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!
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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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!
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Ban The Shorts!
By Mike Conlon | June 9, 2010
Both France and Germany have called on the EU to ban short-selling on certain stocks and government bonds with the intention to curb speculation in the market. While I am never a fan of this type of regulation, there does need to be some sort of “fix” for the market as speculation has gotten a little out of hand.
However, there are always unintended consequences to this type of action, and this could end up hurting their ability to raise capital. This could also hurt the forex market, as Euro-related pairs lack the volume to trade orderly. Nevertheless, there still is a ton of risk related to the Euro, with sovereign debt defaults the primary driver.
In addition, ECB President Trichet helped push the Euro higher with comments on the state of the Euro. As I mentioned yesterday, expect the game of “show and tell” to pick up, with officials telling us how great everything is but showing us little.
Also today, the US Fed Beige Book report comes out, with Bernanke expected to echo his comments from the other night.
In the forex market:
Aussie (AUD): Consumer confidence fell for the 3rd straight month down under, nevertheless the Aussie is higher on risk appetite. Fears of a global slowdown (particularly in China) and the raising of interest rates have added to the sentiment that the economy will slow in Australia.
Loonie (CAD): The Loonie is also higher this morning as oil prices have bounced higher and equity futures are set to open higher on risk-taking in the market.
Kiwi (NZD): The Kiwi is higher ahead of its interest rate policy meeting tomorrow, where the market is anticipating a 75% chance that the RBNZ will raise rates 25bp to 2.75%. Put me in the camp that is betting against the rate hike, as I feel the NZ economy rides on the coattails of Australia, and that the risk in the market may be too great to warrant a hike just yet.
Euro (EUR): The Euro is mixed this morning, trading higher against the safe-haven currencies, but lower against the commodity currencies. Comments from the ECB have helped push the Euro higher slightly, but let’s not forget about the huge risk the Euro poses as they struggle to get their fiscal houses in order.
Pound (GBP): The Pound has a bid this morning after a 4-day decline as investors seems more confident in the UK’s ability to combat their fiscal woes, much more so than the EU. The UK trade balance missed estimates, but narrowed from last month’s reading.
Dollar (USD): Today we get “Fedspeak”, as Bernanke gives his beige book report to Congress. I do not expect any change in language from the Fed Chief, and at this point I’m guessing that we will not see a rate hike this year. The Dollar has been higher this year on the flight to safety trade, and at this point I believe that inflation is a non-issue.
Yen (JPY): The Yen is lower this morning as risk-taking inspired carry trades are taking place ahead of the New Zealand rate decision. Japan will report its own GDP figures tomorrow, which are expected to show moderate but steady growth. In addition, new Finance Minister Noda said he would like to see price gains above 1%, but didn’t make that an “official” inflation target. Japanese deflation has plagued its economy for some time.
As I mentioned yesterday, this is “cheer-leading” week for the various markets, as the lack of hard economic data is supplanted by discussions of various economic situations.
I am always skeptical when it comes to government announcements and prefer to analyze the hard data myself. But with that in mind, you have to pay attention to what they are saying.
As a trader, it is important to trade what you see and not what you think should happen. If Bernanke wants the market to go up, you should play along even if you think the fundamentals don’t match. However, be sure to exit quickly at the first sign of market sentiment change as the market is always right, regardless of what is said.
So pay close attention to the technicals as the various market participants digest the rhetoric.
Do you have a strong grasp of technical analysis?
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Big Ben Is Back!
By Mike Conlon | June 8, 2010
Just when you started wondering where are esteemed Fed Chairman has been, Bernanke gave a speech last evening that helped buoy the markets higher. Bernanke re-affirmed that indeed recovery is intact here in the US; though moderate given the depth of the recession. These comments helped send futures higher, and encouraged risk-taking in the forex market.
Across the pond, Fitch ratings agency came out with comments on the UK saying that the UK fiscal challenge is “formidable”. Perhaps this could be viewed as adding “fuel to the fire”, as these comments came a day after the new British PM said basically the same thing. There is speculation in the market that perhaps a UK credit downgrade is looming. The UK emergency budget is due out on June 22 and that should paint a clearer picture.
Meanwhile, the German trade surplus narrowed, though industrial output increased .9%, besting expectations.
In the forex market:
Aussie (AUD): The Aussie is higher on risk-taking, despite the fact that business confidence fell for the third straight month. Part of this can be attributed to the government’s proposed 40% tax on mining companies as well as Euro zone conditions.
Loonie (CAD): The Loonie is higher as well, catching a slight bid from higher oil prices, despite a housing starts number that came in worse than expected. The number came in at 189K vs. an expectation of 202K.
Kiwi (NZD): The Kiwi is higher ahead of tomorrow’s interest rate policy meeting which the market is expecting will bring at 25bp rate hike, raising the official cash rate to 2.75% from a record-low 2.5%. Inflation is expected to pick up which would outweigh any fallout from the Euro debt crisis. However, as mentioned yesterday, most every country is looking for a weaker currency to export their way to prosperity, so a rate hike may induce carry trades which would push the Kiwi higher.
Euro (EUR): The Euro is higher as there is some risk-taking in the market, though lower vs. the commodity currencies. At this point we all know about the conditions in the Euro zone, so any lack of market-moving news will allow the Euro to drift higher, though without conviction.
Pound (GBP): The Pound is lower this morning on the Fitch news, despite the fact that retail sales rose .8% compared to a decline of 2.3%. The UK emergency budget will be released on June 22nd, and will provide further clarity to extent of budget cuts the UK may be enacting.
Dollar (USD): The Dollar is mostly lower this morning, as risk appetite has picked up partly because of Bernanke’s comments last night. Tomorrow will bring the Fed’s Beige Book economic report which should be similar to the comments made last evening.
Yen (JPY): The Yen is lower as carry trades have increased due to heightened risk-appetite. In addition, new PM Kan takes over officially and his new cabinet is seen as one that favors budget cuts and a weaker Yen.
There’s not a lot of fundamental data out this week so much of the movement we’re going to see will be based on various comments coming from around the globe. As a result, the markets can move somewhat erratically, as officials attempt to jaw-bone their various currencies.
Most of the comments due out will not provide official numbers, so sometimes they need to be taken with a grain of salt.
However, you can see how comments from a ratings agency can affect a currency like the Pound, just like a quick speech at Washington event can improve markets as well.
Let’s face it, most of these government types are economic cheerleaders; however they all favor a lower currency to encourage exports. So I expect much of the “news” we hear to counter-balance each other out, and some sideways trading to occur as we go into the summer slowdown.
That is, until you hear something from the Euro zone. Because at this point, the less we hear from them, the better!
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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Inside Day!
By Mike Conlon | June 2, 2010
Today I’m calling the early market action an “inside day”. While potentially not technically true, today represents a pause in market action from the overall down trend. So today looks like a mild risk-taking event but in reality it’s more of a pause than anything.
From the “when the going gets tough the tough get around to resigning… dept”.: Japanese Prime Minister Hatoyama called it quits after only nine months of ineffectiveness. I have to say, there is something about Japanese humility that strikes a chord with me; perhaps US leaders might take a note.
Other than that, the world didn’t destruct overnight, giving traders a reason to try to put risk back on the table.
Today is not a big news day, as Australian GDP came in a tad better than expected, and Euro zone PPI came in a bit higher as well.
Taking cues from the “no news is good news” mantra, risk trades appear to be happening.
In the forex market:
Aussie (AUD): Australian GDP expanded for the fifth straight quarter coming in at an expected .5%. The economic story down under is a good one, only derailed by Euro weakness and a potential Chinese slowdown. If things start to settle down and global risk abates, a rate hike may be forthcoming at the July meeting.
Loonie (CAD): Yesterday’s news of the rate hike was largely expected and somewhat disappointing as risk aversion ended up winning the tug of war. The BOC put the proverbial kibosh on further rate hikes citing global instability (Euro) as the main driver of policy.
Kiwi (NZD): The Kiwi is receiving a bid today for 2 main reasons: Yen weakness after the Prime Minister’s resignation and the fact that Canada raised rates yesterday. While traders may be speculating that a rate hike in NZ is forthcoming at the June 10th policy meeting; I think it is highly unlikely based on the fundamentals and risk themes globally.
Euro (EUR): Thankfully, there is not a ton of news coming from the Euro zone. PPI figures came in a little hotter than expected, but inflation may be the pill to be swallowed as EU banks attempt to fix themselves and avert a debt crisis. The trend is still down for the Euro.
Pound (GBP): The Pound is showing some strength as it is becoming more apparent that the UK, despite its flaws, is still a better place to invest than the Euro zone. Mortgage approvals were higher, showing signs that recovery may be happening.
Dollar (USD): Traders are selling the Dollar today as the lack of world risk is encouraging yield-seeking behavior. Home sales figures are due out today but regardless of the outcome, short-term recovery appears to have gained some traction.
Yen (JPY): The big news out of Japan is that the Prime Minister Hatoyama resigned. Only slightly less important is that speculation over his successor has placed Finance Minister Kan at the head of the pack. Kan is known for his weak yen stance, which may be helping Yen selling today.
I love days like today where there is nothing in the news that could interrupt what I call the “natural” course of action. Basically, currency behavior is predictable.
As of late, the forex market has been moving at warp speed as every tiny detail is analyzed and as result becomes meaningful. Overall market trends appear to be stable, and the market is pausing to re-evaluate its stance.
Every day that the market can get by without negative news is good for global stability.
And while I enjoy the frantic pace of the market most days, a rest is appreciated 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!
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Euro Declines, Canada Hikes!
By Mike Conlon | June 1, 2010
Now that the debt crisis in the Euro zone appears to have stabilized, the market now turns its attention to EU economic fundamentals. The outlook for the Euro is negative, as governments adopting austerity plans means that GDP growth will like stall and contract. The bounce we saw last week in the Euro was the result of short-covering as the Euro fell too far, too fast. In addition to the weakening fundamental data, political uncertainty in Germany has risen as its President unexpectedly quit. The Euro made new lows against the dollar at 1.211 in the overnight session.
Over the long weekend, news out of Australia showed that the economy there may be slowing and the RBA declined to further tighten interest rates by holding the rate steady.
In an opposite move, Canadian GDP came in better than expected yesterday the Bank of Canada’s rate decision is due out any minute.
The British pound is higher as manufacturing growth remained at 15 year highs, and housing prices rebounded showing signs of economic growth.
In addition, an apparent “fat-finger” error in the Nikkei futures market sent the index lower, though it has rebounded off of erroneous lows. World stock markets are lower, as are the US equity futures. Oil is down as well, though gold is higher as it is viewed as a store of wealth.
The market is in risk-aversion mode, though the open of the US exchanges after the long weekend could change that sentiment.
In the forex market:
Aussie (AUD): The Aussie is lower as the RBA declined to hike interest rates, citing Euro zone uncertainty and a potential economic slowdown in China as threats to economic growth. In addition, building permits were down some 15%, but retail sales came in much better than expected. This shows that investors are treading cautiously down under, as housing prices may be a bit over-blown. So consumers are directing their dollars to smaller ticket items, preferring to hold off on larger investments.
Loonie (CAD): The Loonie is lower on risk-aversion and lower oil prices, as the market waits for the BOC rate decision to be announced. Speculation has the BOC raising rates .25% to .5%, after yesterday’s GDP report showed a gain of 6.1% vs. an expectation of 5.9%. As Canada’s largest trading is the US (the only country NOT enacting austerity measures to combat excessive debt), the Canadian economy appears to be ready to out-perform. *Edit: Rates were increased as expected to .5%, yet the Loonie is lower as the market may have been expecting more.
Kiwi (NZD): The Kiwi is lower on risk aversion, and a slowing European and Chinese economy could stall growth in the region. Also, New Zealand’s own austerity measures could contribute to economic weakness if they attempt to reign in their public debt. Business confidence figures were lower as well.
Euro (EUR): The Euro is lower as well, after the German President Koehler unexpectedly quit, further weakening Chancellor Merkel’s political alliance. Retail sales in Germany were lower, and unemployment came in lower than expected, showing signs that a weaker Euro will be good for German exports. However, unemployment in the EU overall was higher, highlighting the disparity between Germany and the rest of the EU. Meanwhile, French PPI came in higher than expected. It seems as though EU residents are preparing for the worst, and scaling back as negative economic data has a “chicken and egg” effect in the region. The long-term trend of the Euro is still down, and while a lower Euro will help exports and tourism to bring cash to the region, it is going to get worse before it gets better. Now if the banks can just hang on.
Pound (GBP): The Pound is higher across the board, as house prices had their largest annual increase in nearly 3 years. In addition, UK PMI figures showed that manufacturing expanded at its highest level in over 15 years, and money flows are leaving the Euro to invest in the Pound as the economic outlook is far better in the UK which could mean a normalization of monetary policy later in the year.
Dollar (USD): The US dollar is bid vs. the commodity currencies as risk aversion is the theme to start the trading week in the US after the long holiday weekend. Stock futures are off of their lows, and we could see a rebound today if the ISM manufacturing figures come in better than expected. This has become a familiar “pattern”, as fear in the Euro zone and Asia start the session in risk-aversion mode, which flips to risk-taking if all appears well here in the US.
Yen (JPY): The Yen is also higher on risk themes, and also received a bid as a “fat finger” mistake in the Nikkei futures markets sent the index lower. The Yen trades somewhat inversely to the Nikkei, so it started off higher. Regional instability from a potential Korean conflict could cause volatility in the Yen if it escalates.
Long weekends in the US markets can sometimes have disastrous results as trading does not cease in other areas of the world. Risk and fear can cause markets to react violently, as correlations between the markets move back toward their natural order.
This weekend, the market was fairly lucky in that while there was some negative news, there was nothing earth-shattering that would cause a panic.
In the forex market, we are now seeing shifts in the balance of power, as some nations strengthen while others weaken. If the Euro debt crisis can be contained, then expect traders to revert back to the fundamentals as we enter the summer trading season.
While the summer session is normally slower, I’m not certain that will be the case this year. With the markets on high alert and fear still rampant in the market, expect volatility to remain high.
And that’s just what we as traders want!
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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Summer Upon Us!
By Mike Conlon | May 28, 2010
For now, the Euro zone debt crisis appears to have been averted. For now. The Euro is higher for the second straight day as short-covering is taking place. As I’ve repeatedly mentioned, every day that the Euro can get by without negative news is a positive for world markets in general. As a result, we’ve seen recent gains in world equity markets and commodities as they rebound from 9-month lows.
However, don’t be lulled into a false sense of confidence as there still is major work ahead for the Euro. The trend is still clearly down, and there is possible resistance in the 1.245 & 1.26 ranges.
This morning, consumer spending figures in the US came in worse than expected, exhibiting signs that the consumer-led recovery may have stalled. Heading into the long weekend here in the US, expect volume to be light as the “summer slowdown” officially kicks off.
So this morning started off as a mild risk-taking day, which could flip to risk-aversion as the market hasn’t forgotten the economic challenges that lie ahead.
In the forex market:
Aussie (AUD): The Aussie is lower this morning as profit-taking and mild risk-aversion appears to be creeping back into the marketplace. The Aussie had a nice pop off its lows just below .81 vs. USD.
Loonie (CAD): The Loonie is also turning lower as the consumer spending figures have helped risk-aversion return before the long weekend. Oil is higher is back to roughly 74.5, after eclipsing 75 in yesterdays run-up.
Kiwi (NZD): The Kiwi is lower as well, taking cues from risk themes. Yesterday’s IMF report that the Kiwi may be overvalued is contributing to the selling, despite the fact that home-building approvals jumped to 8.5%, a two-month high.
Euro (EUR): The Euro had a bid earlier and tested resistance at 1.245 vs. USD, but selling is now taking place as traders clear their books for the long-weekend. Short-covering had pushed the Euro higher earlier, but bear in mind that the likelihood of any ECB action has been greatly reduced as activity in the common currency appears to have stabilized.
Pound (GBP): Consumer confidence in the UK fell to a 5-month low, as the “political honeymoon” may be about to end. Budget cuts in the UK intended to help with the fiscal deficit may mean that the UK is in for protracted growth going forward. The Pound is lower across the board.
Dollar (USD): The dollar is meandering around as consumer spending numbers came in less than expected causing it to receive a bid from mild risk aversion. The Michigan Confidence survey is due out at 10AM, which could help the Dollar find direction.
Yen (JPY): The Yen is lower this morning although mild risk aversion is driving market direction. Overnight, Japan reported an increase in its jobless rate indicating that the export-led recovery may not be translating over as business is still cautious about future global demand. In addition, deflation continued to plague the economy as consumer prices fell 1.6% which means that BOJ will most likely continue accommodative monetary policy as heightened government pressure to do so will like increase.
The return to fundamentals in the market may be increasing as risk drivers abate with every passing day that the Euro doesn’t implode. And while there is still considerable risk in the marketplace, expect today to be a lighter trading day as traders square their books for the long weekend holiday here in the US.
Going forward, as world economies appear to be committed to deficit reduction, expect economic slowdowns to occur in addition to the normal seasonal patterns. The challenge will be trying to contain global deflation, which could bring about another set up problem.
But until that happens, I’m going to be happy to get some sun this weekend and officially kick off summer. It’s been a crazy month, so I advise you to do the same!
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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Appetite For Risk!
By Mike Conlon | May 27, 2010
The US reported growth figures today that while positive, have missed expectations. US GDP came in at 3% vs. and expectation of 3.4%. In addition, initial jobless claims were reported at 460K, largely in line with expectations.
This morning has started out in full risk-taking mode, as no additional negative news has come out of the Euro zone. As I mentioned yesterday, every day without news will embolden the market and encourage risk-taking. Yesterday’s rumor du jour was that the Chinese government was re-evaluating its Euro zone holdings, which sent the market lower as fears of further selling in the Euro were heightened. However, the Chinese denied that rumor and the markets have rebounded strongly this morning.
The Dollar has benefited as of late due to the flight to safety trade, so at this point while the fundamentals are improving, the US still has a long road to recovery ahead.
In the forex market:
Aussie (AUD): The Aussie is higher on risk-taking this morning, as traders aggressively jump back into carry trades. Because the Aussie had been sold off due to risk-aversion, carry traders buying here are essentially getting a discount which is giving them a better return on investment.
Loonie (CAD): The Loonie is higher as well, as oil is back above 73. The market is looking ahead to next week’s rate policy meeting, where the expectation is that they will raise rates. If the Euro zone can stabilize, then this will most likely happen.
Kiwi (NZD): The Kiwi is also up on carry trades and NZ reported last night a better than expected trade surplus, showing that demand for imports declined as exports increased. However, an IMF report said that the Kiwi may be 10-25% over-valued and that a lower valuation would help narrow its account deficit. So there could be a pause at the mid-year expectation if inflation is contained, though carry traders don’t mind as they are content with the yield differential.
Euro (EUR): Hooray for the Euro! They have finally had a day where everyone was on the same page and the message to the marketplace was clear and concise: the Euro is not in danger of failing, and the debt crisis is likely to be contained. CPI figures in Germany came in on target, showing that inflation is contained despite a weaker Euro. Growth in the US and China may offset the Euro zone debt crisis. China did not pile on to the mess, claiming that they are not reviewing their Euro holdings quelling fears that a further sell-off was imminent.
Pound (GBP): The Pound is higher as risk-appetite in the market has picked up, and the lack of negative news from the Euro zone is providing support.
Dollar (USD): The Dollar is lower this morning as risk-taking has reduced demand for the safe-haven trade. GDP figures came in slightly lower than expected, but positive nevertheless. Initial jobless claims were slightly higher; showing signs that while the US economy is improving, it is moving very slowly. Some may claim that part of this GDP growth was due to government stimulus programs, which are starting to expire shortly. Whether or not the economy can remain on this trajectory remains to be seen once the stimulative measures are removed.
Yen (JPY): As expected, the Yen is the worst performer this morning as risk-appetite has increased the selling of yen as yield-seeking traders put on their carry trades. Tomorrow will bring a plethora of economic data, from CPI to the jobless rate; however don’t expect these to be market movers unless they are grossly out of line.
Yesterday’s blog article about the market “proceeding with caution” was prescient in that it showed that market was still jittery. What started out as a positive day quickly reversed as rumors of a potential Chinese sell-off of Euro assets.
However, with an additional day of Euro stabilization due to the lack of negative news, the markets gain confidence in the global economic picture. As you see, it doesn’t take long for the market to have a “short memory”.
As long as the market believes the Euro debt crisis can be contained, then we should see risk-taking occur. Whether or not this will be the case is yet to be seen. So take yesterday’s advice and proceed cautiously, as potential Euro zone landmines haven’t gone away.
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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Proceeding With Caution!
By Mike Conlon | May 26, 2010
After the furious selling pressure that has taking place in world markets; yesterday, the US stock market was able to rebound and reverse most of its early morning losses. In what has become a familiar pattern, traders push the Euro lower in the overnight session, which causes commodities and stock futures to sell off until the US market opens. At that point, the US fundamentals take over as Europe closes and the potential for reversals is much greater.
And that’s the beauty of the forex market. Once the European session closes, the potential for risk decreases as business is concluded for the day. Every day that the European session can close without some major negative news is a good thing for global economic stability.
So overnight the news was relatively benign; allowing market participants to step back in slowly with risk appetite, though the trend for the Euro is still clearly down. An orderly decline in the Euro is not a bad thing; furious selling based on fear is.
So there is some mild risk-taking in the market, and perhaps a bit of short-covering. Better-than-expected durable goods numbers in the US extend the economic recovery story, however the Euro debt crisis will still be the ultimate factor in global market sentiment.
In the forex market:
Aussie (AUD): The Aussie is higher this morning, as an index of leading economic indicators rose at its fastest pace in almost 13 years. The Australian economy has been one of the better performing economies, and the Aussie has taken a hit as of late due to the unwinding of carry trades.
Loonie (CAD): The Loonie is also higher, catching a bid from its correlation to oil prices, which is back up over 70.5, sporting a 2.5% gain. Prospects for a rate hike at next week’s policy meeting are still on the table, and I mentioned yesterday that now may be an excellent time for the BOC to hike, as the Loonie has sold off due to Euro concerns.
Kiwi (NZD): The Kiwi is also moving higher as risk appetite is beginning to pick up going into the open of the US stock market session. Mild risk-taking as investors “dip their toes back in” is taking place.
Euro (EUR): From the “no news is good news dept.”, the Euro is lower but experiencing a more orderly decline as total meltdown has been avoided so far in the trading session. European stock markets have rebounded from yesterday’s decline, in a sign that the selling may have been excessive. There are still some good growth stories around the Euro zone, however expect Euro weakness to continue as the debt crisis continues. Also Italy announced $30 billion in budget cuts.
Pound (GBP): With a day of rest in the Euro zone, the market has turned its eye toward the UK economy. The Pound is lower this morning as the OECD said that the UK needs to be concerned about potential inflation and may need to raise rates and remove asset purchases going forward in addition to cutting its budget. There is still obvious concern about the UK economy, however at this point it still looks to be in better shape the EU.
Dollar (USD): The Dollar is meandering around as it wants to be weak as equity futures are higher this morning, but is being held up by alternative currencies (Euro, Pound) being weaker. This could cause a shift in the way the dollar trades; reversing from an inverse to a positive correlation with US stock markets. Or we could see a reversion to mean. Durable goods orders rose 2.9% last month, more than doubling the expectation of 1.3%.
Yen (JPY): The Yen is lower vs. all but the Pound and Euro as investors cautiously take risk. BOJ officials are concerned about “excessive involvement” in the allocation of capital, as it attempts to combat deflation. This brings back into focus the debate between monetary and fiscal stimulus, with the BOJ essentially saying they don’t have much room left to maneuver.
Mild risk-taking is happening today as world markets rebound from lows not seen in some time. Every day the Euro zone can get by without a major catastrophe happening will help the markets gain confidence in the global economic recovery.
There are still some good economic growth stories coming from around the globe, and it is sort of becoming a situation where one region has to pick up the slack while another is struggling. The same situation occurred when the US was at the brink of disaster back in 2008 and things looked bleak.
But we made it through. And with global cooperation and support, the EU will 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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Global Slowdown Threatens Markets!
By Mike Conlon | May 14, 2010
In this era of globalization, the reliance on the inter-connectivity of markets has induced what is known as the “butterfly effect”. That is, when something happens in one area of the world, it has the potential to pervade and send shock waves throughout the rest of the world. And this is where we are today.
You may be asking yourself, “How can the debt problems of an economically tiny nation thousands of miles away influence your day-to-day decisions?” Well, Greece is basically a microcosm for the world economic system in that if one part fails, it causes a chain-reaction (contagion) which causes other failures. Once failures occur, confidence is shaken and fear pervades the marketplace.
Have you seen the price of gold lately? Gold is a safe-haven asset that is known to store value and hedge against inflation. Gold is currently in $1240 range and has been in high demand since the Euro debt crisis has picked up steam.
At the forefront of the Euro debt crisis is the structural issues surrounding the viability of the Euro has a single currency. Many are starting to believe that this experiment has failed. Earlier this morning, the Euro tested 1.24 vs. USD.
However, luckily for the markets, the US retails sales figures came in better than expected, showing signs that the US consumer couldn’t care less what is happening abroad. Will a US-led recovery save the global marketplace? Only time will tell.
In the forex market:
Aussie (AUD): The Aussie is lower this morning on risk-aversion, but has bounced back from its lows of the morning. While the economic story in Australia is a good one, the Aussie will continue to be ruled by risk themes in the market and not its fundamentals.
Loonie (CAD): The Loonie is lower this morning as it has been trading as a proxy for oil prices for some time. Oil is now trading at a 73 handle, and Euro zone and UK austerity measures are predicting a slowdown which dampen demand for oil. This could have a negative effect on the Canadian economy, but for now the market is still betting that they will hike rates at the June meeting.
Kiwi (NZD): The Kiwi is an interesting story this morning as I’m reading the economic data that came out earlier this morning and I can’t figure out why the seemingly disappointing data and risk aversion in the market aren’t affecting the Kiwi in a negative way. Retail sales figures rose at the slowest pace in almost a year, and housing prices fell which is weakening the case for a mid-year rate hike. Nevertheless, the Kiwi is higher against all currencies but Dollar and Yen, being only slightly down against the former. My only guess is that it is getting a bid because of higher gold prices, but that is a tenuous guess at best.
Euro (EUR): Yes the Euro is lower again this morning, reaching a one-year low of near 1.24 vs. USD. It has rebounded some, buoyed by the correlative effects of dollar weakness due to US stock futures gains, though the gains off of the lows seem to have been short-lived.
Pound (GBP): The Pound is lower this morning again as well, as belt-tightening in the UK is predicting a continued accommodative monetary policy as I outlined yesterday.
Dollar (USD): The Dollar is higher on the flight-to-safety trade and retail sales did come in better than expected (.4% vs. .2% expectation). However, the market may be skeptical that a US consumer-based rally may not be enough to keep the global economy afloat.
Yen (JPY): Yen is strong due to risk aversion and the un-wind of carry trades as the AUD/JPY pair is the biggest loser this morning. Asian stock markets were down big overnight.
Heading into this weekend, there is a lot of fear in the marketplace. Investors are not comfortable holding risk assets as there is no telling what may happen over the weekend. The general attitude is better to be safe than sorry.
Now that the talk of a Euro breakup is heating up, this is adding fuel to the fire as that potential event could be catastrophic for the markets. Equity futures here in the US look pretty ugly, and I’m not certain that there is anything which is going to change that. The confidence survey due out at 9:55 EST is the stock markets only hope today, and that is a long-shot.
So my advice is to do what the market tells you. If the market is showing fear and risk-aversion, then you dear reader should 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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