Growth By Contraction!
By Mike Conlon | September 2, 2010
In what seemingly is a contradiction, Europe is proving that you can grow by shrinking. If you don’t believe that’s possible, look no further than the EU GDP figures reported this morning. GDP figures came in showing growth of 1.9% vs. an expectation of 1.7%. But wait a second, isn’t the EU enacting austerity measures?
Yes, they are enacting austerity measures but they are not experiencing the crisis of confidence that we have here in the US. This allows for more active participation in the economy, as fears have been removed about the future of policy. In other words, they are taking their medicine. In addition, the ECB left rates unchanged at 1% which was no surprise to anyone and will most likely remain in “crisis mode” until next year.
Conversely, here in the US companies are still afraid to hire employees as they are fearful over the economy and government policy. With no end to the spending in sight, the “extend and pretend” policies and looming deficits and taxes and regulation and healthcare (oh my) make even the boldest of businessmen appear more scared than the cowardly lion!
As a result, Initial Jobless Claims came in slightly better than expected, showing new claims of 472K vs. an expectation of 475K. Home sales figures are due out later this morning and my guess is that this figure is not going to be encouraging either.
In the UK, housing prices came in lower than expected which may help inflation come back down and allow the BOE to maintain accommodative policy measures throughout the austerity measures.
So this morning’s currency market action is a bit of a mixed bag, as the market can’t decide if the fundamentals support risk-taking.
In the forex market:
Aussie (AUD): The Aussie is lower this morning as the trade balance figures came in worse than expected. The Australian trade surplus shrank to A$ 1.89B vs. an expectation of A$3.1B. This comes a day after better than expected GDP figures were reported yesterday.
Kiwi (NZD): The Kiwi is actually higher this morning on—ready for it—higher powdered milk prices!! If I had any sort of journalistic integrity I wouldn’t even mention this but the higher Kiwi seems like an anomaly to me so I’m going to go with it. If I had to guess what is going on, I would blame stealth Chinese currency diversification. (Click chart to enlarge)
Loonie (CAD): The Loonie is lower as crude oil prices have pulled back to 73.25 and the market prepares for tomorrow’s US Non-Farm Payrolls report. Canada is particularly sensitive to US economic data as the US is its largest trading partner.
Euro (EUR): The Euro is mixed this morning as the GDP figures and steady monetary policy are encouraging despite the known debt problems and commitment to austerity. Just goes to show sound economic policy goes a long way to helping in recovery. (Click chart to enlarge)
Pound (GBP): The Pound is mostly lower as home prices fell signaling that inflation may again fall below the BOE upper band of 3%. This may allow the BOE to maintain accommodative policy as austerity measures help tackle the deficit.
Dollar (USD): I’m starting to sound like a broken record here so I’m not even going to say it. I’m just waiting for tomorrow’s NFP figures which they market will use as a true gauge of whether or not jobs are being added to the economy. Government models and proclamations of jobs “created or saved” ring hollow. The proof is in the pudding, as they say.
Yen (JPY): The Yen is showing strength again, as the market is going to test Japanese policy-makers over intervention. The Nikkei was higher overnight so the inverse correlation of Yen to the Nikkei is not holding up today. As the rhetoric heats up, what will Japan do? (Click chart to enlarge)
It is becoming more and more apparent that things in the US are not getting better. While they may not be getting worse (yet), I think we may be in a holding pattern until the November elections where hopefully the “bums get thrown out”.
There has been much talk recently that a lot of the damage has already been done and that political gridlock may not be seen by the market as a good thing. My guess is that any change in leadership at this point is going to be viewed as positive, and if we can actually change the collision course our economy is on people might actually be able to get back to work and help the economy grow again.
Until then, expect fear to rule the markets and tomorrow’s NFP number could be the continuation of last month’s fear driven market action.
I never thought I’d say this as an American but perhaps we should be taking economic direction from the Europeans! For their realistic assessment of how to recover while not popular is the right thing to do.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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Race to the Bottom, 2.0
By Mike Conlon | August 24, 2010
Risk aversion is clearly the theme this morning in the markets as heightened fears of economic slowdown are weighing heavily on world markets. While economic data as of late hasn’t been horrible, it is the constant fear-mongering from government and banking types that keep the markets on edge.
Case in point: Some British policy-maker (who I’ve never heard of before) came out and stated that the UK faces a “real risk” of a second recession. Really? Any more so than any other region around the globe? Or is this a case of someone, somewhere that wants to see a lower Pound to encourage exports?
Let’s face it; wouldn’t every region around the globe prefer to see their currency lower to encourage exports? Thus we are nearing the “race to the bottom, 2.0.” This morning’s risk aversion has pushed the Japanese yen to 15-year highs, and the rhetoric about intervention is now coming directly from the horse’s mouth. Japanese PM Kan stated that “steep currency moves are undesirable” and is looking for joint action from the G-7. It is becoming more apparent that Japan may not have the ability to effectively intervene in their currency alone, as the Swiss National Bank found out recently.
Meanwhile, in New Zealand, 2 –year inflation expectations came in lower for the first time in over a year, prompting expectations that the RBNZ will not raise rates again at the September meeting.
In the Euro zone, the German economy showed it expanded at a 2.2% pace as final 2Q GDP figures were released. The German economy is almost single-handedly keeping the Euro zone economy afloat.
In the forex market:
Aussie (AUD): The Aussie is lower on risk aversion this morning as global market selling has caused the un-wind of carry trades as investors flee yield in favor of safe haven assets.
Kiwi (NZD): The Kiwi is lower on risk-aversion and also because they reported a decrease in the 2-year inflation expectation for the first time in almost a year. The figure showed an expectation of 2.6%, down from the previous reading of 2.8%. It is now highly doubtful that the RBNZ will raise rates in September, especially in light of recent global market fears.
Loonie (CAD): The Loonie is the worst performer this morning, as it has been hit with the triple-whammy of lower oil prices (around 72), bad retail sales figures, and overall risk aversion. Retail sales figures came in at .1% vs. an expectation of .4% showing signs that the Canadian economy is slowing. It doesn’t help that Canada is so reliant upon the US to import from them. (Click chart to enlarge)
Euro (EUR): The Euro is mostly lower on risk aversion, despite the fact that the German economy reported final 2Q GDP figures showing growth of 2.2%. While under normal circumstances this would be considered very good; today is looking more and more like an ugly day overall.
Pound (GBP): Thank you Mr. No Name policy guy for jaw-boning the Pound lower, thereby causing further fear in the markets. The Pound is at 1-month lows to the Dollar, trading just under 1.54. (Click chart to enlarge)
Dollar (USD): The Dollar is higher due to the flight to safety trade and look for it to continue to gain after the existing home sales figures come in which are bound to be dismal. I’m sure the spin cycle will be on high, but make no mistake economic conditions here in the US are deteriorating.
Yen (JPY): The Yen is trading at 15-year highs against the Dollar, as risk aversion is causing the un-wind of carry trades. The jaw-boning is picking up in Japan, but is this going to be a case of too little, too late? Questions abound over whether or not the BOJ can do anything about Yen strength as risk themes may be too large for them to go it alone. This shows the fragile shape of the Japanese economy, and PM Kan’s call for joint action from the G-7 nations may be the final nail in the coffin. (Click chart to enlarge)
It is no secret that everyone would like to have a lower currency value to help their exports which encourages manufacturing and provides employment. The reality is that it is not possible. Thus we see the “race to the bottom, 2.0”, as various reports cause fear-mongering.
As risk aversion picks up steam, it is becoming harder and harder for Japan to slow down the Yen’s ascent. While intervention may have worked in the past, in today’s market it is not as easy to accomplish. They may need to sit through some pain and wait until the world regains confidence in the global economy.
While it is no secret that the global economy will be slowing as governments remove stimulus, the crisis we are in right now is one of confidence. Financial and government types, while out to further their own interests; should be more cognizant of the impact of their rhetoric globally.
While fears of a global double-dip recession are heightened, this is nowhere near as bad as the banking crisis of 2008. When there is fear in the markets, there is also opportunity. For those who know what they’re doing.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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Suspend Your Disbelief!
By Mike Conlon | July 26, 2010
One of the things I mentioned on Friday with regard to the European bank stress tests is that they had to be believable. The results came in on Friday and by and large were viewed as positive by the market. There was some interesting volatility in the forex market, as the news trickled in and was digested.
But the question remains, can we really believe those results? Only 7 of the 91 banks tested need to raise more capital, and none of the banks were deemed likely to fail. This has left many questioning the methods used to test, and the assumptions made to show banking strength.
So what this all really comes down to is whether or not confidence has been restored to the marketplace. Officials have been trumpeting the results and are attempting to move forward from the tests, claiming the exercise a success. Only time will tell if this is the case.
On our side of the pond in the US, we have a similar crisis of confidence taking place. Investors are clearly not enamored with the prospects of the US economy, yet officials here will tell you otherwise. The 10-year Treasury note is currently under 3%, so the talking heads will tell you that it is a “success” that we are able to issue debt with such low rates of interest.
Treasury Secretary Geithner has told us that it is confidence in the US economy that allows this to happen; however, I think otherwise. The fact of the matter is that the US is “the only game in town” at this point, with so many other economies depending on US economic strength or having issues of their own. This is another case of the US winning the “least ugly” prize in the global economic beauty pageant.
How much longer this charade will continue is anyone’s guess; but the little time we have been afforded by European weakness is bound to expire with every passing day that we don’t fix the economic ills that plague the US. But one thing is sure; the Dollar is weaker this morning as everyone has caught on to the ruse.
In the forex market:
Aussie (AUD): The Aussie is lower this morning as PPI figures came in much lower than expected. The PPI gained .3% vs. an expectation of .8%. The true tell-tale will be Wednesday’s CPI figure, which if higher than expected would show the need for further rate hikes going forward. Should the number come in closer to the PPI data, then the chance of further rate hikes would be greatly reduced, which could put pressure on the Aussie.
Kiwi (NZD): The Kiwi is mixed this morning trading higher against the other risk currencies on interest rate differential speculation and US dollar weakness, but lower vs. Yen and Euro. Wednesday evening will bring the RBNZ rate policy meeting and at this point the expectation is for a 25bp hike.
Loonie (CAD): The Loonie is also mixed as oil is lower to 78.25, but still near recent highs. Dollar weakness is not the dragging the Loonie lower as might be expected and Canadian bankruptcies fell 9.2% showing that the economy may be on better footing.
Euro (EUR): The Euro is also mixed as the market is trying to decide what to make of the stress tests. Obvious US dollar weakness has contributed to its strength and should the market decide to move past the stress tests, then CPI and employment figures later this week will come back into focus.
Pound (GBP): The Pound is higher across the board in a continuation of last week’s gains despite the fact that housing price figures fell for the first time in nearly 15 months. This is the sort of news the BOE is hoping for, as rising inflation could equal rate hikes in an uncertain economic climate curtailed by fiscal austerity.
Dollar (USD): The Dollar is lower across the board. Some of it risk appetite, some of it due to lousy economic policy. There isn’t much that could happen here in the US to make me positive on the Dollar, so watch risk around the globe as that may be the only driver of dollar strength as a safe-haven asset.
Yen (JPY): The Yen started out the morning higher but is giving back some gains as risk appetite may be gaining traction. Part of this is Dollar weakness, the part being tacit acceptance of the Euro bank stress tests. Later this week Japan will report CPI data which is expected to show continued deflation. The question will be whether or not deflation is slowing or what, if anything, the BOJ and government intend to do about it.
Part of financial market participation requires a suspension of disbelief and an acceptance that things may not always be as they seem. I tell my mentor clients all of the time: the purpose of investing in markets is to make money, not to always be right.
So while I may disagree with the way things are going or with the “truth” as it is reported, I am always willing to put my personal feelings aside and to join in with market to reach my end goal: making money. It doesn’t make sense to fight the market as “the market can stay irrational longer than you can stay solvent”.
This was one of the first mantras drilled into my head as I began my trading career, and now more than ever do I realize its truth. I hope you do as well.
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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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!
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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The Party’s Over!
By Mike Conlon | June 29, 2010
This morning we are seeing a slew of consumer confidence figures coming out around the globe which are lower but largely in line with expectations. The Euro zone debt crisis is continuing to weigh heavily on the markets, and a leading economic index in China had its smallest gain in nearly 5 months, signaling that the Chinese economy may be slowing down.
Later this morning we are expecting consumer confidence figures here in the US as well as housing price figures. These are expected to come in lower as well, as the removal of the home buying tax credit has caused demand to wane.
Overnight in New Zealand, building permits were lower, and the Japanese jobless rate increased to 5.2%, higher than expected.
This has all contributed to lower equities markets, with US stocks and commodities set to open lower as well. As a result, we are in risk-aversion mode this morning. Keep an eye out for the 10AM numbers, as they may be the stock market’s only chance to recover.
Aussie (AUD): The Aussie is lower as risk aversion is reducing demand for carry trades due to global slowdown concerns, particularly from China. In addition, the market is looking for the new PM to move quickly on the proposed mining tax, which is seen as “anti-business” and bad for the economy.
Kiwi (NZD): In addition to risk aversion, the Kiwi is lower as building permits declined 9.6%, the second decline in 3 months. The Chinese leading index decline is also affecting NZ, as a number of exports go to China as well.
Loonie (CAD): The Loonie is also lower on a classic risk-aversion day, as oil prices retreat on fears of a global slowdown. Tomorrow will bring the Canadian GDP figures which will show how solid recovery is north of the border.
Euro (EUR): The Euro is lower this morning, though higher against the commodity currencies. Fears of the debt crisis have resurfaced, and bank stress tests are to include bank exposure to sovereign debt risk. This is sure to uncover a land mine or two, and the market is fearful of the size and the scope. However, business confidence came in higher than expected as a lower valued Euro should encourage exports.
Pound (GBP): The Pound is lower as well on risk aversion, though it is still above 1.50 vs. USD. Mortgage approvals came in slightly lower than expected, but expect the Pound to fare better than the Euro as GDP figures are due out tomorrow.
Dollar (USD): The Dollar is catching a bid from risk-aversion and is higher against all but the Yen. Consumer confidence figures are due out at 10AM EST and they may be the stock market’s last hope for a turn-around today if the numbers are better than expected. Home price figures came in slightly better than expected, most likely due to the tax credit. Today looks ugly for stocks, which should mean continued dollar strength.
Yen (JPY): The Yen is higher as the rapid unwind of carry trades is driving demand for the Japanese currency despite the fact that industrial production and household spending fell. In addition, unemployment ticked higher to 5.2% vs. an expectation of 5% in a sign that recovery is clearly slowing down.
Well, we knew it was only a matter of time before this global charade was exposed as unsustainable and now the market is starting to realize that it may be time to pay the piper. Obama’s pleas at the G-20 fell on deaf ears, and governments outside of the US have decided that it’s better to cut bait than to try to continue to fish.
In other words, countries are trying to cut their losses and get back to economic health. The only way to do this by taking the “medicine” of financial austerity and debt reduction. This is going to be one heck of a hangover, as now the party may be finally over.
However, all is not lost and I am not trying to be a doomsday forecaster. There are definitely pockets of strength in our economy, including corporate America. All of the lay-offs of the past have allowed corporations to increase profitability, and many are trading at low multiples.
However, it is definitely time for people to wake up. The eventual fallout and backlash against our big-spending government will only bring about better policy in the future. Government, no matter what type of social engineering they try, CAN NOT control economic cycles. The longer they try to pro-long an unnatural order, the worse the pain will be.
Usually the “summer slowdown” takes effect, though this time it may be different. I expect there to be heightened volatility as the world navigates the treacherous waters of the global economy. Expect there to be highs and lows, as well as gains and set-backs.
There is no better time than RIGHT NOW to protect yourself from global economic conditions through the forex market! Don’t be one of the ones left standing when the music stops!
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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Be Careful What You Wish For!
By Mike Conlon | June 25, 2010
Overnight, the US Congress unexpectedly came to a deal and has agreed on bill regarding financial reform and regulation. The uncertainty surrounding this bill has been weighing on the markets, as it was unclear what the outcome might be.
As news trickles out of the 2000+ page document and what it means for the banks and the market in general, at least the uncertainty has been removed. Uncertainty= volatility. Now, whether or not this bill will actually accomplish what it is intended to remains to be seen. What my experience tells me is that no matter what is in the bill; Wall St. has already prepared for likely scenarios and has already devised ways to circumvent regulation. In addition, enacting legislation of this magnitude always comes at a cost, and the brunt of that cost is likely to be paid for by consumers, and not the banks themselves. Banks will simply pass through the new cost so that executives can still buy beach houses. If you don’t believe this will happen, take a look at bank stocks that are trading higher in the pre-market.
This comes ahead of this weekend’s G-20 meeting, where the US will push other nations to consider enacting similar reform.
Economic data is out showing that US GDP grew 2.7%, vs. an expectation of 3% and personal consumption figures were at 3% vs. an expectation of 3.5%. This falls in line with what the Fed said the other day that we are seeing growth, albeit moderate.
Overnight, Japanese CPI figures came in at -.9% vs. -1.1% showing signs that deflation may be subsiding.
The market started out in risk taking mode, but it appears that may be reversing.
In the forex market:
Aussie (AUD): New Australian PM Gillard has backed away from the mining tax that was the eventual downfall of her predecessor and is open to discussion and negotiation. The tax was largely seen as anti-investment in one of Australia’s biggest industries.
Kiwi (NZD): The Kiwi is lower despite a widening trade balance surplus but the market is concerned about a potential Chinese slowdown which could hamper demand for exports. However, this figure fell short of expectations (814M vs. 850M).
Loonie (CAD): The Loonie is higher this morning as its major trading partner (the US) appears to be the only country not entertaining the idea of reduced spending. Unlike the other commodity currencies which are more tied to China, expect the Loonie to benefit as long as the US maintains its spending spree.
Euro (EUR): The Euro is lower continuing the trend of heightened fear from the debt crisis. Today marks the fourth day in a row that European stocks are lower as we head into the G-20 weekend.
Pound (GBP): The Pound is mixed this morning and it will be interesting to see what (if anything) comes out of the G-20 meeting. The UK “tax and axe” strategy is diametrically opposed to the US strategy of “spend, extend, and pretend”.
Dollar (USD): The Dollar is somewhat mixed today as the market figures out exactly what this new financial regulation means. In addition, GDP figures were lower than expectations, but showed that growth, while moderate, is occurring.
Yen (JPY): The Yen is higher this morning, as CPI data showed that deflation came in less than expected. In addition, minutes from the rate policy meeting showed that there was actually talk of inflation. The Nikkei was down overnight, and speculation that the G-20 will not come to a consensus over global economic policy has strengthened demand for the safe-haven of the Yen.
All of my years on Wall St. have taught me one thing: that politicians in Washington DC cannot compete with the brainpower of Wall St. Today, champagne is flowing as the uncertainty over the worst-case scenario from financial regulation has been lifted. True, this isn’t a “home-run” for Wall St.; but I can tell you that they have been prepared for EVERY possible scenario to come out of this and already have plans in place to line their pockets at the expense of the general public.
While regulation is good in theory, it always brings about unintended consequences and in the end it is always the consumer that gets hurt. Now that this is out of the way, the G-20 meeting will be the focus of the weekend but don’t expect anything of substance to come out of it.
The major problem here in the US is jobs. Period. Next week’s Non-Farm Payrolls report will show if we are gaining any jobs in the private sector. If this is a bad number, look out below.
So there is potential for risk over the weekend, but my guess is the G-20 will be a non-event.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
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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Moderate Growth Ahead!
By Mike Conlon | June 24, 2010
Yesterday’s FOMC meeting came and went as expected, and Bernanke acknowledged that the pace of growth is going to be moderate going forward, backing off from last meeting’s stance that recovery was accelerating. Bernanke cited European debt conditions as being not supportive of growth, and of course he left interest rates unchanged as expected and kept the “extended period” language.
In addition to the FOMC news, US new home sales tanked and were off 33%, confirming the previous day’s data that the housing market is getting worse and not better.
Concerns over Greek debt are heating up as the cost to insure said debt is at an all-time high. Outside of general feelings about the global economy, I’m not certain what has changed in Greece to cause this rise.
What this adds up to is risk-aversion in the market, and Japanese yen and the Swiss Franc are benefiting.
Overnight, New Zealand released GDP that showed growth for a fourth straight quarter and matched analyst expectations. The Kiwi is lower, as the market may have been expecting a bigger number and had pushed the Kiwi too high, too fast.
So there’s no real earth-shattering news in the market today, but rather an overall feeling that economic conditions may be worsening and not getting better.
In the forex market:
Aussie (AUD): The Aussie is lower on risk aversion, but overnight a political coup took place where the Prime Minister Rudd stepped down after losing support of his colleagues. Julia Gillard became Australia’s first female Prime Minister as Rudd lost public opinion largely in part to the proposed mining tax he wanted to impose. Mining is a cash-cow for Australia, and this move was seen as anti-business.
Kiwi (NZD): The Kiwi is lower this morning despite the prospect of another rate hike in July as a result of seeing its fourth straight quarter of growth. The market was hoping the GDP figure would beat analyst expectations, but it “merely” came in as expected at .6%. The Kiwi was the biggest gainer yesterday, so this is a case of market anticipation falling flat. Nevertheless, this is still positive for the Kiwi.
Loonie (CAD): The Loonie is lower this morning as well, taking its cues from oil prices which have “retreated” to $76 and overall risk aversion in the market due to the notion that the pace of global economic recovery may be slowing.
Euro (EUR): Concerns over European debt are heating up as European stocks fall for the third day in a row. Perhaps the market is expecting the US to lead us to recovery, and yesterday’s FOMC statement made it pretty clear that may not be the case. I can’t see anything specific that would lead me to believe that anything today is different than last week. Then again, I don’t have insight into the inner-workings of European banks. The Swiss franc has been seeing massive inflows of capital as investors move out of the Euro, and it’s gotten to the point where it may be financially untenable for the SNB to try to intervene again.
Pound (GBP): The pound is higher against all but Yen, as the market “needs” somewhere to park its capital. This is a vote of confidence for the UK budget plans and BOE policy statement which show that the UK may be in the best position to tackle their debt and see growth at the same time. The Pound is back to 1.5 vs. USD.
Dollar (USD): Oh the dollar. It’s catching a bid from risk-aversion, but it’s clearly no beauty-prize winner either. Yesterday’s FOMC meeting and new home sales figures all but take a rate hike off the table for 2010. This morning, jobless claims are lower than the previous week, but still in ridiculously bad territory. Durable goods orders rose ex-transportation, but overall they shrank, though less than expected. Bottom line: the US economy is still weak. Until policies are instituted that will incent companies to create jobs, our slide into Japan-style stagflation is imminent.
Yen (JPY): The Yen is higher across the board on risk-aversion. Japanese stocks are lower as concerns over Europe may hurt Japanese exports, which have been driving economic recovery.
Unfortunately for the world, the US still rules the roost. We started the economic crisis, and now we’re pro-longing it. Yet bad behavior has been replaced by bad policy; and we are slowly sliding into the economic abyss as politicians compete for the next vote.
Meanwhile, banks have been bailed out, executives have paid themselves enormous bonuses, and they sit on the money and don’t lend for fear that regulatory and other economic factors will make it a losing proposition. Or they can’t lend, because they have too many toxic assets sitting on their books and are anticipating the next wave of deflation that will put more home-borrowers under water.
The “solution” to the housing crisis was the tax credit, and it’s just been reported that 14,000 unscrupulous folks bilked the government out of some $25 million, including 240 death row inmates. Government efficiency at its finest! What’s a few million anyway? We’re TRILLIONS in the hole already, and we’ll just keep spending.
Oh yeah, but at least we’re not the EU! Have treasury put that on the dollar bill!
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BOE Not Unanimous!
By Mike Conlon | June 23, 2010
Minutes released from the Bank of England’s rate policy meeting showed that the vote was not unanimous to keep rates unchanged at .5%, for the first time in nearly 7 months. Inflation concerns were the cause of the dissenting vote, as CPI figures in the UK have been above targets. While the BOE expects inflation to subside in the ensuing months, that may not necessarily be the case.
This comes a day after the emergency budget which was announced yesterday, calling for a reduction in spending and an increase in taxes.
In the US, the FOMC rate decision is due out later today, so expect to see some volatility in dollar-related pairs. It is widely held that there will not be a change in policy, but some market participants are betting that we may see a change in the language regarding policy. This would give credence to the rising sentiment that the Fed may raise rates later this year. Personally, I don’t see this happening and I think the Fed will be on hold for the remainder of the year.
Yesterday’s abysmal housing data confirmed that deflationary forces in the housing market may be the start of another leg down.
In the Euro zone, German consumer confidence came in slightly better than expected and PMI figures were largely in line. However, concerns over Greek debt have perked up again.
Overnight, the Yen was higher as the Nikkei was down taking its cues from yesterday’s sell-off in the US stock market.
This morning will bring US new home sales figures as well as Canadian retail sales figures. Any major deviations could send the respective currencies lower.
But expect volatility going into the FOMC announcement at 2:15 EST.
In the forex market:
Aussie (AUD): The Aussie is lower as stocks sold-off in the overnight session but it is gaining back some ground heading into the US session. Risk aversion has driven the Aussie lower, and there is some concern that Chinese demand for metals and energy is causing a rift in the Australian economy.
Kiwi (NZD): The Kiwi is higher this morning in anticipation of GDP figures which are due out later tonight. The expectation of .5% growth will likely be exceeded as demand from China for raw materials has the NZ economy picking up steam. Should the number best expectations, then the likelihood of a rate increase at July’s policy meeting will increase.
Loonie (CAD): The Loonie is lower this morning as oil prices are pulling back from the $78 level, and retail sales figures came in worse than expected. Analysts were expecting a decline of .4% and the figure showed a decline of 2.2%, a big miss. Canada is to the US what Australia and New Zealand are to China. If recovery here in the US is floundering, then it may not bode well for the Loonie and the Canadian economy in general.
Euro (EUR): The Euro is a mixed bag this morning, as it is up against the North American currencies but down against the rest. The EU is considering a bond levy on countries that don’t adhere to debt-to-GDP guidelines which of course brings the Greek debt crisis back to center stage. In addition, business confidence was down in France, though consumer confidence was higher in Germany. Go figure.
Pound (GBP): The Pound is higher across the board, giving a vote of confidence to both the government for their budget and the BOE. The lone dissenter in the rate policy meeting is concerned about inflation, as growth targets may exceed expectations. That’s a “nice” problem to have, considering the economic condition of the US.
Dollar (USD): The Dollar is mostly lower prior to today’s FOMC meeting. Yesterday’s poor housing data sent stocks lower, and today’s new home sales aren’t expected to be much better. This should be enough to keep the Fed unchanged in both language and policy, and the market is starting to catch on to the fact that the smoke and mirrors of government spending may not be enough to stoke the economy. Go back and take a look at my discussion of biflation from a few days ago.
Yen (JPY): The Yen is mixed as well, trading higher vs. USD and CAD (both showing weakness) and the Euro (debt concerns) but lower vs. GBP, AUD, and NZD. So today can neither be classified as risk-taking or risk-aversion, but much of the yen strength was derived from weakness in the Nikkei, which sold off following the US stock market decline.
I think today really shows the difference to how the market reacts to different policy pursuits from around the globe heading into this weekend’s G-20 meeting. On the one hand, you have the EU and the UK who are committed to reducing deficits and trying not to raise taxes too much to discourage business (in fact the corporate tax rate was lowered in the UK), and the policies taken by the US.
The US is going the other way, expanding deficits and throwing good money after bad at our financial problems which can only result in higher taxes when it comes time to pay the piper. President Obama was rebuffed by Chancellor Merkel of Germany with regard to how to best combat the global financial crisis, and it appears as though the market agrees with the EU.
Weak housing data here in the US show that the stimulative effects of government spending may have slowed a decline in the economy, but have not fixed the problem. Now taxpayers (and their children and grandchildren) face an enormous burden for what adds up to temporary conditions.
The change people voted for was for less government spending and indeed we’re seeing change—even more and more spending! Hopefully this course can be reversed before it’s too late. I never thought I’d say this but now is the time we should be taking our economic cues from Europe, and not their prior policies that landed them in this mess.
Those who don’t learn from the past are doomed to repeat it.
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Budget Cuts!
By Mike Conlon | June 22, 2010
The British pound is lower this morning as the UK budget showed a commitment to a balanced budget and a reduction in spending of close to 30 billion pounds annually. This should come as no surprise to the market, yet the Pound is lower as the UK attempts to cut its deficit.
This coincides with some concerns in the market over European bank funding problems which are causing some risk aversion in the market this morning. In addition, yesterday’s enthusiastic response to the Chinese announcement to allow the Yuan to float was short-lived as the US stock market finished the session lower, and futures are pointing to a lower open this morning as well.
Consumer prices were higher in Canada, and there was a note out this morning saying that central banks around the globe are starting to diversify away from the Euro and into the Aussie and Loonie. This could potentially affect their status as “risk assets” as the market is starting to realize that these are strong economies.
So we could see some mixed trading going forward, as the risk-on, risk-off mentality works its way out of the market and these currencies begin to trade on their own fundamentals. Japanese yen will still see gains during risky times as it is still the primary funder of carry-trades, but it will be interesting to see if traders actually unwind the carry trades or add to them going forward.
In the forex market:
Aussie (AUD): The Aussie is mixed this morning on risk-aversion, though it appears to be bouncing off its lows from the Euro session. Demand for the Aussie is higher because of the news from its largest trading partner, China. In addition, the news about central banks diversifying away from the Euro to the Aussie have slightly out-weighed risk themes.
Kiwi (NZD): The Kiwi is affected more by risk aversion this morning than the Aussie, as the NZ economy is not deemed large or strong enough to receive diversified funds from central banks that are moving out of Euros.
Loonie (CAD): The Loonie is higher across the board as CPI figures came in .1% higher than expected to 1.4%. This shows that Canadian economy is still chugging along and that the potential for rate hikes is still on the table. This makes the Loonie a destination for funds from central banks diversifying away from the Euro, with the added benefit of potential rate hikes.
Euro (EUR): The Euro is lower this morning despite the fact that German business confidence was higher. An ECB council member said that some banks are facing funding problems. This comes in advance of the European bank stress tests which are due out sometime next month and could be the next landmine that sends the Euro lower. Banks in Spain may borrow 10 billion euro from its bank-rescue fund.
Pound (GBP): The Pound is also lower as the UK announced its emergency budget which showed a commitment to deficit reduction by reducing spending and setting the table for tax hikes down the road. This has heightened the fear of double-dip recession in the UK, but these announced measures have likely saved the UK top-credit rating from downgrades, which would make it more expensive for them to borrow.
Dollar (USD): The Dollar is mostly lower this morning despite some of the risk in the market. The Chinese decision to allow the Yuan to float more freely and be tied to a basket of currencies and not the US dollar alone is likely causing some selling. Existing home sales are due out later this morning and could provide a snapshot of the housing market ahead of the FOMC meeting.
Yen (JPY): The Yen is higher on risk aversion due largely in part to the Euro debt crisis. In addition, Prime Minister Kan pledged to balance the Japanese budget in 10 years and to reduce bond sales to gain investor confidence. This is quite the task as Japan has the world’s largest budget deficit, so reduced spending and tax changes may be seen as welcome by the markets.
Just when things start to quiet down, the Euro debt crisis comes screaming back into the room and reminds investors that the EU problems have not been solved. Bank funding problems and the upcoming stress tests may show an ugly picture of the financial health of the Euro zone.
Meanwhile, while everyone yesterday lauded the Chinese announcement to allow the Yuan to float more freely, the realization that they now want to use a basket of currencies to peg to (including the potentially sinking ship Euro) is just another way to manipulate their currency to attempt to keep it low.
Canada and Australia could be major beneficiaries of both the Chinese and Euro zone news. Commodity prices have pulled back this morning, but both of these countries have strong economies and that is reflected in their currency gains this morning.
Stay tuned, this may not be a lazy summer after all!
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Yuan Gone!
By Mike Conlon | June 21, 2010
In a move that the market was anticipating and hoping for, the Chinese government announced that they would loosen the peg on its currency and allowing it to float more freely. This hopefully will allow for greater balance in the global economy and help China curb inflation.
However, expectations for Yuan gains fall anywhere in the 3-5% range, as any appreciation will be gradual. This news sent stocks and commodities higher, as this is seen as a vote of confidence by the Chinese. But there is still much work to be done, as China needs to increase domestic demand to support balanced growth.
China has always been the “X factor” in the forex marketplace, as their currency peg and government intervention have created imbalances and uncertainties and have essentially impacted every financial market. There has been increasing pressure on China to make this move, and perhaps recent dollar strength vs. the Euro has encouraged this change.
So this news is very welcome by the markets, and risk appetite is the theme of the morning. Oil is higher this morning to $78.25 and gold reached a 1260 handle earlier. The commodity currencies are higher as a stronger Yuan will increase Chinese purchasing power.
This week is pretty light for news, with the FOMC meeting and the UK budget report due out ahead of this weekend’s G-20 meeting. The timing of the Chinese announcement is somewhat conspicuous, as it was expected that Yuan valuation was to be a major topic of discussion.
In the forex market:
Aussie (AUD): The Aussie is higher on risk appetite, as the Chinese news has the market betting that Australia will be a major beneficiary of a stronger Yuan. There’s no real news for the Aussie this week, so expect it to trade on risk themes this week.
Kiwi (NZD): The Kiwi is higher for the same reasons as the Aussie, though we are going to get some economic data from NZ this week. The current account balance and GDP figures are due out mid-week, which should reveal how the economy is faring and what the RBNZ may be thinking with regard to interest rates.
Loonie (CAD): The Loonie is moving closer to parity with USD, as higher oil prices and risk-taking are drivers behind gains. There is data due out from Canada this week, with CPI and retail sales figures expected to show the state of the economy. In addition, Canada hosts the G-20 meeting this weekend.
Euro (EUR): The Euro is lower this morning against all but Japanese yen, as potential benefits from the Chinese news is out-weighed by the austerity measures to be enacted to deal with the debt crisis. European banks have agreed to publish the results of bank stress tests in July, which may or may not be a good thing.
Pound (GBP): The Pound is mixed this morning trading lower vs. the commodity currencies and USD but higher vs. Euro and Yen. This comes in advance of the emergency budget report due out tomorrow, which is causing increased volatility as the “fear factor” of measures to be enacted leaves the market both hopeful and concerned.
Dollar (USD): The Dollar is lower on risk taking, as equity futures are up big time this morning and stocks are going to open higher. This week’s FOMC meeting is expected to yield no change, but GDP data due out on Friday with other data could tell a different story.
Yen (JPY): Yen is trading lower as selling in order to buy higher yielding assets is taking place. In addition, the Nikkei was up some 2.5%. The Yuan news is widely expected to be positive for Asian countries as a stronger Yuan should benefit other Pac-Rim exports.
I cannot underscore how big this news out of China is. The market has been begging for this for some time to help re-balance the global economy. However, the actual effect of this announcement and how it will play out is highly uncertain.
While it is widely expected that the Yuan will appreciate, I’m hearing rumblings that some analysts thing it could depreciate because of Euro zone issues. While I think this is highly unlikely, the Yuan has been gaining ground as dollar strength due to the Euro debt crisis has lifted its relative value higher.
In addition, the timing of this announcement ahead of the G-20 meeting has bought China time and shifted the focus of the meeting back onto Europe. How and when this actually occurs remains to be seen.
But this could end up being a case of “be careful what you wish for”, as unexpected outcomes could cause market uncertainty and increased volatility. So don’t break out the Champagne just yet; as this move is both necessary and desired, but still a long way away from fixing the global economy.
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