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!
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Markets Still On Edge!
By Mike Conlon | August 12, 2010
Overnight, the Asian equity markets fell, following yesterday’s 2%+ declines in US equities. This has brought about some continued risk aversion, and US stock futures are lower to start the morning. European stocks have held up modestly, though revised growth projections from the ECB and lower than expected industrial production figures have put some pressure on the Euro.
In Australia, the economy added more jobs than expected, but the unemployment rate ticked higher as more people entered the workforce.
Meanwhile here in the US, jobless claims increased to their highest levels in nearly 5 months, coming in worse than expected and lending more credence to the Fed’s forecast of slower growth.
Speculation is heating up in Japan over currency intervention as the Yen advanced to 15-year highs vs. the Dollar, but it is paring back gains after Finance Minister Noda refused to comment on possible actions.
So we are seeing some mild risk aversion in the currencies, led by Dollar strength due to its safe haven status.
In the forex market:
Aussie (AUD): The Australian economy added 23.5K jobs last month, beating an expectation of 20K, but the unemployment rate ticked higher to 5.3% vs. and expectation of 5.1% as more people entered the workforce. This has lead to the sentiment by some that the RBA raised rates too far, too fast. This will likely bring about a pause in hikes in the near-term, as signs that the global economy is cooling off are prevalent. (Click chart to expand)
Kiwi (NZD): The Kiwi is lower on risk aversion in addition to a private report that showed that manufacturing in NZ declined for the first time in nearly a year. Calls for reduced government spending from Finance Minister English to rebalance the “lop-sided” economy are adding fuel to the fire.
Loonie (CAD): The Loonie is holding up well considering the risk aversion in the market and the fact that oil is trading lower to 76.75. The Loonie is faring better than the other commodity currencies as Dollar strength vs. the rest is seen as more positive despite the economic woes in the US.
Euro (EUR): The Euro is lower as industrial production figures fell .1% vs. and expectation of a gain of .6%, showing economic weakness. Meanwhile, rumblings from both Greece and Spain over their slowing economies have returned focus to the Euro zone, and ECB has lowered its growth forecasts.
Pound (GBP): The Pound is mostly lower except vs. the commodity currencies as perhaps the gains that the Pound made recently were over-extended. Next week, the BOE will release its policy meeting minutes which should provide more clarity into the BOE’s line of thinking. (Click chart to expand)
Dollar (USD): The Dollar is showing strength again today, as risk aversion is the continued theme this morning. Initial jobless claims came in worse than expected at 484K vs. an expectation of 465K. This clearly shows that the economic picture in the US is worsening and not getting better, and if the world’s largest economy continues to slow, it could bring down the whole kit and caboodle.
Yen (JPY): The Yen is seeing strength again today as carry trades are unwound, though it is weaker against the Dollar. Speculation is rising about possible intervention in the currency, as it bounced off of 15-year highs vs. the Dollar. (Click chart to expand)
Talk of a double-dip recession is beginning to heat up again, led by the US government’s failure to inspire confidence in both consumers and business alike. The Fed statement from Tuesday echoed these thoughts, and many believe that more accommodative monetary policy is not the answer.
Some have said that Bernanke is “pushing on a string”, meaning he’s getting nowhere. Jobless claims and home foreclosures continue to rise, and will most likely continue until the REAL problem is addressed.
And what is the real problem, you may be asking yourself?
The problem is that the business climate in the US is so negative right now, that companies will actually do better by contracting and not expanding. Not only does this mean that they are not hiring workers, but potential downsizing to cut costs to meet profits is the new corporate mantra.
So our government threatens more regulation and tax hikes while vilifying those that create jobs! Do you think the CEO of XYZ corp. is concerned that people are unemployed? Not really, he’s chillin’ at his beach house somewhere ready to ride out the storm!
Meanwhile the disconnect between Main St. and Wall St. grows wider as populist policies by politicians further erode both business and consumer confidence. Without confidence, both business and consumers are reluctant to spend which creates further downward pressure on the economy!
Recent polls by the Wall St. Journal show that Main St. is just as fed up with Washington DC as it is with Wall St. It’s no wonder the “throw the bums out” sentiment is starting to gain traction. I just hope it’s not too late!
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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“Slowing” Growth!
By Mike Conlon | July 15, 2010
Overnight, the Chinese reported less than expected GDP figures; however before you worry about the Chinese economy, note that growth slowed to 10.3%. That’s right, growth above 10%. By contrast, most other global economies are struggling to reach 3% growth.
In addition, in Japan the BOJ left rates unchanged at .1%, citing forecasts that growth will slow as fiscal stimulus is removed worldwide, thereby affecting global demand.
Across the pond, both the Euro and Pound are trading higher vs. the Dollar as dollar weakness due to continued positive corporate earnings led by JP Morgan are reducing demand for the greenback. In addition, better than expected demand for a Spanish debt issue and lack of bad news has buoyed the Euro to 1.285.
The Aussie and the Kiwi are also lower this morning, as fears of a Chinese slowdown reduce expectations for exports. However, 10% growth still looks pretty good to me.
Lastly, the Fed statement yesterday here in the US showed a commitment to maintain rates for as long as is deemed necessary. This is reducing demand for the Dollar ahead of US PPI and CPI figures which are due out today and tomorrow respectively.
In the forex market:
Aussie (AUD): The Aussie is lower on fears that a Chinese slowdown may soften demand for Australian commodities, despite the fact that demand for safe haven currencies has subsided.
Kiwi (NZD): The Kiwi is also lower for the same reason as the Aussie; however the NZ manufacturing index expanded at a faster than expected pace. Tomorrow NZ will report CPI data which will show whether inflation is tame or not and may influence the market’s expectation of a rate hike.
Loonie (CAD): The Loonie is lower on concerns about demand for commodities, despite the fact that oil is trading marginally higher. The BOC rate decision is due out next Wednesday, which may bring a rate hike should policy makers fear that inflation may come in higher.
Euro (EUR): The Euro is higher across the board, as the lack of bad news has emboldened traders as a series of successful debt auctions have provided confidence to the marketplace. In addition, the ECB maintained that interest rates are appropriate and they expect to see moderate growth.
Pound (GBP): The Pound is also mostly higher this morning and reached a high of 1.537 vs. USD as Chancellor Osborne said he does not expect banks to need additional support and cited austerity measures as a main reason. However, the BOE has still maintained a dovish outlook for future policy.
Dollar (USD): The Dollar is lower today as PPI figures came in at -.5% vs. an expectation of -.1%. This shows that prices are declining faster and may, in conjunction with tomorrow’s CPI data, show that deflation is firmly in hand. Initial jobless claims came in less than expected, with 429K new claims vs. an expectation of 450K. Corporate earnings have been good so far, but may not be enough to hold up stocks as the futures are giving back earlier gains.
Yen (JPY): The Yen is surprisingly strong this morning as it looks like US data may be moving the market toward risk-aversion. The BOJ policy meeting still showed a cautious outlook and recent Yen strength could pose a threat to Japanese exports, the leading driver of economic growth.
While Chinese growth may be “slowing”, it is hard to argue that 10% is nothing short of remarkable. However, when one considers that it is Chinese growth that is driving the world economy right now, there is concern that a lack of global demand could cause further reductions.
In the US, it looks like deflation is winning the battle as the government’s attempts to maintain higher prices may have been misguided. While deflation is a problem, let’s consider for a moment that Japan has been experiencing it for the last 20 years.
While I am hoping that policy-makers can avoid a Japan-style economic malaise, I have my doubts currently. The government is just about out of magic bullets to help maintain prices as interest rates cannot get much lower.
The problem with the economy right now is not that there is a lack of demand, but rather an over-supply of homes, goods, and services. As the economy reached the asset bubble that became known as the Great Recession, government policy to attempt to keep prices high only served to help bank balance sheets. While this may have prevented a total collapse of the financial system (still up for debate), now is the time to pursue pro-business policies that will help bring new money to the US economy to increase demand as supply clears.
On the plus side, at least it was “only” 429K losing jobs last time, it could have been much worse. So let’s just hope that China will continue to grow, as it looks like the US may be done for a while. Dollar weakness is evidence of this.
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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US Earnings On Tap!
By Mike Conlon | July 12, 2010
This week starts earnings season for US companies and, rightly or wrongly, will help show whether or not economic progress is occurring. We’ve witnessed the disconnect between corporate profits and the “real economy”—namely jobs—and good corporate earnings will give the unemployed hope that hiring may be soon to follow.
In the UK, GDP figures came in as expected showing slightly positive growth for the quarter, and there was an article over the weekend claiming that the UK’s proposed bank requirements would lead to a double-dip recession.
In the Euro zone, potential fears of bank solvency issues were balanced out by German economic strength measured by employment and industrial production figures. A lower Euro had helped German exports and if the banks can “pass” the stress tests without setting off a chain reaction, then the Euro could stabilize near these levels.
In Japan, the ruling party lost control of the upper house in elections, providing political uncertainty and causing the Yen to sell-off overnight. However, overall risk aversion has brought strength back to the Yen.
In the forex market:
Aussie (AUD): The Aussie is lower on risk aversion, despite the fact that home loans rose for the first time in 8 months. However, futures are showing that traders are decreasing their bets for an Aussie rise vs. the Dollar. US corporate earnings will be the major driving force this week, with better numbers encouraging risk appetite.
Kiwi (NZD): The Kiwi is also lower on risk fears despite the fact that the NZ budget deficit came in narrower than expected. Home prices came in slightly lower, but still posting gains of 5.2%. Inflation figures are due out later this week.
Loonie (CAD): Not a lot of news for the Loonie this week but expect it to be extra sensitive to US corporate earnings this week. The US is largest importer of Canadian goods and services.
Euro (EUR): The Euro is also lower as the policy makers are already calling for better capitalization of the banks before the results of the stress tests are released. It is no secret that banks would be better off with more capital; the problem is whether or not increased capital requirements will hamper growth. Germany is showing that its economy is still strong, and that may be enough to out-weigh the negativity surrounding the Euro.
Pound (GBP): The pound is lower as DGP figures showed .3% growth in the first quarter; however the current account deficit is at its widest margin since 2007. Economists are expecting better growth in the 2nd quarter, before the impact of fiscal tightening takes place. The Pound traded below 1.50 earlier but has since rebounded higher.
Dollar (USD): The Dollar is seeing some strength this morning as risk aversion is present at the start of the US session. US CPI and PPI figures are due out later this week, but all eyes will be on the US corporate earnings reports. Good earnings will provide hope that hiring may be around the corner, but at the end of the day we may still be in the “tale of 2 economies”, with companies thriving while the unemployed are crying. Bad corporate earnings could send the markets reeling, so expect volatility in the short-term.
Yen (JPY): Overnight, the ruling party lost control of the upper house of government, providing political uncertainty and the fear that Japan may have trouble attempting to tackle its deficit. The Yen was lower, but is now seeing strength on risk aversion. The Bank of Japan Monetary policy meeting is taking place this week but don’t expect them to move on rates. Japan will trade this week on risk themes.
So the market and the US government are counting on good corporate earnings to provide confidence that the economic picture may be improving. With higher profits, the likely conclusion is that companies will begin hiring again which will hopefully help lower unemployment.
However, this may not necessarily be the case. Companies are fearful of the current economic climate as potential new rules, regulations, and taxes spur hesitation. Companies will be very cautious when looking to expand and could be quite content with their present situation.
Whether or not this is the case remains to be seen as the market expects good earnings. Should the numbers be average or even bad, then that could open up a whole new can of worms.
So expect volatility this week, and be ready to profit from short-term fluctuations should the situation present itself.
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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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!
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Less Money Needed!
By Mike Conlon | June 30, 2010
There was encouraging news overnight as the ECB said it would lend banks less than analysts had predicted, showing signs that the European banking system may not be in as weak a state as the market thinks. In addition, German unemployment changed less than expected and the unemployment rate remained steady showing signs of economic stability. Euro zone CPI figures fell back to 1.4%, slightly better than analyst expectations.
In the UK, consumer confidence figures fell to 6-month lows as residents prepare for budget cuts, and BOE policy-maker Adam Posen said that UK recovery is tentative and could risk sliding back into recession. Look for continued loose monetary policy unless inflation figures really heat up.
In the US, the ADP employment change came in less than expected and could serve as a harbinger of Friday’s Non-Farm Payrolls report.
In Australia, bank lending and house price gains showed that the economy has been resilient in the face of rate hikes but whether that trend continues remains to be seen.
Canadian GDP figures came in flat, showing neither growth nor contraction but missing analyst expectations of a .2% gain.
So today is a bit of a mixed bag, with earlier risk-taking on the European bank news giving back some gains. Stocks are mixed to slightly lower with commodities relatively flat. Today is the last day of the second quarter, so we could see some window dressing which could mean volatility in stocks.
In the forex market:
Aussie (AUD): The Aussie is giving back some gains after bank lending and home price figures showed how strong the Australian economy has held up despite the RBA’s rate hikes to cool the economy. While the trading day started off in risk-taking mode, the Aussie may decline if we flip to risk aversion.
Kiwi (NZD): The Kiwi is lower this morning as the RBNZ said in its annual Statement of Intent that it will continue to remove economic stimulus as the NZ economy recovers. Part of this statement has been construed as backing away from tighter monetary policy, citing global economic conditions.
Loonie (CAD): A bit of a reversal for the Loonie this morning as well, as risk-taking waned and GDP figures came in lower than expected. GDP stalled after gaining for 7 straight months as retail sales declined as the government removed temporary tax relief measures.
Euro (EUR): The Euro is higher across the board this morning as the ECB said it will lend less to banks to cover their debt payments than the market was expecting. This shows that the financial health of European banks may not be as bad as expected and that they are largely able to meet debt obligations. There has been major fear about the sovereign debt exposure of these banks, and this announcement took that fear down a notch.
Pound (GBP): The Pound is lower this morning as comments from the BOE said that recovery is tentative and consumer confidence figures fell to 6-month lows as budget concerns weighed heavily. However, house price figures rose to 2-year highs in a sign that the property market may be stabilizing.
Dollar (USD): The Dollar is mixed as the ADP employment change showed a gain of 13K vs. an expectation of 60K jobs gained. Friday’s Non-Farm Payrolls report will really show how far along we are in the employment picture and economic health, but this worse-than-expected figure may be foreshadowing.
Yen (JPY): The Yen is showing some strength against all but the Euro as risk aversion appears to winning the morning battle. Yen started the trading lower as Asian stocks continued to sell-off, but then reversed on the Euro bank news, only to reverse again on the ADP jobs report.
Yesterday’s sell-off may have been an over-reaction to negative sentiment in the market but the important thing to remember is that global economies are still fragile. As various governments remove stimulus, economies will now be forced to stand on their own.
In the US, it’s all about jobs, jobs, jobs. As long as people are unemployed and unable or unwilling to spend, economic recovery is going to be fragile. Part of the problem is that we don’t have policies in place that encourage private sector growth, as looming tax hikes to support out of control spending weigh heavily on private business.
So this most recent scare is all about confidence. It is obvious that people don’t have confidence in their government’s ability to improve conditions. It doesn’t matter what the policy is, there is NO confidence right now.
However, there are pockets of economic strength around the globe and those who are employed are experiencing a MUCH different economy than those who aren’t. Some are beginning to say that this is the “new normal”; where we will have economic growth AND high unemployment. I beg to differ.
I understand that emergency stimulus measures were necessary to prevent us from going over the cliff but enough is enough. The sooner the government removes the training wheels from the economy, the sooner citizens will learn how to ride again. Because at this point, the US government is holding us back, and not letting us move forward. Friday’s NFP will either confirm or deny this assertion, and the market will respond accordingly.
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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Budget Cuts!
By Mike Conlon | June 22, 2010
The British pound is lower this morning as the UK budget showed a commitment to a balanced budget and a reduction in spending of close to 30 billion pounds annually. This should come as no surprise to the market, yet the Pound is lower as the UK attempts to cut its deficit.
This coincides with some concerns in the market over European bank funding problems which are causing some risk aversion in the market this morning. In addition, yesterday’s enthusiastic response to the Chinese announcement to allow the Yuan to float was short-lived as the US stock market finished the session lower, and futures are pointing to a lower open this morning as well.
Consumer prices were higher in Canada, and there was a note out this morning saying that central banks around the globe are starting to diversify away from the Euro and into the Aussie and Loonie. This could potentially affect their status as “risk assets” as the market is starting to realize that these are strong economies.
So we could see some mixed trading going forward, as the risk-on, risk-off mentality works its way out of the market and these currencies begin to trade on their own fundamentals. Japanese yen will still see gains during risky times as it is still the primary funder of carry-trades, but it will be interesting to see if traders actually unwind the carry trades or add to them going forward.
In the forex market:
Aussie (AUD): The Aussie is mixed this morning on risk-aversion, though it appears to be bouncing off its lows from the Euro session. Demand for the Aussie is higher because of the news from its largest trading partner, China. In addition, the news about central banks diversifying away from the Euro to the Aussie have slightly out-weighed risk themes.
Kiwi (NZD): The Kiwi is affected more by risk aversion this morning than the Aussie, as the NZ economy is not deemed large or strong enough to receive diversified funds from central banks that are moving out of Euros.
Loonie (CAD): The Loonie is higher across the board as CPI figures came in .1% higher than expected to 1.4%. This shows that Canadian economy is still chugging along and that the potential for rate hikes is still on the table. This makes the Loonie a destination for funds from central banks diversifying away from the Euro, with the added benefit of potential rate hikes.
Euro (EUR): The Euro is lower this morning despite the fact that German business confidence was higher. An ECB council member said that some banks are facing funding problems. This comes in advance of the European bank stress tests which are due out sometime next month and could be the next landmine that sends the Euro lower. Banks in Spain may borrow 10 billion euro from its bank-rescue fund.
Pound (GBP): The Pound is also lower as the UK announced its emergency budget which showed a commitment to deficit reduction by reducing spending and setting the table for tax hikes down the road. This has heightened the fear of double-dip recession in the UK, but these announced measures have likely saved the UK top-credit rating from downgrades, which would make it more expensive for them to borrow.
Dollar (USD): The Dollar is mostly lower this morning despite some of the risk in the market. The Chinese decision to allow the Yuan to float more freely and be tied to a basket of currencies and not the US dollar alone is likely causing some selling. Existing home sales are due out later this morning and could provide a snapshot of the housing market ahead of the FOMC meeting.
Yen (JPY): The Yen is higher on risk aversion due largely in part to the Euro debt crisis. In addition, Prime Minister Kan pledged to balance the Japanese budget in 10 years and to reduce bond sales to gain investor confidence. This is quite the task as Japan has the world’s largest budget deficit, so reduced spending and tax changes may be seen as welcome by the markets.
Just when things start to quiet down, the Euro debt crisis comes screaming back into the room and reminds investors that the EU problems have not been solved. Bank funding problems and the upcoming stress tests may show an ugly picture of the financial health of the Euro zone.
Meanwhile, while everyone yesterday lauded the Chinese announcement to allow the Yuan to float more freely, the realization that they now want to use a basket of currencies to peg to (including the potentially sinking ship Euro) is just another way to manipulate their currency to attempt to keep it low.
Canada and Australia could be major beneficiaries of both the Chinese and Euro zone news. Commodity prices have pulled back this morning, but both of these countries have strong economies and that is reflected in their currency gains this morning.
Stay tuned, this may not be a lazy summer after all!
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
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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Big Ben Is Back!
By Mike Conlon | June 8, 2010
Just when you started wondering where are esteemed Fed Chairman has been, Bernanke gave a speech last evening that helped buoy the markets higher. Bernanke re-affirmed that indeed recovery is intact here in the US; though moderate given the depth of the recession. These comments helped send futures higher, and encouraged risk-taking in the forex market.
Across the pond, Fitch ratings agency came out with comments on the UK saying that the UK fiscal challenge is “formidable”. Perhaps this could be viewed as adding “fuel to the fire”, as these comments came a day after the new British PM said basically the same thing. There is speculation in the market that perhaps a UK credit downgrade is looming. The UK emergency budget is due out on June 22 and that should paint a clearer picture.
Meanwhile, the German trade surplus narrowed, though industrial output increased .9%, besting expectations.
In the forex market:
Aussie (AUD): The Aussie is higher on risk-taking, despite the fact that business confidence fell for the third straight month. Part of this can be attributed to the government’s proposed 40% tax on mining companies as well as Euro zone conditions.
Loonie (CAD): The Loonie is higher as well, catching a slight bid from higher oil prices, despite a housing starts number that came in worse than expected. The number came in at 189K vs. an expectation of 202K.
Kiwi (NZD): The Kiwi is higher ahead of tomorrow’s interest rate policy meeting which the market is expecting will bring at 25bp rate hike, raising the official cash rate to 2.75% from a record-low 2.5%. Inflation is expected to pick up which would outweigh any fallout from the Euro debt crisis. However, as mentioned yesterday, most every country is looking for a weaker currency to export their way to prosperity, so a rate hike may induce carry trades which would push the Kiwi higher.
Euro (EUR): The Euro is higher as there is some risk-taking in the market, though lower vs. the commodity currencies. At this point we all know about the conditions in the Euro zone, so any lack of market-moving news will allow the Euro to drift higher, though without conviction.
Pound (GBP): The Pound is lower this morning on the Fitch news, despite the fact that retail sales rose .8% compared to a decline of 2.3%. The UK emergency budget will be released on June 22nd, and will provide further clarity to extent of budget cuts the UK may be enacting.
Dollar (USD): The Dollar is mostly lower this morning, as risk appetite has picked up partly because of Bernanke’s comments last night. Tomorrow will bring the Fed’s Beige Book economic report which should be similar to the comments made last evening.
Yen (JPY): The Yen is lower as carry trades have increased due to heightened risk-appetite. In addition, new PM Kan takes over officially and his new cabinet is seen as one that favors budget cuts and a weaker Yen.
There’s not a lot of fundamental data out this week so much of the movement we’re going to see will be based on various comments coming from around the globe. As a result, the markets can move somewhat erratically, as officials attempt to jaw-bone their various currencies.
Most of the comments due out will not provide official numbers, so sometimes they need to be taken with a grain of salt.
However, you can see how comments from a ratings agency can affect a currency like the Pound, just like a quick speech at Washington event can improve markets as well.
Let’s face it, most of these government types are economic cheerleaders; however they all favor a lower currency to encourage exports. So I expect much of the “news” we hear to counter-balance each other out, and some sideways trading to occur as we go into the summer slowdown.
That is, until you hear something from the Euro zone. Because at this point, the less we hear from them, the better!
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
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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German Political OxyMorons!
By Mike Conlon | May 19, 2010
The German people are known for being hard-working, efficient, industrious people. They are not known for their charismatic personalities or ability to excel in politics. While this is not a bad thing, it is coming back to haunt the Euro zone as Germany is making unilateral decisions that affect the financial markets.
Just yesterday, Germany enacted a “naked short-sell” ban on financial stocks and bonds and wants to limit the use of CDS only to those who actually own the bonds. While in and of itself this is not a bad policy, they needed to get the other members of the EU on board with this action. They did not consult the other nations, which consequently raised suspicion in the market that they “had something to hide” and sent the Euro plummeting lower to 1.21 and change.
In what many view as yet another political blunder by Germany in the handling of this crisis, the market has started to realize that this ban will largely ring hollow without the other nations on board, and that this announcement was more about dumb German politics than anything financial related. They really should take a look back to the first few months of Obama’s presidency; the guy was so used to being on TV that every time he spoke the markets tanked! When he finally learned to be quiet, the markets were able to rebound.
Hey Germany, if you want to save the Euro—just shut up already! In any event, we are seeing risk taking in the market as the commodity currencies have sold off, as has the Pound as the UK rate policy meeting minutes came out. The Euro has rebounded from very oversold levels, and US CPI came out slightly negative vs. a slightly positive expectation.
In the forex market:
Aussie (AUD): The Aussie is down big-time this morning, as the German short ban-induced sell-off caused major risk aversion. Other factors contributing to the sell-off are (in no particular order): potential slowdown in China, Greek debt concerns, and lower commodity prices. In addition, consumer confidence levels are at 19-month lows, despite the fact that wages grew at the fastest pace in almost a year.
Loonie (CAD): The Loonie is lower for the same reasons as the Aussie, especially dragged lower by oil prices which are in the $68.5 range. Canadian CPI is due out on Friday, but if risk themes persist an increase around the globe, then no amount of inflation will give the market confidence that the BOC will hike rates at the June meeting. The bottom line is that you cannot raise rates if the threat of a global double-dip recession exists.
Kiwi (NZD): The Kiwi is the biggest loser this morning on risk aversion, but in addition, RBNZ Governor Bollard came out saying that NZ needs to reduce its budget deficit and should forego growth prospects in favor of austerity to rebalance its economy. He also said that a gradual depreciation of the Kiwi would be desirable, so investor sentiment has shifted away from a mid-year rate hike as had been previously expected.
Euro (EUR): Years from now, both economics and poli-sci classes are going to use this EU debt crisis as a case study of what not to do. The announced bailout was supposed to be the final straw, the end of the play. And like a bad movie that just won’t seem to end, Germany keeps giving the markets reason to question the credibility of the Euro which in turn inspires risk aversion and a lack of confidence around the globe. Meanwhile construction output in the region was higher. So the Euro has bounced back, as the market has realized that it was just German stupidity and not a hidden time-bomb. If this keeps up, then the Euro could be finished very quickly.
Pound (GBP): The Pound is lower as but is rebounding a bit as the BOE rate policy meeting minutes were released showing a dovish stance. Policy-makers voted unanimously to leave rates and bond purchase programs unchanged, which falls in line with the potential austerity measures about to be under-taken.
Dollar (USD): The Dollar is higher on risk aversion, but is giving back some gains as the market is moving away from the major threat level induced by Germany. CPI figures came in less than expected showing a decline of .1% vs. an expected gain of .1%. While not a major difference, this really shows that we are still in a deflationary mode even with all of the tremendous government spending which was supposed to prop-up prices.
Yen (JPY): The Yen is higher, especially against the commodity currencies as risk-aversion caused a major unwind of carry trades. In addition, industrial production figure came in better than expected heading into tomorrow’s GDP report which is expected to show positive growth led by exports. This may help Japan take measures to reduce its extraordinary debt.
The only thing I can say regarding the global economy is that there is major risk in the marketplace right now. Countries around the globe are preparing to tighten their belts and are looking to return to fiscal responsibility.
The only real country not on this path is the US, as politics rules and economics drools! So Washington DC is going to continue to re-fill the punch bowl to keep the masses at bay, rather than do what is economically responsible but politically suicidal.
I don’t know how confidence is going to return to the Euro zone and if it will happen anytime soon. A gradual decline of the Euro is OK, but these break-neck moves need to be stopped if the global economy is going to function properly.
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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