Here We Go Again?
By Mike Conlon | August 25, 2010
Yesterday, S&P downgraded Ireland’s sovereign debt which sent bond yields higher for the troubled Euro zone nation. However, German business confidence figures came in better than expected which has counter-balanced the regions prospects and is providing a bid for the Euro.
Here in the US, Durable goods orders came in worse than expected and yesterday’s dismal existing home sales figures shows signs that the US economy may be floundering. This has caused speculation of further Fed quantitative easing to heat up as policy makers attempt to revive the US economy.
In Japan, the official jaw-boning has begun as Prime Minister Noda said he was prepared to take “appropriate action” to combat “one-sided” currency fluctuation.
Overnight, equity markets are lower, and the US stock futures are lower going into the open. Oil has retreated to 71.50, and gold is higher as investors seek safe haven assets.
In the forex market:
Aussie (AUD): The Aussie is higher this morning despite the uncertainty surrounding the elections Down Under. As the votes are being tabulated, right now it appears to be a dead heat. Yen weakness has provided the Aussie with a bid, and completed construction work figures came in better than expected.
Kiwi (NZD): The Kiwi is lower on risk aversion following yesterday’s reduction in the expectation for inflation, despite overall Yen weakness.
Loonie (CAD): The Loonie is also lower as its high correlation to oil prices has reduced demand and general risk aversion and US economic weakness reduces its prospects for economic growth. Yesterday’s retail sales figures are still in the back of trader’s minds.
Euro (EUR): The Euro is mostly higher to start the US session despite the Irish debt downgrade. German business confidence figures came in better than expected to its highest reading since 2007. This has caused yield spreads between German bonds and those of the PIIGS nations to rise. While the PIIGS haven’t had trouble with debt offerings, higher yields could impact their ability to service that debt. (Click chart to enlarge)
Pound (GBP): The Pound is mostly higher with no news on the docket to affect it one way or another. UK Treasury Minister Hoban defended the government’s austerity measures in a BBC interview, and today’s price action could be a technical bounce after 3 days of declines. (Click chart to enlarge)
Dollar (USD): The Dollar is trading higher vs. the commodity currencies and Yen as the US economy appears to be weakening. Durable goods orders came in at -3.8% vs. an expectation of .5% which highlights the effect of the withdrawal of the “stimulus” funds on the economy.
Yen (JPY): The Yen is lower as the jawboning has increased in Japan. Speculation of intervention in the currency has increased as the Yen pulls back from 15-year highs. In addition, export growth slowed as a result of the combination of reduced world demand and the higher Yen, yet it came in slightly higher than expectations. Keep your eyes on this one!
It looks like extend and pretend may be coming to an end. As the US “stimulus” plan comes to end, the economic data is starting to show that private demand is just not there. This is mostly likely a result of government “crowding out” private business as the money came from government coffers.
However, because policy is not in place to encourage private business, unemployment remains high which reduces consumer demand which in turn causes economic growth to stagnate. Uncertainty over financial regulation, tax policy, and health care has left business content to drive profits through reduction and not expansion.
So one would think that it’s time to change these policies, right? Wrong. The answer that is being talked about is either additional stimulus or further quantitative easing! Talk about making a bad situation worse.
It is going to be interesting to see how this plays out and whether the elections here in the US bring about change in policy. Until then, be prepared for the pain.
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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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.
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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Scared of the Weekend?
By Mike Conlon | June 18, 2010
In what has become a familiar pattern, Friday selling of risk assets heading into the weekend is taking place as the risk posed by the Euro zone debt crisis is still prevalent. In fact, various policy makers around the globe have expressed concern about the Euro zone, even as the market has been in risk-taking mode as of late.
Today there is a lack of market making news so we’ll turn our attention to more macro themes, one of them being oil prices. It was only a matter of time before fallout from the oil spill in the US began to show up in the markets. The proposed ban on offshore drilling will only reduce supply, thereby causing prices to move higher. The cruel irony is that this would actually benefit BP, the company responsible for this disaster. That means higher prices for consumers.
This is also falls in line with yesterday’s discussion of biflation, where we are likely to see higher commodity prices yet debt-based asset prices go lower.
If the usual correlations hold up, this will benefit the Canadian dollar the most, and the US dollar the least. It’s amazing to think that even in the face of nascent recovery, that oil prices are around $75/barrel. What would it be if we were in full-blown recovery mode? Conspiracy theorists will tell you that high oil prices increase the demand for alternative energy, one of the largest pieces of the Obama agenda. Now I’m not a conspiracy theorist, however I believe in “cui bono”, meaning who stand to benefit the most. You decide for yourself.
So this morning we’re seeing some mild risk aversion, as traders wish to avoid weekend risk from the Euro zone.
In the forex market:
Aussie (AUD): Risk aversion is pushing the Aussie slightly lower going into the weekend. If commodity inflation persists, higher gold prices would benefit the Aussie.
Kiwi (NZD): Same as the Aussie though slightly lower following the “risk ladder”.
Loonie (CAD): The Loonie is lower as oil prices have pulled back as there is concern over the pace of global recovery. In addition the BOC said that there are no “pre-ordained” rate hikes, leaving the door open for a possible pause.
Euro (EUR): The Euro is lower as the ECB head maintained that rates were appropriate in light of the debt situation in the region. However, German PPI figures came in higher than expected, showing signs that inflation may be heating up in the Euro zone’s largest economy.
Pound (GBP): The Pound has given back overnight gains that pushed it to 1,4885 vs. USD. Next Tuesday, the government will release its budget statement that is expected to show a significant deficit and major cost-cutting measure to combat that problem. So far, the market has reacted favorably to the plan as the Pound has had recent gains.
Dollar (USD): The Dollar is slightly higher on risk-aversion, as traders use the safe-haven aspects as a temporary holding vessel.
Yen (JPY): Consumer lending and bank stocks fell on the Nikkei taking the index lower and causing a rise in Yen. In addition, the BOJ is concerned about the Euro zone debt crisis spreading to Japan according to it rate policy meeting’s minutes.
On a day that is light on news, the markets may not tend to move much. As of right now, the market is largely unchanged, with a slight bias toward risk-aversion.
This just goes to show that the daily news events that occur around the globe really do have an impact on the currency and other financial markets. While one doesn’t need to be an expert economist to understand why things move as they do, it is important to know if there is news for a specific currency you like to trade.
And that is the purpose of this blog; to give readers a brief run-down of what’s happening so that they may be aware of potential drivers or obstacles to their favorite currency pair.
So I expect today to be a quiet one, with the start of the summer season picking up as the market slows. In fact, I am on a long vacation weekend myself!
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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Jobs Disappoint!
By Mike Conlon | June 4, 2010
US Non-Farm Payrolls came in at a less than expected 431K vs. an expectation of 520K. While this does reflect job growth from last month’s gain of 220K, the number is disappointing as census workers were included in this reading. This shows that job growth in the private sector is not happening as quickly as the market would like to see and offers proof that we may be in a “jobless recovery”.
In addition, news out of the Euro zone is that Hungary may need a bailout as default may be imminent. This could set off a chain reaction which causes the bailout facility to be accessed by other countries with similar problems.
What this adds up to is major risk aversion, as traders will not want to go into the weekend long risk assets in the event of further complications in the Euro zone. US stock market futures are down significantly, as is oil, trading back to 72.5.
In the forex market:
Aussie (AUD): The Aussie is lower this morning on risk aversion coming from the Euro zone. However, sales of gold to Europe have increased dramatically as the Euro zone debt crisis induced a flight to safe-haven assets.
Loonie (CAD): The Loonie is also lower on risk-aversion, despite a better than expected employment report. Data showed an addition of 25K jobs vs. an expectation of a 15K gain. The unemployment rate remained unchanged at 8.1%.
Kiwi (NZD): The Kiwi is lower as well for the same reasons as the Aussie.
Euro (EUR): Well it was just a matter of time before the debt crisis reared its ugly head again. To think that the problems plaguing the Euro zone were solved with the announcement of the bailout facility would have been naïve. Hungary’s announcement that it is in a “grave situation” as a result of the previous governments lies and manipulated figures which gave a false picture of its economy. Euro zone GDP figures came in as expected, but this reading from the previous quarter may not paint a proper picture of the state of overall Euro zone economic health.
Pound (GBP): The Pound is mixed; trading higher against risk currencies but lower vs. Dollar and Yen. The Halifax report showed that home prices fell for a second straight month; however this report appears to be conflicting with other reports on home prices. The takeaway here is that housing prices are likely to remain flat.
Dollar (USD): Well what can I say about this employment number that’s positive? Truthfully, not much. The majority of job gains reported in this month’s NFP were temporary jobs created by the government in the form of census workers. I suppose I am doing my part to “help” the economy by hiding from these people, thereby attempting to offset spending as population is under-reported giving the government one less reason to spend my hard-earned tax dollars. In addition, the longer it takes to track me down, the longer one of these workers may be employed! It’s a win-win for everybody. But seriously, I try not to rail on politics but this is a disaster on so many levels. Massive deficits, tax hikes coming down the pike, and the private sector unwilling to create jobs out of FEAR that their taxes will be going up to pay for massive entitlement plans are going to be the economic death of this great nation. But the Dollar is higher on risk-aversion, so that means that the masses can be placated by still being able to afford cheap foreign stuff, while government fat cats finance new beach houses (yes you Al Gore) paid for by my yet to be born grand-children. A sad day for Amerika.
Yen (JPY): The Yen is higher on risk aversion and the unwinding of carry trades.
When bad economic policies are put in place by cowardly government figures, bad things will happen. The government has been the largest creator of jobs for some time, and most of these are unproductive, and do not contribute to economic growth. I have nothing against government workers, and I believe everyone who wants a job should have one.
But the insidious transfer of wealth from the private sector to public sector weakens our economic strength. I’m tired of hearing about the “failed economic policies” of the past and the need for “change”.
These policies are NOT failed; they were under-regulated. The same people trumpeting this mantra are also some of the same people responsible for those policies. Excessively low interest rates and the housing bubble are the root cause of our economic problems, not free market principles.
The sooner people start to wake up and understand this, the sooner we’ll be able to get out of this mess. Of course you have to pull them away from their cheap plasma TV to care for more than half a minute.
Nevertheless, the forex market trades on and there are tremendous gains to be made by those brave enough to understand what is going on and how to profit from it.
Are you one of those people? If not, become one!
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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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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A Perfect Storm!
By Mike Conlon | May 25, 2010
World financial markets are facing a “perfect storm” as a combination of geo-political and financial uncertainty is driving risk-aversion. The first issue is coming from the Euro zone as Spain seeks to shore up its banking system. A series of banking mergers aimed at pairing weak banks with stronger ones has caused investors to fear that indeed contagion from the debt crisis has taken place.
Secondly, news out of Asia that N. Korea may have been responsible for the sinking of a S. Korean vessel has heightened political tensions in the region. Whether or not there will be consequences remains to be seen but N. Korea has been known to make idle threats which are intended to destabilize the status quo.
Lastly, news out China that Secretaries Geithner and Clinton are making headway with the Chinese regarding Yuan revaluation may be picking up has brought further uncertainty to the marketplace as there is no telling what the lasting effect may be IF such actions were taken.
This all adds up to MAJOR risk-aversion in the markets in a continuation of yesterday’s selloffs and flight to safety. Libor rates (the rates at which banks lend to one another) have increased to levels last seen during the initial banking crisis here in the US from 2008. Both Asian and European stock markets have sold off to the tune of 2.5-3%, and both gold and oil are trading lower.
In the forex market:
Aussie (AUD): The Aussie is lower on risk aversion. While the economy in Australia has been strong, the unwinding of carry trades has punished the Aussie dragging it down to 10-month lows. Should China effectively attempt to slowdown its over-heating economy, the economic situation in Australia could change dramatically for the worse.
Loonie (CAD): The Loonie is also lower this morning, taking cues from oil prices which are below $68. Economists are still predicting a rate hike at next week’s rate policy meeting, though global economic uncertainty may derail that plan. However, since the Loonie has been beaten up by risk-aversion, this may actually be a good time to sneak in a rate hike that won’t strengthen the currency too much.
Kiwi (NZD): Same deal for the Kiwi; risk aversion dragging it lower. The RBNZ reported its 2-year inflation outlook that was largely in line with expectations.
Euro (EUR): First Greece, now Spain. The moves taking place in Spain’s banking system have put investors on high alert, though it must be noted that Spain has not sought out any assistance as of yet. File this under the, “where there’s smoke there’s fire” sentiment. In the meantime, Industrial orders in the Euro zone were higher showing signs that they are benefitting from a weaker Euro. Stay tuned.
Pound (GBP): UK GDP figures came in largely in line with expectations, indicating that the UK economy grew .3% in the last quarter on the back of the highest manufacturing gains seen in 4 years. The Pound is still vulnerable to any fallout from the Euro debt crisis, but BOE policy-maker Posen said that the UK was at a low risk of experiencing the type of economic stagnation that plagued Japan in there “lost decade”.
Dollar (USD): The Dollar is higher as the rush to the flight to quality is in full effect. Yesterday, existing home sales came in better than expected, but it was not enough to reverse losses. Later this morning, we are going to get consumer confidence and the home price index which will show whether or not a consumer-led recovery may be taking place.
Yen (JPY): The Yen is the best performer this morning as the un-wind of carry trades has increased demand. In addition, a sell-off in Japanese equities has also increased yen demand as the yen experiences a similar correlation to its stock markets as in the US. As tensions heat up in the region due to N. Korea, people forget that almost a year ago, N. Korea fired off nuclear test missiles in the direction of Japan. They are a major destabilizing force in the region and the former policies of trying to appease and placate them may have run its course. The yen is fast approaching its 2010 high vs. USD, just above 88.
I call what is taking place in the markets right now the “perfect storm” because there is much uncertainty due to events that can’t be quantified. It is one thing when there is bad economic data for a region or two; however when there are political threats that could potentially cause a war, all bets are off.
And while N. Korea has been known to posture and bluff its position in order to gain, this time it could be different. No one wants to see military action in the region, but N. Korea is such a wild card that no one knows what to expect.
In addition, world recovery has pretty much been driven by Chinese demand and should they slow down, it could affect the nations which have been experiencing economic recovery.
Oh yeah, don’t forget about potential sovereign debt contagion in Spain, which could potentially be a MUCH larger problem than what was seen with Greece.
Meanwhile, everyone rushes to the safety of the US dollar and Japanese yen and both countries government bonds as it is better to earn almost no interest than to lose out entirely.
Are we having fun yet?
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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The Great Unwind!
By Mike Conlon | May 20, 2010
I talk often about carry trades in the currency market which go hand in hand with the risk themes that drive daily price action. When there is confidence in the financial markets, investors look to take on risk and seek out higher yielding assets. They can do this by selling the currency of a low interest rate country and buying the currency of a higher interest rate country, thereby capturing interest through yield differentials. This is known as a carry trade.
The currency pair that represents the greatest “carry” among the most actively traded pairs is the AUD/JPY pair which can also be used as a proxy for risk-taking in the market. Currently, the positive carry of this pair is roughly 4.4%, as rates in Australia are at 4.5%, and rates in Japan are .1%. So just by owning this pair, an investor would earn that rate difference. This is a common trade when there is confidence in the financial markets.
Currently, there is little confidence in financial markets, as the EU debt crisis has brought to light many problems in the global marketplace. And unless you have been living under a rock for the past few weeks, this should not come as news to you.
So what we are seeing is major risk-aversion in the markets, and no pair is getting hit harder than the above mentioned as investors unwind a risk-taking position. In addition, global stock markets and commodities are selling off, adding additional fuel to the fire as investors run to the “safety” of the Japanese yen and US dollar.
In the forex market:
Aussie (AUD): The Aussie is the biggest loser this morning, as risk-aversion is causing the un-wind of carry trades. It is currently at an 8 month low vs. the US dollar, as gold prices have sold off to the 1178 level. Gold is often used as a proxy against inflation, which does not appear to be as great a concern as deflation is, as the world prepares for a global slowdown. Concerns about a Chinese slowdown could really derail the world economy, but all eyes are on the Euro crisis for now.
Loonie (CAD): The Loonie is also selling off as commodity prices, particularly oil at 68, are lower across the board. The Loonie does not benefit as much as the Aussie (or Kiwi) from carry trades, as low rates in Canada do not encourage carry trades. The Loonie may be better off in the long run, as the US is its largest trading partner, and the US keeps throwing money at its financial woes instead of adopting austerity measures that the rest of the globe seems to be taking.
Kiwi (NZD): The Kiwi is selling off for the same reasons as the Aussie; however in NZ they just announced that they will be cutting income taxes but raising sales taxes to encourage savings and debt reduction. This will help NZ reduce its foreign debt as financial discipline is needed in the region.
Euro (EUR): The Euro is higher vs. the commodity currencies above on the carry un-wind as well as risk aversion pervades the marketplace. Now this may seem counter-intuitive to some as the major risk in the market is the Euro, which appears to be stabilizing as banter about Euro intervention is thrown about. In somewhat decent news, PPI figures in Germany were higher showing signs that massive deflation has not taken hold. Yet.
Pound (GBP): Retail sales were higher in the UK for the third month in a row, in what may be short-lived gains in consumer sentiment. With the new government looking toward austerity measures and a return to fiscal responsibility, and the BOE pledging to stay the course on monetary policy, the Pound may continue to be weaker vs. the Yen and the Dollar.
Dollar (USD): US jobless claims came in higher than expected though continuing claims fell, most probably the result of discouraged workers losing their benefits. This does not bode well for the US economy which, quite frankly is only seeing strength because everything else looks so bad. US equity futures are lower, though off of their lows of the morning.
Yen (JPY): GDP figures came in worse than expected to 4.9% vs. an expectation of 5.5%. The export led recovery did not encourage consumers to spend, and higher yen values due to risk-aversion could derail exports going forward. Nevertheless the yen is higher on the flight to safety trade, despite the fact that the BOJ may have to do more to combat deflation.
What we are seeing now is a global “ratcheting down” of economic bubbles that ran rampant over the last few years. As different economies around the globe pare back spending and attempt to get their debt under control; economic slowdown is the natural consequence.
This is going to send a ripple effect through the global market place and fears of a global double-dip recession may not only be founded but likely. I believe there is much more pain to be felt in the market place and have little confidence that world leaders can come up with a solution.
Because of the fractured nature of the world economy and competing interests, a solution may be impossible. In my opinion, we are going to start to see either debt defaults or massive money printing which will eventually lead to inflation. But that could be YEARS away.
So for now, think globally, but act prudently locally.
And take advantage of these extraordinary times by trading forex and shoring up your own personal balance sheet!
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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Not Dead Yet!
By Mike Conlon | May 12, 2010
So we know all about the debt crisis in the Euro zone and the bailout agreement that was put forth, leaving some in the market to wonder whether or not it was “enough” and to question the structural feasibility of the Euro.
The major question is whether or not the PIIGS countries (particularly Greece) will accept austerity measures to try to get their budget deficits in order. Earlier today, Spain announced new spending cuts designed to show their commitment to austerity. This is a good first step, and Spain will probably have to access the bailout funds. But as I mentioned yesterday, if confidence returns to the EU then borrowing costs will be lower allowing the PIIGS to refinance their debt at lower levels. If they can accept some austerity measures, there is no reason why the Euro can’t survive.
In addition, European GDP figures came in higher than expected showing an expansion of .2%, in a sign that there is still some life in the EU.
Across the channel in the UK, a deal between the Conservatives and Lib Dems has forged a coalition government that has agreed in principle to reduce the UK budget deficit. While this news was deemed positive by the Bank of England, Governor King stressed caution that risks to UK growth have increased.
So there’s some mild risk-taking in the market this morning.
In the forex market:
Aussie (AUD): The Aussie is higher on mild risk taking and gold prices have soared to $1240, which is beneficial to the Australian economy, especially in light of a proposed “windfall profits tax” on mining companies. Employment figures are due out tomorrow.
Loonie (CAD): The Loonie is higher for the fourth straight day as investors are increasing bets that there will be a rate hike in June. The growth story in Canada is still intact and the only thing keeping the Loonie lower is the risk Euro-related risk in the market.
Kiwi (NZD): The Kiwi is slightly higher on risk appetite in the market. Home sales and retail sales figures are due out in the next day or so, which should give a clue on inflation in NZ. This could affect potential rate hikes that the market is expecting mid-year.
Euro (EUR): The Euro has a bid this morning and is higher, as Spain’s spending cuts and EU GDP figures show that there is still life in the region, despite what all of the “doom and gloomers” may have you believe. It’s kind of funny that now that everyone is coming out of the woodwork to talk about the Euro is finished, I’m actually positive on it as a viable currency! Must be my contrarian nature. But that’s not to say I’m positive on its growth prospects (I’m not), but merely that a lower Euro is going to be good in the long run.
Pound (GBP): The Pound is lower this morning as the BOE has jawboned it lower. Governor King came out and said that there are still risks to economic growth, but seemed to be talking out of both sides of his mouth as he also applauded the new government’s plans to reduce the deficit. So while he mentioned that quantitative easing may need to be increased, I don’t think it’s likely. Don’t forget that a lower Pound is better for UK exports, so watch what they do and not what they say.
Dollar (USD): The Dollar is lower as risk appetite is increasing in the market, and though the trade balance numbers came in slightly worse than expected, it is not enough to derail the US economic growth story. Initial jobless claims are due out tomorrow, and Friday we get retail sales figures.
Yen (JPY): The Yen is lower on risk-taking and carry trades. CAD/YEN is the biggest gainer showing signs that market is betting that Canada is the next to raise rates.
As my wife likes to say, “When the party is over, it’s time to go home.” The sooner the Greeks realize this, the better off they will be. Look, everyone in the world would love to retire with full pensions at the age of 52, it just isn’t possible. No one is saying that these guys have to go back to manual labor. Get a fishing boat, take tourists out. With a declining Euro, the PIIGS countries will actually benefit.
Sure there’s going to be anger right now, and we haven’t seen the last of the rioting. But pretty soon the crowd starts to thin out, as the intelligent ones realize they can secure jobs for themselves while the other idiots are out rioting! Before you know it, there’s only 2 guys out there banging the drum, and everyone else has reluctantly gone back to work.
So the punch bowl has been removed. There will be other parties in Greece. The sooner they realize this, 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!
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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Dumb Markets!
By Mike Conlon | May 11, 2010
Yesterday we saw the markets come back with a vengeance as both stocks and risk assets traded higher. The obvious driver of these moves was the EU bailout, but as I mentioned yesterday, the bailouts are going to be negative for the Euro in the long-term. It didn’t take the markets long to realize this, as the Euro is lower and taking other markets with it.
Part of the problem we are seeing is that because the PIIGS countries are going to have to adopt austerity measures, this by nature is going to stunt growth while the debt situations get under control. However, when the US was facing economic crisis, the EU only had to lower interest rates and did not engage in quantitative easing to stabilize its economy. Now granted, they are facing problems today, but I think that stability is more important than growth at this point.
Nevertheless, the market still relies on some of the correlations that have held up over the past couple of years, and my guess is that is going to change. While the Euro is known as the “anti-dollar”, it tends to trade with risk assets. If we use the premise that the Euro is going to go lower based on the dilutive actions taken to administer the bailout, then it likely follows that we’re going to see some Dollar strength.
However, we still are seeing good growth stories around the globe. Sure a weaker Euro will decrease demand for imported goods to the EU, but it will also be much better for Euro exports as now their goods are cheaper around the globe.
So pay attention to how the other markets react to a declining Euro. Right now the markets seem to be playing by the old rules. It may be a while before the market catches on to the new paradigm. So for now trade what you see and not what you think it will be!
In the forex market:
Aussie (AUD): The Aussie is lower this morning as fears that a European economic contraction may weigh heavily on global recovery. However, the economic story is still intact and a global slowdown could halt inflation down under.
Loonie (CAD): The Loonie is holding up fairly well despite the risk aversion in the market as investors are betting on a rate hike next month. Swap rates are higher as homeowners are attempting to lock in fixed-rate mortgages in anticipation.
Kiwi (NZD): The Kiwi is lower as risk aversion in the market is causing demand to weaken. The target date for a rate hike is still mid-year, but that could be pushed out further if inflation subsists due to a lack of Euro or Chinese demand.
Euro (EUR): So stocks are lower in Europe and the US futures are set to open lower as well as there is concern that the bailout plan will not be big enough to halt the debt problems. My take is that this bailout should be sufficient, as spending gets slashed and budgets get reduced throughout the region. As long as this backstop is in place, the troubled nations will receive aid initially and will be able to go out into the markets down the road once more and more confidence is established. While the crisis everyone speaks about is directly related to excessive debt, the real crisis in the EU is one of investor confidence. If this process can be managed skillfully, the confidence will come back. In the meantime, I am expecting the Euro to decline. And watch the flows into gold as an asset class as gold not only acts as a hedge against inflation, but also as a store of wealth. Gold is higher to $1210.
Pound (GBP): The Pound is higher this morning as industrial production figures came in much better than expected. The Pound was initially lower on risk aversion and due to a report that the Lib Democrats in Parliament were in talks to form a coalition government with the Labour party even though the Conservatives won the majority though not by a large enough margin to dominate Parliament.
Dollar (USD): The Dollar started the morning higher on risk aversion but is giving back some ground as the stock market gets set to open. Stock futures are off their lows of the morning and I could see this as a “turn-around” day as the economic story is improving in the US.
Yen (JPY): The Yen is giving back gains as the market is seemingly moving away from risk aversion. Japanese stocks were lower overnight, as fears of a Chinese slowdown may affect earnings going forward.
In my opinion, the bailouts in Europe should be viewed as a good thing and not bad. A lower Euro will not only help manufacturing countries such as Germany and France as their exports will be cheaper, but it will also help the PIIGS countries as tourism will increase.
I live here in the NYC, and for the last couple of years you couldn’t walk down the street without bumping into a European here on a shopping excursion. Even with the price of the airfare, it was still cheaper for them to shop here than at home.
Conversely, the last time I was in Europe, I felt like a pauper and was astounded at some of the dinner bills I racked up. Now, my wife and I are planning our next trips. Things will get worse in the EU before they get better, but in the long run a lower Euro will benefit them greatly.
We all have to make sacrifices in the grand scheme of things, and once the Greeks (and those who acted irresponsibly) realize how they can benefit, the quicker they can return to normalcy.
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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