Race to the Bottom, 2.0
By Mike Conlon | August 24, 2010
Risk aversion is clearly the theme this morning in the markets as heightened fears of economic slowdown are weighing heavily on world markets. While economic data as of late hasn’t been horrible, it is the constant fear-mongering from government and banking types that keep the markets on edge.
Case in point: Some British policy-maker (who I’ve never heard of before) came out and stated that the UK faces a “real risk” of a second recession. Really? Any more so than any other region around the globe? Or is this a case of someone, somewhere that wants to see a lower Pound to encourage exports?
Let’s face it; wouldn’t every region around the globe prefer to see their currency lower to encourage exports? Thus we are nearing the “race to the bottom, 2.0.” This morning’s risk aversion has pushed the Japanese yen to 15-year highs, and the rhetoric about intervention is now coming directly from the horse’s mouth. Japanese PM Kan stated that “steep currency moves are undesirable” and is looking for joint action from the G-7. It is becoming more apparent that Japan may not have the ability to effectively intervene in their currency alone, as the Swiss National Bank found out recently.
Meanwhile, in New Zealand, 2 –year inflation expectations came in lower for the first time in over a year, prompting expectations that the RBNZ will not raise rates again at the September meeting.
In the Euro zone, the German economy showed it expanded at a 2.2% pace as final 2Q GDP figures were released. The German economy is almost single-handedly keeping the Euro zone economy afloat.
In the forex market:
Aussie (AUD): The Aussie is lower on risk aversion this morning as global market selling has caused the un-wind of carry trades as investors flee yield in favor of safe haven assets.
Kiwi (NZD): The Kiwi is lower on risk-aversion and also because they reported a decrease in the 2-year inflation expectation for the first time in almost a year. The figure showed an expectation of 2.6%, down from the previous reading of 2.8%. It is now highly doubtful that the RBNZ will raise rates in September, especially in light of recent global market fears.
Loonie (CAD): The Loonie is the worst performer this morning, as it has been hit with the triple-whammy of lower oil prices (around 72), bad retail sales figures, and overall risk aversion. Retail sales figures came in at .1% vs. an expectation of .4% showing signs that the Canadian economy is slowing. It doesn’t help that Canada is so reliant upon the US to import from them. (Click chart to enlarge)
Euro (EUR): The Euro is mostly lower on risk aversion, despite the fact that the German economy reported final 2Q GDP figures showing growth of 2.2%. While under normal circumstances this would be considered very good; today is looking more and more like an ugly day overall.
Pound (GBP): Thank you Mr. No Name policy guy for jaw-boning the Pound lower, thereby causing further fear in the markets. The Pound is at 1-month lows to the Dollar, trading just under 1.54. (Click chart to enlarge)
Dollar (USD): The Dollar is higher due to the flight to safety trade and look for it to continue to gain after the existing home sales figures come in which are bound to be dismal. I’m sure the spin cycle will be on high, but make no mistake economic conditions here in the US are deteriorating.
Yen (JPY): The Yen is trading at 15-year highs against the Dollar, as risk aversion is causing the un-wind of carry trades. The jaw-boning is picking up in Japan, but is this going to be a case of too little, too late? Questions abound over whether or not the BOJ can do anything about Yen strength as risk themes may be too large for them to go it alone. This shows the fragile shape of the Japanese economy, and PM Kan’s call for joint action from the G-7 nations may be the final nail in the coffin. (Click chart to enlarge)
It is no secret that everyone would like to have a lower currency value to help their exports which encourages manufacturing and provides employment. The reality is that it is not possible. Thus we see the “race to the bottom, 2.0”, as various reports cause fear-mongering.
As risk aversion picks up steam, it is becoming harder and harder for Japan to slow down the Yen’s ascent. While intervention may have worked in the past, in today’s market it is not as easy to accomplish. They may need to sit through some pain and wait until the world regains confidence in the global economy.
While it is no secret that the global economy will be slowing as governments remove stimulus, the crisis we are in right now is one of confidence. Financial and government types, while out to further their own interests; should be more cognizant of the impact of their rhetoric globally.
While fears of a global double-dip recession are heightened, this is nowhere near as bad as the banking crisis of 2008. When there is fear in the markets, there is also opportunity. For those who know what they’re doing.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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Record Low Rates Persist!
By Mike Conlon | August 5, 2010
Earlier this morning, both the ECB and the BOE left interest rates unchanged. While this move was largely anticipated, comments from the ECB show that economic progress is being made; evidenced by better than expected factory orders in Germany.
Here in the US, Initial Jobless Claims came in at 479K vs. an expectation of 455K showing signs that the employment picture is still weak and worsening. Tomorrow’s Non Farm Payrolls Report will be the rubber match and the ultimate decider of economic condition of the US.
Speaking of bad employment figures, last night New Zealand reported a worse than expected unemployment rate, sending the Kiwi lower as the worst performer this morning.
So this morning is a bit of a mixed bag, with fundamental data driving the marketplace more so than risk themes. There is significant US dollar weakness, yet Canadian dollar strength. The Japanese yen is also showing strength, as is the Euro.
In the forex market:
Aussie (AUD): The Aussie is lower this morning on a lack of risk appetite as its neighbor NZ reported dreadful employment figures.
Kiwi (NZD): The Kiwi is the worst performer this morning as worse than expected jobless figures have soured speculation that further rate hikes may be forthcoming. The unemployment rate went up to 6.8% vs. an expectation of 6.2%, showing signs that the economy in NZ may be cooling. (click chart to enlarge)
Loonie (CAD): The Loonie is surprisingly strong this morning as risk appetite has diminished and oil prices have fallen back to around $82. However, building permits advanced to 6.5% vs. an expectation of a 1.8% gain, reflecting a more positive outlook. Loonie strength this morning is most probably money flowing from the Kiwi as a future NZ rate hike is all but off of the table.
Euro (EUR): The Euro is mostly higher after the ECB left rates unchanged. However, positive comments from ECB President Trichet have increased demand for the Euro, as has anti-Dollar sentiment.
Pound (GBP): The Pound is now lower across the board as more traditional risk aversion is creeping its way into the market this morning. The BOE left rates and its asset purchase program unchanged, and there is increasing speculation that a rate hike may be coming sooner than later.
Dollar (USD): The Dollar is weaker this morning on the heels of the Initial Jobless Claims report which showed an increase of 479K vs. an expectation of 455K, which is a 3-month high. Tomorrow’s NFP report is expected to show a loss of 65K jobs, and the unemployment rate is expected to tick higher to 9.6%. Worse than expected figures could send the market into major risk aversion going into the weekend. The Dollar is gaining strength though as risk themes come further into focus.
Yen (JPY): The Yen is stronger this morning as the market slips into a more traditional risk aversion mode. There is major concern about possible intervention in the currency should it continue to strengthen, however Finance Minister Noda has shunned such discussion. (click chart to enlarge)
The employment picture in the US looks bad and there is no sign that it is getting better. Current economic uncertainty over government policy has left businesses content to do more with less. This is unfortunate as there are many able-bodied and willing workers out there who are victims of big government ideology.
Future tax hikes, regulation, costs, and general anti-business climate have caused many Americans to realize their greatest fear, that they may have to rely on the government to get by.
Meanwhile, countries around the globe have decided to take their medicine and cut back on spending, thereby reducing the uncertainty over the business climate and actually encouraging economic progress.
Just a few months ago, everyone was calling for the Euro to collapse and now the economic prospects look (dare I say it) better than those of the US. The marketplace is sending a loud and clear message which is backed up by the data that currently the US is in danger of going over the cliff.
If we continue to let this happen, then we have no one to blame but ourselves. So keep an eye out for tomorrow’s NFP which is sure to be a market-mover. Remember that volatility is a trader’s friend but be sure to remember to trade what you see and not what you think will happen.
In other words, don’t guess. React.
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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Hungry for Risk!
By Mike Conlon | July 6, 2010
After last week’s sell-off in world markets, investors are feeling more confident about economic prospects as the US markets return from the holiday weekend. Bank stress tests in Europe are intended to show transparency, and EU leaders are “banking on” hopes that the balance sheets are not as bad as previously thought.
Overnight, the RBA left interest rates unchanged in Australia, but signs that inflation (particularly home prices) may be rising is giving the Aussie a boost this morning.
World stock markets are higher this morning, as stock earnings season is almost upon us. There is a common notion that stocks may offer the best chance for growth despite the fact that world economies are putting on the brakes and trying to curb spending.
There is no major news on tap for the US in this shortened week, but we’ll get GDP figures from the Euro zone, as well as the UK rate decision on Thursday.
In the forex market:
Aussie (AUD): The Aussie is higher on risk-taking despite the fact that the RBA left interest rates unchanged. The RBA did say that consumer spending and business investment are expanding, and they may be in the middle of a housing bubble due to housing shortages. This could foreshadow further rate hikes to come.
Kiwi (NZD): The Kiwi is also higher as risk appetite is back to start the week, despite the fact that business confidence figures have fallen as domestic demand slowed. Nevertheless, the market is betting that the next rate hikes will come from New Zealand, as they attempt to thwart inflation. However, the RBNZ has been cautious as economic growth and inflation may not accelerate as quickly as expected.
Loonie (CAD): The Loonie is also higher as oil prices are higher for the first time in 6 days as risk appetite is returning to the market. Canada’s employment report on Friday will show whether or not the economy is improving, but speculators have pared back expectations of a rate hike at the next policy meeting.
Euro (EUR): The Euro is also higher as comments from various officials regarding the bank stress tests have allayed market fears—for now. EU GDP figures are due out tomorrow, with CPI figures to follow on Friday. The market is expecting tepid growth despite the austerity measures various governments are undertaking to get deficits under control.
Pound (GBP): The Pound is mixed this morning trading lower vs. the risk currencies but higher against USD and Yen. The UK rate policy decision is due on Thursday, and no change is expected. The market is still reacting favorably to the UK budget cuts, however only time will tell if the economy is strong enough to support such measures.
Dollar (USD): The Dollar is mostly lower this morning (but up against Yen) in a week that is light on news out of the US. Comments from various Fed officials will likely be insignificant, and US stock earnings season kicks off next week.
Yen (JPY): The Yen is lower this morning on a classic risk-taking day as carry traders look to re-establish positions. Japanese stocks rallied overnight as a rally in Chinese stocks gave the market direction.
Most of the news that the market has received lately has been negative, yet so far the markets have been behaving resiliently. With not much news on the docket this week, the market will have time to adjust to the notion that we may be seeing slower, but steadier growth.
Next week will kick off earnings of US companies, and they are likely to be positive despite the economic slowdown. Right now, there is uncertainty as to where is the best place for investors to park their money, with fixed income investments paying little to no interest.
That is one of the reasons why the currency market has become one of the fastest growing markets for investors, as it provides alternate opportunities and a chance to benefit from global economic conditions.
Investors have been reaping the benefits that the currency market has provided for some time; isn’t time you join them? There is no time like the present; and if world economic conditions continue to behave as they have recently, the currency market should continue to flourish.
There is always a bull market somewhere in currencies; the trick is knowing where!
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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Dependence Day?
By Mike Conlon | July 2, 2010
Going into this Fourth of July weekend, I can’t help but think about the state of the US economy and how we have become so dependent on government to fix society’s ills. This morning, the US Non-Farm Payrolls report came out and it showed that we had an overall jobs decline of 125K, but an increase in private sector hiring to 83K, which was better than last month but less than expectations. In addition, the unemployment rate fell to 9.5%, but this was more a function of people leaving the work force than economic and jobs growth.
Part of the reason we see these distorted numbers is because of the decline of census workers, but private sector job growth has been tepid at best. This is all a function of the current economic climate in Washington DC, and government policy which businesses deem as uncertain. Without private sector growth, the economy could be in danger of sliding into double dip recession.
In other news, PPI figures in Europe came in as expected, and Moody’s ratings agency re-affirmed the UK’s AAA rating.
In the forex market:
Aussie (AUD): The Aussie has been volatile and is now higher as the market reacts to the NFP number. In addition, the PM is backing away from the mining tax as Australia prepares for a potential economic slowdown.
Kiwi (NZD): The Kiwi is also higher on risk taking, and is the best performer this morning as New Zealand is seen as potentially the next to raise interest rates.
Loonie (CAD): The Loonie is lower as traders are paring back speculation that Canada will raise rates this month. Tepid Canadian GDP figures in addition to the potential US economic slowdown could affect the Canadian economy as the US is the largest importer of Canadian goods. Also to note is that oil is trading lower to roughly 72.50.
Euro (EUR): The Euro is higher against all but the Kiwi, as continued confidence that the banking situation may not be as bad as expected is gaining traction. In addition, the market is speaking loud and clear that it favors the EU plan of economic austerity to the US plan of spend, extend, and pretend. In addition, Euro zone unemployment came in slightly better than expected at 10%, and PPI figures came in higher at 3.1%, showing that wholesale inflation is the highest it’s been in 19 months. However, don’t expect the ECB to move on rates anytime soon.
Pound (GBP): The pound is higher as Moody’s reaffirmed the UK’s AAA rating citing the deficit reduction plan as positive.
Dollar (USD): The Dollar is mostly lower, as economic prospects in the US are diminishing. Until we get policy that will encourage business and not harm it, we are going to have high unemployment for some time. Now that unemployment benefits have not been extended, more people will have to get off of the dole and get a job, even if it’s far less than they desired. This potential political backlash could cost the incumbent party in November if the economy continues to worsen.
Yen (JPY): The Yen is lower on risk appetite as the market is deeming the NFP number “acceptable”, as the worst-case scenario fears were averted.
There really is no other way to say other than the US is on the wrong path and the continued spend, extend, and pretend policies of this administration are going to harm the US for some time.
Whether you believe in the free markets or not is of no consequence; as no one can deny that private business is the largest employer of workers. If you create a hostile environment for business, they’re not going to hire. Period.
Go ahead and raise taxes on business, they’ll move elsewhere thereby removing even more jobs. Anyone who believes that higher taxes aren’t coming down the pike lives in fantasy land. With out of control spending taking place on a daily basis, this isn’t going to end well.
I hate to write this so close to July 4th, the day on which our forefathers said ‘no more’ to the unfair policies that were imposed upon them. However, it seems cruelly ironic that as our forefathers roll over in their graves; their successors are trying to emulate the same policies that they rejected 234 years ago.
So Happy 4th of July to all…. as this may be one of the last truly Independence days if we continue down this path. By the time the dust settles, we may be saying, “Happy Dependence Day” as we all line up for our government checks and government cheese.
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 Party’s Over!
By Mike Conlon | June 29, 2010
This morning we are seeing a slew of consumer confidence figures coming out around the globe which are lower but largely in line with expectations. The Euro zone debt crisis is continuing to weigh heavily on the markets, and a leading economic index in China had its smallest gain in nearly 5 months, signaling that the Chinese economy may be slowing down.
Later this morning we are expecting consumer confidence figures here in the US as well as housing price figures. These are expected to come in lower as well, as the removal of the home buying tax credit has caused demand to wane.
Overnight in New Zealand, building permits were lower, and the Japanese jobless rate increased to 5.2%, higher than expected.
This has all contributed to lower equities markets, with US stocks and commodities set to open lower as well. As a result, we are in risk-aversion mode this morning. Keep an eye out for the 10AM numbers, as they may be the stock market’s only chance to recover.
Aussie (AUD): The Aussie is lower as risk aversion is reducing demand for carry trades due to global slowdown concerns, particularly from China. In addition, the market is looking for the new PM to move quickly on the proposed mining tax, which is seen as “anti-business” and bad for the economy.
Kiwi (NZD): In addition to risk aversion, the Kiwi is lower as building permits declined 9.6%, the second decline in 3 months. The Chinese leading index decline is also affecting NZ, as a number of exports go to China as well.
Loonie (CAD): The Loonie is also lower on a classic risk-aversion day, as oil prices retreat on fears of a global slowdown. Tomorrow will bring the Canadian GDP figures which will show how solid recovery is north of the border.
Euro (EUR): The Euro is lower this morning, though higher against the commodity currencies. Fears of the debt crisis have resurfaced, and bank stress tests are to include bank exposure to sovereign debt risk. This is sure to uncover a land mine or two, and the market is fearful of the size and the scope. However, business confidence came in higher than expected as a lower valued Euro should encourage exports.
Pound (GBP): The Pound is lower as well on risk aversion, though it is still above 1.50 vs. USD. Mortgage approvals came in slightly lower than expected, but expect the Pound to fare better than the Euro as GDP figures are due out tomorrow.
Dollar (USD): The Dollar is catching a bid from risk-aversion and is higher against all but the Yen. Consumer confidence figures are due out at 10AM EST and they may be the stock market’s last hope for a turn-around today if the numbers are better than expected. Home price figures came in slightly better than expected, most likely due to the tax credit. Today looks ugly for stocks, which should mean continued dollar strength.
Yen (JPY): The Yen is higher as the rapid unwind of carry trades is driving demand for the Japanese currency despite the fact that industrial production and household spending fell. In addition, unemployment ticked higher to 5.2% vs. an expectation of 5% in a sign that recovery is clearly slowing down.
Well, we knew it was only a matter of time before this global charade was exposed as unsustainable and now the market is starting to realize that it may be time to pay the piper. Obama’s pleas at the G-20 fell on deaf ears, and governments outside of the US have decided that it’s better to cut bait than to try to continue to fish.
In other words, countries are trying to cut their losses and get back to economic health. The only way to do this by taking the “medicine” of financial austerity and debt reduction. This is going to be one heck of a hangover, as now the party may be finally over.
However, all is not lost and I am not trying to be a doomsday forecaster. There are definitely pockets of strength in our economy, including corporate America. All of the lay-offs of the past have allowed corporations to increase profitability, and many are trading at low multiples.
However, it is definitely time for people to wake up. The eventual fallout and backlash against our big-spending government will only bring about better policy in the future. Government, no matter what type of social engineering they try, CAN NOT control economic cycles. The longer they try to pro-long an unnatural order, the worse the pain will be.
Usually the “summer slowdown” takes effect, though this time it may be different. I expect there to be heightened volatility as the world navigates the treacherous waters of the global economy. Expect there to be highs and lows, as well as gains and set-backs.
There is no better time than RIGHT NOW to protect yourself from global economic conditions through the forex market! Don’t be one of the ones left standing when the music stops!
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
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Moderate Growth Ahead!
By Mike Conlon | June 24, 2010
Yesterday’s FOMC meeting came and went as expected, and Bernanke acknowledged that the pace of growth is going to be moderate going forward, backing off from last meeting’s stance that recovery was accelerating. Bernanke cited European debt conditions as being not supportive of growth, and of course he left interest rates unchanged as expected and kept the “extended period” language.
In addition to the FOMC news, US new home sales tanked and were off 33%, confirming the previous day’s data that the housing market is getting worse and not better.
Concerns over Greek debt are heating up as the cost to insure said debt is at an all-time high. Outside of general feelings about the global economy, I’m not certain what has changed in Greece to cause this rise.
What this adds up to is risk-aversion in the market, and Japanese yen and the Swiss Franc are benefiting.
Overnight, New Zealand released GDP that showed growth for a fourth straight quarter and matched analyst expectations. The Kiwi is lower, as the market may have been expecting a bigger number and had pushed the Kiwi too high, too fast.
So there’s no real earth-shattering news in the market today, but rather an overall feeling that economic conditions may be worsening and not getting better.
In the forex market:
Aussie (AUD): The Aussie is lower on risk aversion, but overnight a political coup took place where the Prime Minister Rudd stepped down after losing support of his colleagues. Julia Gillard became Australia’s first female Prime Minister as Rudd lost public opinion largely in part to the proposed mining tax he wanted to impose. Mining is a cash-cow for Australia, and this move was seen as anti-business.
Kiwi (NZD): The Kiwi is lower this morning despite the prospect of another rate hike in July as a result of seeing its fourth straight quarter of growth. The market was hoping the GDP figure would beat analyst expectations, but it “merely” came in as expected at .6%. The Kiwi was the biggest gainer yesterday, so this is a case of market anticipation falling flat. Nevertheless, this is still positive for the Kiwi.
Loonie (CAD): The Loonie is lower this morning as well, taking its cues from oil prices which have “retreated” to $76 and overall risk aversion in the market due to the notion that the pace of global economic recovery may be slowing.
Euro (EUR): Concerns over European debt are heating up as European stocks fall for the third day in a row. Perhaps the market is expecting the US to lead us to recovery, and yesterday’s FOMC statement made it pretty clear that may not be the case. I can’t see anything specific that would lead me to believe that anything today is different than last week. Then again, I don’t have insight into the inner-workings of European banks. The Swiss franc has been seeing massive inflows of capital as investors move out of the Euro, and it’s gotten to the point where it may be financially untenable for the SNB to try to intervene again.
Pound (GBP): The pound is higher against all but Yen, as the market “needs” somewhere to park its capital. This is a vote of confidence for the UK budget plans and BOE policy statement which show that the UK may be in the best position to tackle their debt and see growth at the same time. The Pound is back to 1.5 vs. USD.
Dollar (USD): Oh the dollar. It’s catching a bid from risk-aversion, but it’s clearly no beauty-prize winner either. Yesterday’s FOMC meeting and new home sales figures all but take a rate hike off the table for 2010. This morning, jobless claims are lower than the previous week, but still in ridiculously bad territory. Durable goods orders rose ex-transportation, but overall they shrank, though less than expected. Bottom line: the US economy is still weak. Until policies are instituted that will incent companies to create jobs, our slide into Japan-style stagflation is imminent.
Yen (JPY): The Yen is higher across the board on risk-aversion. Japanese stocks are lower as concerns over Europe may hurt Japanese exports, which have been driving economic recovery.
Unfortunately for the world, the US still rules the roost. We started the economic crisis, and now we’re pro-longing it. Yet bad behavior has been replaced by bad policy; and we are slowly sliding into the economic abyss as politicians compete for the next vote.
Meanwhile, banks have been bailed out, executives have paid themselves enormous bonuses, and they sit on the money and don’t lend for fear that regulatory and other economic factors will make it a losing proposition. Or they can’t lend, because they have too many toxic assets sitting on their books and are anticipating the next wave of deflation that will put more home-borrowers under water.
The “solution” to the housing crisis was the tax credit, and it’s just been reported that 14,000 unscrupulous folks bilked the government out of some $25 million, including 240 death row inmates. Government efficiency at its finest! What’s a few million anyway? We’re TRILLIONS in the hole already, and we’ll just keep spending.
Oh yeah, but at least we’re not the EU! Have treasury put that on the dollar bill!
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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BOE Not Unanimous!
By Mike Conlon | June 23, 2010
Minutes released from the Bank of England’s rate policy meeting showed that the vote was not unanimous to keep rates unchanged at .5%, for the first time in nearly 7 months. Inflation concerns were the cause of the dissenting vote, as CPI figures in the UK have been above targets. While the BOE expects inflation to subside in the ensuing months, that may not necessarily be the case.
This comes a day after the emergency budget which was announced yesterday, calling for a reduction in spending and an increase in taxes.
In the US, the FOMC rate decision is due out later today, so expect to see some volatility in dollar-related pairs. It is widely held that there will not be a change in policy, but some market participants are betting that we may see a change in the language regarding policy. This would give credence to the rising sentiment that the Fed may raise rates later this year. Personally, I don’t see this happening and I think the Fed will be on hold for the remainder of the year.
Yesterday’s abysmal housing data confirmed that deflationary forces in the housing market may be the start of another leg down.
In the Euro zone, German consumer confidence came in slightly better than expected and PMI figures were largely in line. However, concerns over Greek debt have perked up again.
Overnight, the Yen was higher as the Nikkei was down taking its cues from yesterday’s sell-off in the US stock market.
This morning will bring US new home sales figures as well as Canadian retail sales figures. Any major deviations could send the respective currencies lower.
But expect volatility going into the FOMC announcement at 2:15 EST.
In the forex market:
Aussie (AUD): The Aussie is lower as stocks sold-off in the overnight session but it is gaining back some ground heading into the US session. Risk aversion has driven the Aussie lower, and there is some concern that Chinese demand for metals and energy is causing a rift in the Australian economy.
Kiwi (NZD): The Kiwi is higher this morning in anticipation of GDP figures which are due out later tonight. The expectation of .5% growth will likely be exceeded as demand from China for raw materials has the NZ economy picking up steam. Should the number best expectations, then the likelihood of a rate increase at July’s policy meeting will increase.
Loonie (CAD): The Loonie is lower this morning as oil prices are pulling back from the $78 level, and retail sales figures came in worse than expected. Analysts were expecting a decline of .4% and the figure showed a decline of 2.2%, a big miss. Canada is to the US what Australia and New Zealand are to China. If recovery here in the US is floundering, then it may not bode well for the Loonie and the Canadian economy in general.
Euro (EUR): The Euro is a mixed bag this morning, as it is up against the North American currencies but down against the rest. The EU is considering a bond levy on countries that don’t adhere to debt-to-GDP guidelines which of course brings the Greek debt crisis back to center stage. In addition, business confidence was down in France, though consumer confidence was higher in Germany. Go figure.
Pound (GBP): The Pound is higher across the board, giving a vote of confidence to both the government for their budget and the BOE. The lone dissenter in the rate policy meeting is concerned about inflation, as growth targets may exceed expectations. That’s a “nice” problem to have, considering the economic condition of the US.
Dollar (USD): The Dollar is mostly lower prior to today’s FOMC meeting. Yesterday’s poor housing data sent stocks lower, and today’s new home sales aren’t expected to be much better. This should be enough to keep the Fed unchanged in both language and policy, and the market is starting to catch on to the fact that the smoke and mirrors of government spending may not be enough to stoke the economy. Go back and take a look at my discussion of biflation from a few days ago.
Yen (JPY): The Yen is mixed as well, trading higher vs. USD and CAD (both showing weakness) and the Euro (debt concerns) but lower vs. GBP, AUD, and NZD. So today can neither be classified as risk-taking or risk-aversion, but much of the yen strength was derived from weakness in the Nikkei, which sold off following the US stock market decline.
I think today really shows the difference to how the market reacts to different policy pursuits from around the globe heading into this weekend’s G-20 meeting. On the one hand, you have the EU and the UK who are committed to reducing deficits and trying not to raise taxes too much to discourage business (in fact the corporate tax rate was lowered in the UK), and the policies taken by the US.
The US is going the other way, expanding deficits and throwing good money after bad at our financial problems which can only result in higher taxes when it comes time to pay the piper. President Obama was rebuffed by Chancellor Merkel of Germany with regard to how to best combat the global financial crisis, and it appears as though the market agrees with the EU.
Weak housing data here in the US show that the stimulative effects of government spending may have slowed a decline in the economy, but have not fixed the problem. Now taxpayers (and their children and grandchildren) face an enormous burden for what adds up to temporary conditions.
The change people voted for was for less government spending and indeed we’re seeing change—even more and more spending! Hopefully this course can be reversed before it’s too late. I never thought I’d say this but now is the time we should be taking our economic cues from Europe, and not their prior policies that landed them in this mess.
Those who don’t learn from the past are doomed to repeat it.
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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!
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Asia Leads The Way!
By Mike Conlon | June 10, 2010
Overnight, China reported a 48.5% increase in exports showing signs that its economy is still cooking with gas. However, this figure could be a “one-off” as China’s largest trading partner, the EU, is enacting austerity measures to deal with its debt crisis.
An additional sign that Pac-Rim growth may be intact is the interest rate hike that occurred in New Zealand overnight. The RBNZ raised rates 25bp to 2.75% as most economists had expected. I, however, was not in this camp as I thought that a potential Chinese slowdown and the EU debt crisis might give reason for pause. I was mistaken.
Also from that region, Australia reported better than expected employment data and as a result the commodity currencies on renewed risk taking, and Japan reported better than expected GDP growth.
In the UK, the BOE kept interest rates steady and their bond-purchase program in place. In the EU, there is pressure on the ECB to provide clarity over its own bond-purchase program.
So we’re seeing some major risk taking today, with the Japanese yen lower against all but USD, as economic recovery in Asia is pushing yen higher vs. the other safe-haven currency.
In the forex market:
Aussie (AUD): The Aussie is higher as renewed economic confidence due to better than expected employment figures and Chinese exports have ramped up risk appetite. The employment change came in at a gain of 26.9K jobs vs. an expectation of 20K.
Loonie (CAD): The Loonie is mixed this morning, taking a back seat to Aussie and Kiwi as the focus this morning has been on Pac-Rim economic growth. Oil is higher to $75, so there is a bid higher vs. Euro, Dollar, and Yen.
Kiwi (NZD): The Kiwi is the big winner this morning as yesterday the RBNZ raised interest rates from a record low 2.5% to 2.75%, the first hike in nearly 3 years. Inflation must be heating up in New Zealand, as this decision occurred in the face of the Euro debt crisis. A return to “normalized” rates is desired by the RBNZ, so this decision has encouraged carry-trades and risk-taking in the market.
Euro (EUR): The Euro is mixed this morning as well, trading lower against the commodity currencies but higher against the rest. The Euro is getting a boost from the good economic news from the Pac-Rim, and a debt offering from Spain that was over-subscribed. The latter may be a sign that the Euro zone countries may be able to attract capital despite their problems, though higher rates also entice investors.
Pound (GBP): The Pound is falling right in line on my “risk ladder”, trading lower against the currencies above it on this list, and higher against the ones below it. This comes despite the fact that the BOE has kept the interest rate steady at .5% and its stimulative bond purchase plan the same. All of this comes as the UK prepares for budget cuts in an effort to get its deficit under control.
Dollar (USD): The Dollar is the biggest loser this morning as the focus has shifted toward Pac-Rim growth this morning, pushing world equity indices higher. The market is acting favorably to growth prospects around the globe as well as budget-cutting measures taking place. Perhaps the powers that be should take a note that they should be cutting deficits and not creating even larger ones. As world economic stabilization takes place, expect US policy to be questioned.
Yen (JPY): Overnight, Japan reported better than expected GDP growth at 5% vs. and expectation of 4.2%. In addition to the export-led recovery, consumer spending increased to a .4% gain, compared to a .3% gain last quarter. This is leading to the belief that corporate spending will pick up which should be better for employment going forward.
So today was the “big” news day and it did not disappoint. Nearly all economic data reported came in as expected or better, showing signs that global growth is occurring, despite the problems in the Euro zone.
This begs the question: What is the US thinking? Nearly all other economies are slashing spending or raising rates (or both), and the US appears to be doing just the opposite. Weak-willed politicians and misguided economic policies while having worked in the short-term, need to be reversed before it is too late.
While we are certainly not out of the woods yet, there are encouraging signs coming from around the globe. Hopefully, with some practical and forward-thinking economic regulation to prevent over-leverage and excessive speculation in the markets, the world economy can recover.
Regulation is not the anathema of the free-market; excessive and misguided over-regulation is.
Let’s just hope that they get it right for once, and allow natural economic cycles to take place.
In the meantime, hang on for the ride!
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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