reason to be risk-averse. China’s intentional slowing of its economy and not allowing its Yuan to appreciate could be an important fundamental factor in world demand going forward. If demand slows and US recovery does not pick up, then we could see further impediments to economic recovery.
All of this adds up to the flight to safety trade which could mean Dollar strength and equity and commodity market weakness.
If you are someone who is heavily invested in world markets, it would behoove you to check out the forex market in order to hedge your risk in un-correlated assets. Isn’t time you sought the portfolio protection you need?
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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Holiday Hangover?
By Mike Conlon | April 6, 2010
Yours truly wasn’t the only one feeling the ill-effects of the Easter holiday, as both European and Australian markets were closed yesterday. However, with the holidays behind us, the forex market has wasted no time in digesting news which has sent the market into risk-aversion mode.
We did start the morning higher as the RBA raised rates in Australia to 4.25% for the fifth time in six months. And earlier this morning, the Loonie reached parity with the US dollar before pulling back. Last Friday’s NFP report was sort of a dud, as the closure of stock markets helped to reduce volume. While the number of jobs gained is encouraging, the US government still has a long way to go as the fiscal stimulus is over and the jobs “created” by the census are short-term in nature.
Meanwhile, oil and gold have traded higher to 86.5 and 1127 respectively, showing signs that commodity inflation may be ready for another run if US rates continue to stay extraordinarily low. The Dow Jones came close to breaching 11K, only to be turned back 25 points short.
And lastly, the continued news out of Europe and the UK has caused weakness in their respective currencies and will continue to weigh heavily until there is resolution.
In the forex market:
Aussie (AUD): The Kiwi is higher this morning against all but the Yen which is showing technical strength despite the risk-aversion mood the market is in this morning. The RBA raised rates to 4.25%, as they feel that both housing and commodity inflation is starting to rise. The return to “normal levels” is tantamount to the RBA as Australia is showing a balanced economy despite the ongoing worries of a slow US economic recovery and a potential China slowdown.
Loonie (CAD): For those who have followed this blog closely, you will notice that I have replaced the Kiwi with the Loonie in the “ladder of strength” as I believe the Loonie is set to further out-perform the Kiwi in the near future. Earlier this morning, the Loonie reached parity with USD as oil prices advanced beyond 86.5 and as Australian rates were hiked. The only news of significance for the Loonie this week is Friday’s unemployment report.
Kiwi (NZD): The Kiwi got bumped down a notch as they could only ride the Aussie’s coattails for so long. Business confidence has slowed in New Zealand as weak consumer demand has reduced hiring and curbed corporate profits. New Zealand appears to be in no rush to raise rates, which could hold steady well into the second half of the year.
Euro (EUR): The Euro is lower this morning as renewed fears over Greece’s ability to raise enough capital to service its debt have arisen again. In addition, tomorrow the Euro zone will report its GDP figures and will have its rate policy meeting on Thursday which is expected to remain unchanged.
Pound (GBP): The pound is lower this morning as the date for the spring election has been set for May 6th, and renewed fears of a “hung Parliament” have resurfaced as uncertainty over whether or not a political majority will be elected. It is widely feared that a hung Parliament will not have the political will to reduce UK deficits which have been weighing heavily on UK economic recovery. In addition, the UK will have its GDP estimates on Thursday, as well as the BOE interest rate policy meeting which is expected to leave rates unchanged.
Dollar (USD): The dollar is showing some strength this morning as risk-aversion plays and European weakness are dominating the morning. This week are going to get a lot of Fed chatter, as the FOMC policy meeting minutes are due out today, followed by a bevy of speeches from various Fed governors on Wednesday. This could give some insight into “Fed logic”, which many liken to “jumbo shrimp”– that is—an oxymoron. But don’t count on it.
Yen (JPY): The yen is higher across the board this morning as it is pulling back from recent weakness as risk-aversion is slowing the market. The Japanese interest rate decision is due out tomorrow and is all but certain to remain unchanged. However, signs that economic recovery is taking place are overshadowed by rampant deflation, and the ongoing battle between the BOJ and the government is bound to produce no “winners”.
Outside of the Aussie rate hike, not much to get excited about today as far as economic news is concerned. There is still considerable risk in the market place and now politics is starting to really become a drag on individual economies.
Those economies that have the political will necessary to take appropriate actions will be rewarded, and those who let politics gets in the way of returning to sound fiscal and monetary policy will be punished. Because at the end of the day, it is fiscal policy that can be controlled; more so than monetary policy.
As a result of the economic crisis, monetary policy has become reactive as opposed to proactive as the whims of politicians may have been toxic. Only time will tell who are the winners and losers. Until that picture becomes clearer, I am inclined to err of the side of caution.
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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A Good Friday?
By Mike Conlon | April 2, 2010
All eyes are on this morning’s Non-Farm Payrolls report which is due out at 8:30AM EST. Stockholders anxiously await this figure as their market is closed today so those that didn’t hedge against potential downside risk may be a bit nervous going into this number and subsequently this weekend.
The NFP report is expected to show a gain of 184K jobs; however I read somewhere that some 70K of those jobs were due to hiring by the government for the census, which by all accounts is temporary. So there is a lot of uncertainty about what the market needs to see to form the opinion that the UD economy is recovering. Regardless, of what the number is, expect mucho volatility surrounding it.
In other news, the Swiss Franc made headlines yesterday as a major amount of selling hit the market near the close in Europe. While not confirmed by the Swiss National Bank (SNB), speculation is that the government intervened in the currency to weaken it and keep it from appreciating to further record highs. I don’t talk about the Franc much here, but the Swiss have been known to do this in the past as recent Euro weakness has caused Franc strength. The sell-off was good for roughly 350 pips vs. the Euro, a tidy profit if one were on the right side of the trade.
So this morning we are seeing dollar strength, and without the other markets trading to provide correlations and historical trends, the forex market is on its own today. So expect trading to be dominated by risk themes and little else today.
In the forex market:
Aussie (AUD): The Aussie is slightly lower as the market as traders pare back positions heading into NFP. The AUD/USD will be extremely volatile as it best represents the risk on, risk off trade.
Kiwi (NZD): The same deal for the Kiwi as the Aussie, though slightly more at risk as the Kiwi attempts to shake off the IMF’s claim form yesterday that it is over-valued by 10-25%.
Loonie (CAD): Will today be the day that the Loonie reaches parity with the US dollar? It came within 65 pips of doing so yesterday, and is currently sitting just over a penny away.
Euro (EUR): The Euro is just hanging in there above 1.35 vs. USD and is benefiting from the “no news is good news” mantra today.
Pound (GBP): The Pound has been on a tear as of late as exports have improved causing stocks to move higher. In addition, advance polls show that the Conservatives are leading right now, giving a glimmer of hope that fiscal responsibility may return to the UK.
Dollar (USD): I’ve already mentioned the Dollar above and the expectations, but my feeling is that initially we are going to see dollar strength, followed by dollar weakness brought on by a better than expected number. While I don’t like to guess at these things and I’m not trading this event, I must admit I’m totally confounded by this report. So I’m just gonna sit on my hands and watch the action from the sidelines.
Yen (JPY): The Yen has been weakening as appetite for risk and yield-seeking has been ferocious. This suits the Japanese just fine as a weak yen is good for exports.
So unless you have nerves of steel, I suggest you grab a bag of popcorn and sit back and watch this event unfold. (I realize its 8:30 AM and no one eats popcorn then, but I do have a European following and as they say with regard to other pastimes, “it’s always noon somewhere!”
I’m going to try to do the video live for the release of the number and am hoping that the increased craziness surrounding it doesn’t invoke technical difficulties.
Happy Good Friday and Easter weekend to those that celebrate it!
To learn more about how you can get started in the forex market, be sure to check out our currency trading courses!
To get started with a free, real-time practice account, click here!
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Topics: What To Look At In The Market | 1 Comment »
The “Calm” Before the Storm!
By Mike Conlon | April 1, 2010
Today will be an interesting day for the markets as the US stock market is closed tomorrow for Good Friday. Traders may be positioning themselves ahead of the Non Farm Payrolls number due out tomorrow, which is expected to show a gain of 184K jobs vs. a loss of 36K last month. As I have mentioned ad nauseum, this number is of extreme importance as the market will use this figure to determine whether the US is beginning economic expansion, or still in decline.
In other regions, the Pound is higher on better than expected UK manufacturing numbers, and the New Zealand dollar is lower after an IMF report stated that the Kiwi was “over-valued”.
Today we are expecting the US ISM manufacturing number, which will signal how far along we are in economic recovery.
In the forex market:
Aussie (AUD): The Aussie is higher this morning on renewed optimism over global recovery and risk-taking despite the fact that the trade deficit widened more than expected. Also adding to pressure on the Aussie was that manufacturing growth slowed last month, which may further contribute to sentiment that the RBA may hold on rates next week. However with oil above $84 a barrel, there is no doubt that commodity inflation is picking up. Futures and swaps are showing a 65% chance that the RBA will raise rates next week, though that figure is bound to change after NFP tomorrow.
Kiwi (NZD): The Kiwi is lower this morning despite risk appetite after an IMF report that reported that the Kiwi may be overvalued by “10-25%”. They also said that New Zealand should make spending cuts to return to economic surplus sooner. However it should be noted that part of this assessment was based upon an assumption that the US may tighten, which unfortunately may be economic fantasy.
Loonie (CAD): The Loonie is screaming this morning with oil above $84 a barrel and NFP on tap. The Loonie is only 100 pips away from parity with USD, and could get there tomorrow with a good NFP reading. No other news out of Canada. And frankly the Bank of Canada is happy for that.
Euro (EUR): The Euro is mixed this morning as German retail sales figures came in worse than expected in a sign that the Euro zone’s strongest economy may be weakening. In addition, the “rescue plan” for Greece appears to not be working as its primary function was to reduce Greece’s borrowing costs which as of today, is not happening.
Pound (GBP): The Pound keeps trucking along as signs are showing that the UK economy is improving. The UK Factory Index rose to a 15-year high as exports improved dramatically, no doubt in part of recent Pound weakness. In addition, the conservative party is increasing its lead at the election polls which many believe will bring the UK back to fiscal responsibility.
Dollar (USD): The Dollar is lower today as risk appetite is higher going into the 10 AM ISM Manufacturing number and in advance of tomorrow’s NFP. Should the number come in above analyst expectations of 184K, then we could see some major risk-taking (dollar weakness). If the number comes in positive but below analyst expectations, then we could see some mild-risk taking (mixed dollar). Should the number come in negative, we could see some MAJOR risk-aversion (dollar strength). Part of the problem is that the stock market is closed tomorrow and won’t reopen until Monday. A bad reaction could push equity futures lower over the weekend which could in turn cause a lower (much) open on Monday. So that is the basic scenario. However, with oil above $84 and possibly going higher, commodity inflation may force the Fed to move on rates sooner than later which could cause some dollar strength. Regardless of which way the number goes, expect to see some major movement.
Yen (JPY): The Yen is mostly lower today as the Japanese Tankan index sentiment rose to its highest levels since 2008. This index represents manufacturing confidence as exports have been stronger than expected. So the familiar story of Japanese stocks up, yen down as investors seek yield through carry trades is in full effect.
Tomorrow’s NFP is a unique situation for a couple of reasons. With stock markets closed for Good Friday, and the number expected to be positive for the first time in who knows how long (sorry too lazy to look up—but you get the idea) this could be THE pivot point in world markets.
Now I’m not trying to be Debbie Downer here, but my experience in the markets has taught me that sometimes when things look too rosy in the markets, that just might be the case. This situation could set up to be the “perfect storm” if the numbers don’t come in as expected. I feel like there might be not enough pessimism in the marketplace despite all of the inherent risks facing the market.
March can be a tricky month for stocks, and we’ve seen some of the more spectacular moves down occur (2008, 2009 come to mind). In addition, today is April Fool’s Day which brings out my superstitious nature. Now I’m not saying that the NFP number will be bad tomorrow, however I’ll be sitting this one out and content to let the market do what it does.
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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Topics: What To Look At In The Market | 1 Comment »
Fed Surprise!
By Mike Conlon | February 19, 2010
Just when you thought the markets were starting to calm down and that the news out of the Euro zone was beginning to fade, the US Fed dropped a bombshell on world markets last night at 4:30 PM EST, just after the US stock market closed. The Fed announced to everyone’s surprise that they would be raising the rate at the Fed discount window 25bp to .75%, effectively charging banks more for Fed borrowing.
The markets immediate reaction was to buy dollars and cover dollar shorts, and stock futures tanked. Asian equity markets were down big last night and Europe looks to be bouncing back from earlier lows.
This move was the dominant theme in the overnight market, as retail sales figures in the UK and Canada are taking a back seat, as is the US CPI report which came in less than expected showing that inflation may still be at bay.
The two major things to take away from this move are: 1) the Fed is stressing that this move is not to tighten credit on consumers and businesses, but is merely trying to remove some over the overly-accommodative measures they have taken, and 2) investors need to be wary of the fact that the Fed may continue with these “sneaky” off-hours moves to try to avoid inter-day market Armageddon. It will be interesting to see how the market reacts to this move once trading begins today.
In currencies:
Aussie (AUD): The Aussie is down this morning as it is the currency that is most likely to be affected by this move, all other factors being equal. While I wouldn’t classify today as a risk-taking or aversion day, this is the third day in a row that the Aussie is down against USD.
Kiwi (NZD): Like the Aussie, the Kiwi is down 3 in a row. In addition to being affected by the discount rate hike, New Zealand has just reported the widest budget cash deficit in almost 9 years on lower tax receipts and increased government spending.
Loonie (CAD): The Loonie is lower this morning on lower commodity prices and the US discount rate hike. Also, Canadian retail sales figures came in slightly less than expected, but were at least positive. This could be a sign that economic growth is not as strong as investors may think, and everyone is anticipating the inevitable “Olympic Hangover” as the one-time economic windfall goes away.
Euro (EUR): The Euro is at nine-month low to the Dollar after the discount rate hike in addition to all of the problems coming from the Euro zone. Now speculation is heating up that perhaps Italy used the same sort of derivative maneuver to conceal debt that allowed them to enter the EU as well as Greece. There’s a lot of tension and in-fighting right now among EU members. This could put further pressure on the Euro in weeks to come.
Pound (GBP): The Pound is also at a nine-month low to the Dollar as fiscal concerns continue that the UK may need to continue accommodative measure to revive their economy. Retail sales figures came in at a disappointing -1.2% vs. and expectation of -.5%, showing further economic weakness.
Dollar (USD): It is going to be interesting to see how the market reacts to the discount rate hike today. Personally, I think that this move shows that the Fed is trying to get the market to believe that economic recovery is taking place. This move is sort of a red herring, which induced a knee-jerk reaction from the market as soon as everyone hears “rate hike”. This move does not affect the Fed Funds Rate so it shouldn’t affect either businesses or consumers. So by the end of the day I expect that we’ll see some risk-taking as economic strength in the US is good for world economies and inflation is lower as reported by the CPI.
Yen (JPY): The yen is higher on risk-aversion, however I think the market may “have it wrong” as its gotten used to the risk-on, risk-off mentality. Let’s see if the Yen gives back some gains by day’s end.
In overnight markets, the Hang Seng and Nikkei were down over 2% and European markets have reversed prior losses and are trading higher. US futures are still negative, but trading well off their lows in the overnight session. Oil has reversed earlier losses and is trading around 79.5, and gold is back to around 1115.
When I saw the charts last night immediately following the Fed move, my initial reaction was similar to that of much of the market—sell everything, buy dollars and yen. However, as I thought about the implications of the move, I’m actually quite impressed with the timing of the move and think the Fed did a great job implementing this. And I haven’t been a big fan of the Fed as of late! In my view, this is positive for world markets.
Also, watch out for volatility as today is options expiration.
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!
By Mike Conlon | February 16, 2010
The markets are back to “normal” after some being closed for various holidays. Risk appetite is the play today, as the Euro is rebounding against the dollar on thoughts that the Euro may have slid “too far, too fast”. Also, news out of Australia from the Reserve Bank minutes hinted that further rate hikes were in order should the Australian economy extend its recovery.
Also to note is that commodity prices are higher as which is consistent with an increase in risk appetite.
On to the currencies:
Aussie (AUD): The Aussie is higher on new from the RBA minutes. Analyst expectations are for the Aussie to gain to .91 vs. USD by the end of March. Should the economy continue to expand, then further rate hikes could be in order. The current benchmark rate is at 3.75%, making the Aussie a popular destination for carry trades.
Kiwi (NZD): The Kiwi is moving in tandem with its South Pacific partner the Aussie. While growth has not been as robust in New Zealand, the Kiwi will also benefit from increased commodity prices and a higher benchmark interest rate as well. That rate is currently 2.5%.
Loonie (CAD): The Loonie is trading higher this morning on the risk trade as well as the fact that oil is back over $75. Canada is in the spotlight right now as host of the 2010 winter Olympics as sometimes they get lost in the shuffle in the risk trade hierarchy. The Loonie is up to 1.043 vs. USD this morning, its highest level this month.
Euro (EUR): The Euro is higher against all but the commodity currencies, paring back some of its losses from the previous week. There is tough talk coming from the EU finance ministers regarding Greece, as news has surfaced that Greece may have used derivatives to “fudge the numbers” in order to gain entry to the EU. The fact that Goldman Sachs was involved should come as a shock to no one. Also contributing to the Euro gains this morning is the reading from the German Sentiment Index this morning which was lower than previously reported, but ahead of analyst expectations which net-net is positive for the Euro.
Pound (GBP): The Pound is lower this morning across the board as consumer prices rose 3.5% from a year earlier. A deviation of more than 1% from the target rate of inflation (2%) requires a letter from BOE Governor King as to how he intends to get back to the goal rate. Inflation volatility is to be expected, and this reading was not a surprise to analysts. This could put more Quantitative Easing back on the table for the UK, which would be Pound negative.
Dollar (USD): The Dollar is down this morning as risk-taking is the flavor of the day and stock futures and commodities are higher. The dollar is down 1% vs. the Kiwi and Aussie.
Yen (JPY): As is expected on a risk-taking day, the Yen is down against all but the Pound as the threat of deflation keeps rate hikes off of the table and provides the fuel for carry trades in Aussie and Kiwi despite the good GDP numbers from yesterday.
In overnight markets, the Nikkei closed higher but the Hang Seng closed lower. European markets are higher as are US stock market futures. Oil is back over $75.25 (+1.5%) and gold is up to around 1115 (+1.38%).
As you can see, there is always something happening in the currency market that can influence sentiment and thus market direction. Following the news is extremely important in understanding how market participants view world events.
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GBP/USD Short Looking Good!
By Mike Conlon | August 26, 2009
Just wanted to post a quick update on this trade that triggered yesterday. We actually closed out a portion at 1.6175, for a 175 pip gain. This pair is the biggest loser of the day so far (-1.04%), so it appears that other traders may have recognized the H&S pattern as well. The reason we closed a portion was because of the doji that occurred on the 5-minute chart, and the stochastic cross that occurred as well. See chart (click to enlarge)
While this trade started out as a pattern on the daily chart, we chose to drop down to the 5-minute chart to manage the trade as our first profit target was hit. Our trailing stop for the rest of the position is now at 1.6275, which is just above the most recent area of resistance, and also represents a 75 pip gain. So basically this is now a risk free trade!
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Yen Weakness and Canadian dollar Strength Abounds this Morning!
By Sean Hyman | July 1, 2009
The theme for today so far is “yen weakness” particularly vs. the Canadian dollar (CAD). This has pushed CAD/JPY up about 1.53% so far this morning. However, many other yen crosses are trailing behind it: CHF/JPY, EUR/JPY, AUD/JPY, etc.
The worst performers this morning? USD/CAD and AUD/CAD. So since CAD/JPY is the strongest and these others are the weakest…it shows that there is CAD strength across the board this morning, dominating many currencies out there.
The unusual thing about this? Canadian banks are closed today for a holiday. Normally that makes a currency very “dull” more times than not. So in this case, there must be enough speculative volume out there to push this currency around in the absence of the big bank volume. Interesting!
U.S. ISM Manufacturing will be out shortly this morning. So be on the look out for that and what it comes out at. You can get that info at www.dailyfx.com .
Sean Hyman
www.forextradingblog.com
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