Retail Sales Improve!
By Mike Conlon | March 12, 2010
All eyes were on the US retail sales figures, as the US consumer represents some two-thirds of US GDP. There was speculation that bad weather would affect this number, causing it to be lower than expected. Well, that hedge turned out to be unnecessary, as there was a negative expectation of -.2%. The number came in much better than expected, at + .3%, which is positive growth as opposed to a negative expectation. So expect stocks to rally higher, but be wary of the correlation of “stocks up, dollar down” as some in the market may feel that this could have a material impact on US interest rate policy.
In other news, Canadian employment figures came in better than expected and Japanese Finance Minister Kan used the dreaded “I” word—as in intervention, which readers of this blog know is not totally unexpected.
In currencies this morning:
Aussie (AUD): The Aussie is higher this morning as investors are seeking yield as economic conditions appear to be improving, particularly in the US. No real news but the Aussie has made one attempt at .92 vs. USD and could challenge 2010’s high of .932 in short order.
Kiwi (NZD): Retail sales figure came in at a better-than-expected .8%, showing signs that domestic demand in New Zealand is improving. This bodes well for their economic story but we shouldn’t expect any rate hikes until mid-year as the policy meeting told us earlier this week. However, should inflation start to pick up, we could see a surprise hike earlier than expected.
Loonie (CAD): Good news out of Canada as the jobless rate fell to a 10-month low, falling to 8.2%. The Loonie is higher across the board as hopes that economic recovery is taking hold. According to an RBC analyst, the Bank of Canada is, “running out of arguments against keeping rates low”. The Loonie currently buys 98.35 US cents, and the Loonie could be at parity with the Dollar for the first time since July 2008.
Euro (EUR): The Euro is mostly higher this morning, as European Industrial outputs expanded 1.7%, the largest gain in almost 20 years. The Euro challenged 1.38 vs. USD and EU President Junker argued that the Euro zone needs new tools to be able to combat future crises.
Pound (GBP): The Pound is higher this morning, extending yesterday’s rebound. Reports are that the sell-off in the Pound has been excessive, as house prices in the UK rose at the fastest pace in 7 years, showing that the economic recovery may be taking affect. The Pound is at 1.514 vs. USD.
Dollar (USD): The Dollar is lower vs. all but the Yen as retail sales figures came in MUCH better than expected, as I mentioned above. Consumer confidence figures are due out at 10AM EST, but don’t expect that to have a material impact on today’s action. Other reports are that President Obama wants to nominate Janet Yellen as Fed Vice Chair. Yellen is known to be dovish, meaning that she is not an inflation hawk. This could mean extended zero interest rate policy as the government attempts to inflate their way out of debt on the backs of consumers, who will be forced to pay higher prices for everything. Stay tuned.
Yen (JPY): As I’ve mentioned before, Japan is not adverse to using intervention as a tool to keep Yen from strengthening, and earlier today Finance Minister Kan confirmed this. It is likely that yen will weaken as the government hopes to stimulate exports to improve their economy. It will be interesting to see how this plays out and if the Bank of Japan has enough muscle to fend off risk-aversion plays should global economic recovery falter.
As you can see, there can be different market responses to good economic news. One could make a cogent argument for either Dollar strength or weakness based on today’s sales figures. Inflation hawks will claim this means that the Fed should be raising rates; while doves say the economy is still too fragile and investors should seek yield elsewhere.
Regardless of which way the Dollar moves and its affect on other currencies, this is good news for the US economy.
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Fundamentals Do Matter!
By Mike Conlon | March 10, 2010
Now that the fears of global collapse have abated—for now—the markets have returned to heavier scrutiny on the fundamental numbers being reported in various countries. It is times like these that remind traders that indeed the fundamentals do matter. The longer the global economy can sustain itself without Armageddon taking place, the more and more traders will focus on specific stories and not overall risk themes.
So, while one might look at this morning’s action and be inclined to say that today is risk-taking because commodity currencies are higher, a more appropriate reaction would be that are actually both good and bad stories out there which are driving individual currency pairs.
More specifically, in currencies:
Aussie (AUD): One of the good economic stories out there is coming out of Australia which has had good gains as of late. Tomorrow they will be reporting their employment figures, which are expected to gain for the sixth straight month. In fact, the economy is buzzing along so well there that there is no an expectation that they may raise the benchmark interest rate again next month. The Aussie is in a clear uptrend and I expect it to test 2010 highs very soon.
Kiwi (NZD): The Kiwi is also another good economic story, though not as strong as the Aussie. While the interest rate decision due out tomorrow is expected to be unchanged, overall Asian recovery will benefit the Kiwi. The most important take-away from the rate decision will be the language used to give a clue as to a timeframe for further hikes. And should they surprise the market with a rate hike (highly unlikely), then lookout above!
Loonie (CAD): The Loonie is just kind of hanging out today, with no real news on tap in Canada. Oil is higher so the Loonie is up; and also riding the coattails of the Aussie and Kiwi. The only anomaly is USD/CAD, as there is dollar strength this morning.
Euro (EUR): The Euro is mixed this morning. On the one hand, now that the risk of a Greek default is mitigated, the focus is back on the fundamentals in the Euro zone. On the other, news out of Germany is that German exports are down, but German CPI is up. Traders are using this opportunity to cover some EUR/USD shorts, but otherwise the Euro is down vs. the commodities and up vs. the rest. I expect EUR/USD to be range-bound for a bit.
Pound (GBP): Another tough day for the Pound, which would be down across the board if not for the Yen. The Industrial production figures and manufacturing came in negative, marking the first decline since last August. This is likely to keep rates low in the UK for an extended period. Meanwhile, the BOE’s Adam Posen stated that he hopes their bond purchase plan “has done it” with regard to stimulating the economy but he didn’t rule out further quantitative easing.
Dollar (USD): There’s a bit of optimism about the dollar this morning as economic recovery appears to be going faster in the US than in Europe and Japan. As risk of a global collapse is lessening, traders are looking more toward the fundamentals. So the expectation is that we may see a rate hike in the US sooner than in Europe or Japan. However, don’t be surprised to see Dollar weakness should commodity inflation pick up.
Yen (JPY): The Yen is down across the board this morning in advance of the Japanese GDP report due out tomorrow as fears of deflation are warranted. Combine this with good news from the commodity currencies, higher commodity prices, and “risk-taking” and you have a recipe for Yen weakness. Carry traders are gaining more confidence and the Yen is the funding currency of choice.
As you can see, when global economic conditions become more stable, market fundamentals return to center-stage. Under “normal” conditions, currencies from the best economies will flourish, while those not doing as well will be sold.
And that’s the basic idea behind forex trading; that you want to own the strong currencies and sell the weak ones, hopefully picking up interest along the way!
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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France to the Rescue?
By Mike Conlon | March 8, 2010
Bet you never thought you’d hear that unless it was the punch-line to some joke. All kidding aside, this past weekend French President Sarkozy gave Greece his support and claimed that if Greece was allowed to fail, then the Euro would be “pointless”.
I’m not sure how this is going to sit with Germany, who I’m sure don’t appreciate France undermining its stance. For all the talk of Greece leaving the Euro zone, what if Germany was the one to up and go? I don’t see this as a likely scenario and see this as more of “good cop, bad cop” tag-team effort to keep the Euro from losing further value. At the end of the day, German banks have huge exposure to Greece so it is definitely not in their interests to see Greece fail. As of right now, for all the fear of monetary bailouts, the only thing on the table right now is allowing Greece to piggy-back on the good credit of Germany. Meanwhile the EU is working to create a lender of last resort and limit credit default swaps to help prevent another potential catastrophe.
This is a pretty light week for news, which usually puts me on edge to “expect the unexpected”. Barring any unexpected negative news, I expect to see a continuation of last Friday’s market action as moderate risk-taking should have the upper hand.
In the currencies:
Aussie (AUD): There is no real news for the Aussie this week until Thursday, when they report their unemployment figures. Right now the Aussie is still the dominant currency and destination for carry trades. We’ll get a better idea of how the Aussie is going to fare going into Thursday but for now I expect the Aussie to move higher on risk-taking themes and commodity prices. The Aussie should hold short-term support at .91 vs. USD.
Kiwi (NZD): The big news of the week for New Zealand is the interest rate decision due out on Wednesday. The Kiwi is higher this morning as home prices have advanced for the fifth straight month in what some traders may feel is the onset of inflation. Personally, I don’t see a rate hike coming at this meeting so we’ll have to see how the market reacts but for now I expect the Kiwi to trade higher into the meeting on expectations of a rate hike and moderate risk-taking with the potential for those gains to be erased if the hike doesn’t happen. Stay tuned.
Loonie (CAD): The Loonie continues to “receive love” from the market as more and more people are starting to catch on to the economic story in Canada. A report out this weekend claimed that the Loonie to could surpass the Aussie as the majority of options bets placed on the Aussie/Loonie pair are for the Loonie to strengthen. While the Loonie may do better in the short-run as traders begin to expect a series of rate hikes, don’t lose sight of the impact of the interest rate differentials, as the Aussie is currently yielding 4% and the Loonie is yielding .25%.
Euro (EUR): As mentioned the Euro got a boost from Sarkozy’s comments this weekend, but is trading marginally lower than the commodity currencies. Financial stability is the name of the game for the Euro and I expect it to trade sideways for a while as the drama unfolds. This is not the final word on Greece so I expect we’ll see it trade range-bound between 1.345 and 1.38 vs. USD depending on the “he said, she said” between Merkel and Sarkozy. Not to mention German CPI, which is due out on Wednesday.
Pound (GBP): The Pound is down against all but the Dollar and Yen, as mild-risk taking is the flavor of the morning. On Wednesday we’re going to get the estimate of Feb. GDP and the Industrial production and manufacturing figures. Should those numbers come in weaker than expected than we could see the Pound re-test last week’s lows.
Dollar (USD): The major thing to look at this week is going to be Friday’s retail sales figures. This is going to give a clue as to the behavior of the US Consumer, and well as the confidence figure due out the same day. The US consumer represents some 70% of GDP so if these numbers are better than expected than it could compel further risk-taking and dollar weakness. Leading up to those numbers, we have a couple of Fed speakers out to entertain us with their jaw-boning of the dollar. Remember, forget what they say, and watch what they do!
Yen (JPY): Japanese GDP is due out on Wednesday but frankly, the Yen is going to trade on risk themes this week. Still considered the top funding currency for carry trades, I can’t foresee a situation that would cause this to change barring an interest rate hike which is unthinkable.
So, for a week with surprisingly little news, it seems kind of busy. Watch out for the British GDP figures on Wednesday to be a key point, and this could be the week when the Loonie jumps the Kiwi on the risk scale.
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Employment Gains!
By Mike Conlon | March 5, 2010
In a scene out of the movie, Trading Places, all eyes were on the US Non-Farm Payrolls report this morning. In today’s version of the Frozen Concentrated Orange Juice crop report, the number game in at -36K jobs lost, vs. an expectation of -65K. The unemployment rate also held steady at 9.7%. So what does this mean for the market today? Well right now there is so much market volatility that it’s hard to get a good read.
This should be positive for risk-taking today as the number was just good enough to show economic progress, but not great enough to bring about talk of US interest rate hikes. However, anything can happen on NFP day so traders need to be on their toes! Just take a look at any chart at 8:30EST to see what I mean.
In currencies:
Aussie (AUD): No real news for the Aussie today as it is higher on risk themes and had a nice pop on the NFP report.
Kiwi (NZD): Same deal for the Kiwi as the Aussie, though it’s bouncing much higher as it has been a bit over-sold the last few days. Between Kiwi strength and Yen weakness, that pair is the largest gainer, up 2.18%.
Loonie (CAD): The Loonie is also higher, as the market has decided that risk-taking is the flavor of the day as the market digests the impact of the NFP report. Oil is also higher to just over 81, adding to Loonie gains.
Euro (EUR): What more can be said about the Euro at this point? The Greek crisis is center-stage, with Greek austerity measures angering its citizens, and the potential bailout and contingency plans upsetting the Germans. Quite the balancing act going on there. The Euro is down against all but the Yen.
Pound (GBP): Producer prices came in higher in the UK, and commodity prices are suggesting that they may be experiencing the start of inflation. The increase of 4.1% came in higher than the target rate of 3%, so it will be interesting to see how the BOE handles this situation. The Pound is mixed this morning.
Dollar (USD): I discussed the NFP report above but whether or not the risk-taking theme that has been pushed forward by the forex market continues will remain to be seen. Stocks are expected to see an initial bounce as the futures are higher. However, there is no improvement in the unemployment rate, so market bears may use this opportunity to establish shorts on signs that the economy may be stabilizing but is not improving.
Yen (JPY): The yen is weaker for the second day in a row as it appears as though the market believes the Bank of Japan will boost credit easing. So it appears as though the government may be winning the battle against the Bank of Japan which should weaken the Yen and make it even more attractive as the funding currency of choice for carry traders. It is down across the board this morning.
So while it appears that the market is in a risk-taking mood so far, don’t be so certain that it won’t change its tune by the end of the day. At some point, we are going to have to see actual good news, and not more “less bad”. Unemployment is still extraordinarily high, which will translate over to reduced consumer spending, which makes up some 70% of US GDP.
In my opinion, it would be a fool’s folly to continue to buy stocks and commodities on interest rate policies alone and not fundamentals. At some point this will catch up to the market. It always does.
Good weekend to all!
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Australia Hikes!
By Mike Conlon | March 2, 2010
Aussie Rate Hike, Canada to Follow?
As expected, the RBA raised interest rates today .25% to 4%, as the economy there has been humming along. More hikes are expected throughout the year. Later this morning, the Canadian interest rate decision is due out. And while it is not expected that the rate will change, the Bank of Canada may provide clues as to when this may happen.
That’s the good. As for the bad, there’s no shortage of negative news coming out of the Euro zone and the UK. Potential political gridlock in the UK and the Greek debacle are weighing heavily on the Pound and the Euro. Commodities are also higher in what can be deemed mild risk-taking.
In currencies:
Aussie (AUD): The Aussie is higher this morning as the RBA did the expected and raised rates to 4% as economic recovery is more advanced than anywhere else on the planet. Having just reported a surge in business confidence and explosive jobs growth, there could be up to another 1% in rate hikes as the year moves forward, depending upon whether or not inflation picks up. As of right now, inflation appears to be within the targeted range, which could suggest a slowing of rate increases which is dovish. This is why the Aussie is showing modest gains today and not explosive ones.
Kiwi (NZD): Surprisingly, the Kiwi is down this morning as there are dovish outlooks on economic recovery and inflation appears to be muted. So while Australia is raising rates; New Zealand could be at a standstill for some time.
Loonie (CAD): The Bank of Canada rate decision is due out later this morning and though the market is predicting no change, there may be some language hinting of future rate hikes which may come sooner than expected. Fourth quarter GDP came in at 5% vs. and expectation of 3.3%, showing much faster growth. Inflation is also very close to the target rate which could cause earlier than expected action. The Loonie is the best performer this morning, higher against all heavily traded currencies. Because the forex market is forward-looking, potential rate hikes usually trump actual ones. This is why the Loonie is higher vs. the Aussie.
Euro (EUR): The Euro is mixed this morning, trading lower vs. the commodity currencies but higher against the rest. Germany is putting immense pressure on Greece to cut its deficit and is basically in charge of the Greek bond offering which makes them the “holder of the purse-strings”. These austerity measures aren’t going over too well in Greece, as strikes are scheduled which usually lead to some sort of rioting. Greece has a tough pill to swallow and the citizens there don’t want to take their medicine. Stay tuned!
Pound (GBP): The political wrangling is heating up in the UK as fears that a “hung Parliament” may prevent the UK from tackling their economic deficit. With elections coming in a few months, the speculation that there will be no majority party could induce political grid-lock which will prevent anything from getting done. Does this sound familiar? It will be interesting to see the outcome of these elections, and whether the British actually vote to have the punch bowl removed from the party. The Pound is down across the board. Again.
Dollar (USD): USD is down against all but the Pound, as the big news in the US is going to be Friday’s Non-Farm Payrolls report. Expect the Dollar to trade on risk themes until then.
Yen (JPY): Japanese yen is higher this morning as unemployment fell unexpectedly to 4.9% and household spending increased for the sixth straight month, showing signs that domestic demand may be improving. However, yen strength is negative for exports and at this point it doesn’t seem like further expansion is in the cards. Let’s see if they decide to rein in government spending to tackle further debt, or provide quantitative easing to try to keep yen low.
As you can see, some economies are doing much better than others and those that look to decrease their debt and may be targeted lower in the short-term, but may reap the benefits in the long-term. Right now, look for the commodity currencies to lead the pack provided there is no global shock to the system.
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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Be Careful What You Wish For!
By Mike Conlon | February 24, 2010
Today, Fed Chairman Ben Bernanke will begin 2 days of testimony on Capitol Hill regarding monetary policy. On the heels of one of the worst Consumer Confidence numbers in recent memory it will be somewhat difficult to weed through all of the political wrangling and double-talk that is bound to arise from self-serving Congress-people. That aside, pay attention to 2 things: 1) his recommendation for how to stimulate jobs growth—incidentally this is akin to Congress asking Bernanke to their job for them; and 2) any change to the language that he will keep rates at a record low for an “extended period”. At some point, he will have to move on rates and last week’s move on the discount rate may be a harbinger of things to come.
In other news, German GDP came in flat as in they had no growth—which is actually positive in that their GDP is not negative from the previous quarter and meeting analyst expectations. Asian markets were down big overnight, taking their cues from yesterday’s US stock market sell-off. Commodities are lower yet I’m seeing general US dollar weakness. So today is a mixed bag yet again.
In currencies:
Aussie (AUD): The Aussie is mixed this morning as wage growth slowed at the slowest pace in close to 10 years, up .6% vs. analyst expectations of .8%. The RBA is monitoring this figure closely to see if inflation pressures are mounting. With Chinese demand expected to pick up and Australia to benefit greatly, the RBA is not afraid to raise rates if necessary.
Kiwi (NZD): The Kiwi is down this morning in a case of “less-good” news than some of the other regions around the globe. Tomorrow we will get a reading on New Zealand business confidence so that could hint at the consumer spending numbers and GDP which will also give a clue as to inflation. While the Kiwi is “along for the ride” with the Aussie and is a destination for carry trades, its economy is not nearly as strong as its neighbor to the west.
Loonie (CAD): The Loonie is higher this morning due to “Olympic Fever” and investors starting to catch on to the economic story in Canada. Canada flies under the radar a little bit and sometimes gets too caught up in the US economy and oil correlation. Incidentally, oil is off of its lows of the morning and is just barely negative.
Euro (EUR): The Euro is bouncing back nicely from oversold conditions and is taking a break from all of the selling we’ve seen as of late. German GDP figures came in as expected, thereby not providing cannon fodder for short-sellers. Tomorrow is the real test for Germany though, as unemployment figures are due out. Unless risk-aversion comes into play later today, I expect to see the Euro remain positive.
Pound (GBP): Political uncertainties in addition to economic struggles are plaguing the Pound as of late. A UBS report claims that the market is worried that the conservatives in government will push for deficit reduction pre-maturely before the British economy is in full-blown recovery mode, thereby adding additional pressure to Sterling. In the meantime, additional bond buying has not been ruled out by the BOE—yet!
Dollar (USD): The Dollar is mixed this morning, showing neither major gains nor losses vs. other currencies. New home sales are due out this morning but at this point unless the number is ridiculously bad I can’t see it having any impact on the market. Bernanke will be testifying for the next 2 days so expect the Dollar to trade cautiously unless Big Ben says something to upset the market.
Yen (JPY): The Yen is seeing a bit on strength as of late, showing four days on gains in a row vs. USD. Recently, the government spat with the Bank of Japan may be on to something as the former claims that the latter isn’t doing enough to prevent Yen strength. As an exporting nation, we know that the Japanese want just the opposite—Yen weakness.
In overnight trading, the Asian markets were down, following the sell-off here in the US. European markets are currently higher on the German GDP news, and stock futures are higher here in the US.
It looks like oil has climbed back to near flat from being down earlier trading at just a smidge under $78, and gold is lower trading at roughly 1095, higher than its lows of the morning but now under $1100.
Look for light trading in the forex market as all ears are glued to the Bernanke testimony. As painful as it may be to listen to politicians make fools of themselves, this could be an important if indeed there is going to be a policy shift. My gut tells me it won’t be.
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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Flip Flopping on Risk!
By Mike Conlon | February 23, 2010
This morning has seen some “flip-flopping” on risk themes as the overnight session was trading on risk aversion due in part to some economic figures out of the Euro zone. However, those themes had pulled back and we actually saw some risk-taking, only to set-up for risk-aversion again! Can you say volatile?
The back and forth nature of the forex market is what traders thrive on. As of right now, we are seeing some Japanese yen strength, but not all of the risk aversion plays one might expect to see. While the Kiwi is noticeably weak, the Aussie is holding up against all but the yen. This looks like its setting up to be a back and forth day, as the market attempts to re-align itself according to risk themes. I will probably play today short-term, and wait to see what the market reaction is to the US Consumer Confidence figures due out at 10 AM EST.
While I can’t imagine that they will be “good”, one never knows how the market will react. Also to note is that the US Housing Price Index will also be out a little earlier, giving a glimpse into the whole inflation/deflation debate. Combine that with the political landscape here in the US and the malaise surrounding it; and the market could be in for a wild ride today is this could be a recipe for disaster.
In currencies:
Aussie (AUD): The Aussie is holding up surprisingly well this morning despite the general risk-aversion themes we’ve seen this morning. This is more of a case of being “less-bad” than actually good. With problems in Europe (Aussie nearing 10-year highs vs. the Euro) and the UK, investors may start catching on to the fact that owning Aussie over Euro and Pound is LESS risky regardless of what the correlations say. In my opinion, the Aussie is THE place to be for both risk-taking (commodity plays) as well as risk-aversion. Now if the market would just begin to see it. In the meantime, I will continue to buy dips.
Kiwi (NZD): While lumped in with the Aussie and Loonie as commodity currencies and known as a “risk-taking” vehicle, the Kiwi is not nearly as strong as the Aussie yet sometimes benefits from Aussie strength. Until economic conditions improve in New Zealand or rate hikes seem imminent, the Kiwi will continue to trade on risk themes as it is not strong enough on its own to “buck trends”.
Loonie (CAD): I’ve been seeing a lot more of Canada lately (probably because my wife makes me watch ice-dancing in the Olympics) but I’m starting to come around to being positive on the Loonie. Despite record low interest rates and its close ties to the US, the Canadian economy is strong and recovering much faster than the US. Because of the Loonie’s tight correlation to oil, it will continue to trade as a proxy for the commodity as the market determines whether or not recovery will drive further demand for oil. The Loonie is lower this morning.
Euro (EUR): Is anyone surprised that Business Confidence figure in Germany are down this morning? No? Me neither. In fact, this prompted German Chancellor Merkel to lash out the banks that “created the problem” for speculating in the Euro—driving it lower naturally. It looks like she’s at stage 3 (anger) in the seven stages of grief. It’s starting to look more and more like the Euro zone actually knew about the derivatives that helped Greece obfuscate its debt to the point that it was allowed to gain entry to the Euro zone. In my eyes this is akin to going to a “jackets required” restaurant jacket-less, then taking off with the loaner they give you, rather than just being denied access in the first place. Any way you slice it, the trend for the Euro is clearly down.
Pound (GBP): The Pound is lower this morning as speculation abounds that the UK will continue its bond purchase program to help keep their currency lower to stimulate their economy. People forget that the UK is still an industrial power and a BOE Deputy Governor reminded the markets of that fact when he said that a “weaker currency will boost exports”. Should the current situation continue, the Pound could be near 1.50 vs. the US dollar in no time flat. This would also represent the 61.8% Fibonacci retracement that technical analysts love so much.
Dollar (USD): Home prices in the US are expected to rise for the seventh straight month, though incrementally and down over 3% from the previous year. Should the figures meet the expectation, then expect risk-taking to pick up as this would be a sign that inflation is nowhere to be found and confirming that interest rates will most probably remain unchanged for a long time. Consumer confidence is out at 10AM, if anyone is confident in this environment, then they need to have their head examined!
Yen (JPY): The Yen is higher on risk-aversion this morning despite the fact that the Japanese government and the Bank of Japan are in dispute over what is to be done to combat the deflation they are experiencing. Not surprisingly, government wants more liquidity to encourage inflation, and the BOJ wants fiscal discipline and reduced deficits. Sound familiar?
In overnight markets, the Nikkei was down while the Hang Seng was higher. In current trading, the European markets are lower though off of their lows. US stock futures are lower, and oil is down roughly 1.25% to 79.3, with gold following suit down to 1111 and change.
With the problems facing Europe, rampant deflation in Japan, and trouble in the UK, the markets may be re-assessing which currencies are actually “risky”. In fact, the reason why I introduce the currencies in this blog in the order that I do is based on the “hierarchy” of the risk themes. As the economic recovery picture becomes clearer, I would not be surprised to see this pecking order change in the not-so-distant future.
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Fed Surprise!
By Mike Conlon | February 19, 2010
Just when you thought the markets were starting to calm down and that the news out of the Euro zone was beginning to fade, the US Fed dropped a bombshell on world markets last night at 4:30 PM EST, just after the US stock market closed. The Fed announced to everyone’s surprise that they would be raising the rate at the Fed discount window 25bp to .75%, effectively charging banks more for Fed borrowing.
The markets immediate reaction was to buy dollars and cover dollar shorts, and stock futures tanked. Asian equity markets were down big last night and Europe looks to be bouncing back from earlier lows.
This move was the dominant theme in the overnight market, as retail sales figures in the UK and Canada are taking a back seat, as is the US CPI report which came in less than expected showing that inflation may still be at bay.
The two major things to take away from this move are: 1) the Fed is stressing that this move is not to tighten credit on consumers and businesses, but is merely trying to remove some over the overly-accommodative measures they have taken, and 2) investors need to be wary of the fact that the Fed may continue with these “sneaky” off-hours moves to try to avoid inter-day market Armageddon. It will be interesting to see how the market reacts to this move once trading begins today.
In currencies:
Aussie (AUD): The Aussie is down this morning as it is the currency that is most likely to be affected by this move, all other factors being equal. While I wouldn’t classify today as a risk-taking or aversion day, this is the third day in a row that the Aussie is down against USD.
Kiwi (NZD): Like the Aussie, the Kiwi is down 3 in a row. In addition to being affected by the discount rate hike, New Zealand has just reported the widest budget cash deficit in almost 9 years on lower tax receipts and increased government spending.
Loonie (CAD): The Loonie is lower this morning on lower commodity prices and the US discount rate hike. Also, Canadian retail sales figures came in slightly less than expected, but were at least positive. This could be a sign that economic growth is not as strong as investors may think, and everyone is anticipating the inevitable “Olympic Hangover” as the one-time economic windfall goes away.
Euro (EUR): The Euro is at nine-month low to the Dollar after the discount rate hike in addition to all of the problems coming from the Euro zone. Now speculation is heating up that perhaps Italy used the same sort of derivative maneuver to conceal debt that allowed them to enter the EU as well as Greece. There’s a lot of tension and in-fighting right now among EU members. This could put further pressure on the Euro in weeks to come.
Pound (GBP): The Pound is also at a nine-month low to the Dollar as fiscal concerns continue that the UK may need to continue accommodative measure to revive their economy. Retail sales figures came in at a disappointing -1.2% vs. and expectation of -.5%, showing further economic weakness.
Dollar (USD): It is going to be interesting to see how the market reacts to the discount rate hike today. Personally, I think that this move shows that the Fed is trying to get the market to believe that economic recovery is taking place. This move is sort of a red herring, which induced a knee-jerk reaction from the market as soon as everyone hears “rate hike”. This move does not affect the Fed Funds Rate so it shouldn’t affect either businesses or consumers. So by the end of the day I expect that we’ll see some risk-taking as economic strength in the US is good for world economies and inflation is lower as reported by the CPI.
Yen (JPY): The yen is higher on risk-aversion, however I think the market may “have it wrong” as its gotten used to the risk-on, risk-off mentality. Let’s see if the Yen gives back some gains by day’s end.
In overnight markets, the Hang Seng and Nikkei were down over 2% and European markets have reversed prior losses and are trading higher. US futures are still negative, but trading well off their lows in the overnight session. Oil has reversed earlier losses and is trading around 79.5, and gold is back to around 1115.
When I saw the charts last night immediately following the Fed move, my initial reaction was similar to that of much of the market—sell everything, buy dollars and yen. However, as I thought about the implications of the move, I’m actually quite impressed with the timing of the move and think the Fed did a great job implementing this. And I haven’t been a big fan of the Fed as of late! In my view, this is positive for world markets.
Also, watch out for volatility as today is options expiration.
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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No Recovery in Sight!
By Mike Conlon | February 4, 2010
US Initial Jobless Claims came in worse than expected this morning, rising to 480K, the highest level seen in three weeks. Analysts were expecting a slight decrease, so that makes this number “unexpected”. (As a side note, how sick and tired are you of hearing about “unexpected“economic reports as reported by media outlets?) Also to note this morning is that both the UK and the Euro zone left rates unchanged, which was not “unexpected”. So needless to say, this morning is a risk-aversion day.
Here’s the rundown of world currencies:
Aussie (AUD): The Aussie is down this morning as expected. The major news for the Aussie will be made overnight as the RBA will come out with its quarterly monetary policy statement. There was a bit of new this morning that retail sales figures in Australia were down (MoM) to -.7%, showing a negative figure as consumers are starting to become more interest-rate sensitive.
Kiwi (NZD): The Kiwi is getting smacked this morning with the double whammy, losing value due to risk-aversion but also contributing was their unemployment report. Unemployment in New Zealand rose to 7.3%, the highest level in over 10 years, dampening hopes for any rate hikes in the near future.
Loonie (CAD): Building permits in Canada increased in December, showing signs that there may be hope for economic growth. However, the Loonie is down this morning, suffering from its correlation to oil and the general risk-aversion theme.
Euro (EUR): The Euro is down this morning against all but the Aussie and Kiwi, assuming its rightful place in the risk pecking order. The ECB voted to keep interest rates unchanged at a record low 1%, as concern about Greece stills weighs heavily on the common currency. There is a fine line the Euro zone countries are walking, attempting to encourage growth while at the same time reduce deficits and rein in budget shortfalls.
Pound (GBP): The BOE also kept rates unchanged at .5% and has also announced plans to not expand its bond purchase program (QE) for the first time since the program was initiated last march. The UK is trying to balance the threat of inflation at the expense of economic growth. It is also important to know that general elections are coming up in May and the “throw the bums out” mentality has made its way to the other side of the pond and is not only popular in the US. So the BOE is also taking potential political change into account.
Dollar (USD): I’ve already touched on the bad news about initial jobless claims, and tomorrow’s Non-Farm Payrolls Report (NFP) is weighing heavily on the US economy. Readers of this blog know that of course that means the dollar is up, as the flight to safety trade takes hold. Lost in the mix are pretty decent earnings reports coming out of the stock market, though as a most likely result of cost-cutting and firing workers. See the irony here?
Yen (JPY): Lastly, the Japanese yen is the big winner this morning, benefiting from the risk-aversion trade. Because of its status as the reserve currency for the carry trades, when risk aversion takes place, demand for yen goes up as traders flee riskier currencies.
As I scan the different news wires, I can’t help but notice that I haven’t seen one piece of encouraging news out there that would lead me to believe that economic recovery is gaining traction. The only silver lining I found, decent corporate earnings, is a joke compared to what’s going on out there.
At the US market open, stocks are down. Europe is down currently and Asia closed down overnight. Not to be Debbie Downer here but today could be ugly with a capital ‘U’. Oil is down to 76 and change, and gold is down testing 1100.
Remember, in order to benefit from a strengthening dollar, you have to sell a different currency and buy dollars to make gains! Just having dollars in your bank account does you no good except potentially influence your purchasing power. The only way to take advantage of these moves is through the forex market. When you’re sitting there looking at a red screen (because everything is down) and have no idea where to put your money, the forex market can give you a safe haven.
Isn’t it time you looked at this today? To get set up for a free, real-time practice account, click here.
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Busy Week Ahead!
By Mike Conlon | January 25, 2010
Rumors abounded last week that Fed Chairman Ben Bernanke was losing political support for re-confirmation and there was some speculation that he might not get the “nod’. Combine that with president Obama’s populist rhetoric and the markets sold off because of the uncertainty. The one thing I cannot stress enough is that THE MARKETS HATE UNCERTAINTY!
Realizing the consequence of their actions, politicos this weekend conceded that Bernanke will most likely be re-confirmed so it was game on for the markets again. As a result, the theme so far this morning is mild risk-taking. The Aussie (AUD) and Kiwi (NZD) are up, the Japanese yen (JPY) is down.
The yen drop also comes as a result that “people familiar with the situation” claim that the Bank of Japan will expand bond buying to keep the yen from strengthening too much and encourage weakness to help exports.
The British pound (GBP) is also showing strength this morning, as the UK GDP report is expected to show an expansion of .4% in Q4 vs. a previous contraction of .2% in Q3. The pound is also near 5-month highs against the Euro (EUR) which is currently under pressure from problems with the PIIGS countries, particularly Greece.
Also on tap this week is GDP reports from the UK on Tuesday and Annualized GDP from the US on Friday.
Consumer Price Index (CPI) reports from the Euro Zone and Australia on Wednesday and Japan on Thursday.
Interest rate decisions from Japan on Tuesday and the US and New Zealand on Wednesday.
That plus a smattering of consumer confidence numbers from various regions plus the US and President Obama’s State of the Union address should make for a volatile week!
When trading markets that are expected to have a higher degree of volatility, it is important to stay nimble and not “get married” to a position. Remember to cut your losers short and let your winners run!
Happy trading!
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