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Survived the Weekend!
By Mike Conlon | May 17, 2010
One of the biggest fears in the marketplace is holding positions over the weekend as news may come out that may affect an investment and there is nothing investors can do about it until that specific market reopens. This is why many professionals “hedge” their risk by investing in un-correlated asset classes. The forex market is one such market.
As we have seen, the Euro debt crisis not only affects currencies, but it can also affect world stock and commodities markets. Overnight, the Asian stock markets were down as investors rushed to the safety of the Yen and Dollar, as oil prices slid briefly below $70.
While cheaper oil may not sound like a bad thing for consumers, it has historically been used as a proxy for economic growth rates. So when oil is down, the markets are expecting economic slowdowns.
Starting tomorrow, we get a bunch of CPI figures from different regions around the globe that will show where we are in the inflation/deflation debate. It is interesting to note that even though global economies are inter-twined, they can and do experience different degrees of inflation or deflation. So these reports could have a material impact on the forex market this week. Stay tuned!
In the forex market:
Aussie (AUD): The Aussie is lower this morning as the Australian stock market tumbled the most in almost a year on EU debt concerns as most of the Pac Rim markets were lower overnight. Risk aversion was the theme in the overnight session, but risk seems to have rebounded some after the European stock markets opened.
Loonie (CAD): The Loonie is lower on risk aversion, though it has rebounded with the price of oil which traded briefly under $70 overnight. The hope around the world is that the European debt crisis will not spread outside of the EU. Canadian CPI and retail sales figures are due out on Friday, which could foreshadow what the BOC is going to do with rates in June.
Kiwi (NZD): The Kiwi is the biggest loser this morning as the Pac Rim countries were sold earlier on risk aversion. In addition, the NZ government said it would spend $1 billion dollars to repair homes. While not a game-changing development, this helped add to notion of risk aversion.
Euro (EUR): The Euro has bounced back from 4-year lows as it was sold off overnight on risk aversion. As I’ve mentioned before, a lower Euro is going to be good the EU economies, and the market finally caught on and pushed Euro Bourses higher, which then in turn helped stabilize the common currency. CPI figures are due out this week, but expect the debt crises to dwarf the readings. There is also talk (finally) about instituting some sort of fiscal regulation to go along with the monetary regulation in the region. It was this disconnect which largely led to the debt crisis they are facing today.
Pound (GBP): The Pound fell to a 13-month month low vs. USD as UK budget woes are heating up. New British PM Cameron said that they discovered “very bad” spending decisions made by the previous government, which will lead to more austerity and spending cuts than previously thought as well as higher taxes. While this will weigh heavily on the Pound in the short-run, it will help UK manufacturing in the long run.
Dollar (USD): The Dollar is higher, getting a bid from risk aversion despite the Empire Manufacturing number which came in much worse than expected. While this number cannot be viewed alone, it does give insight into how economic recovery is going here in the US. It appears as though recovery at this point may be more demand-driven; we’ll have to see if the US consumer can maintain hungry for goods and services. CPI data due out on Wednesday.
Yen (JPY): Yen started out in the overnight session much higher as there was major selling in the Asian markets overnight. However, it looks like we have survived the weekend and both European and US markets are set to move higher. This is causing some yen weakness as risk appetite appears to be returning. Japanese machine orders were higher, which bodes well for sentiment surrounding economic recovery. In addition, we’re going to get Japanese GDP figures on Wednesday, and their interest rate policy decision on Friday. Don’t expect much variance from the expectations.
With every passing day that the Euro zone doesn’t collapse, the markets regain more confidence. The blue-print for EU recovery is actually pretty simple: enact massive budget cuts despite popular opposition, allow the Euro to depreciate, keep nations from defaulting, and wait for your economic cycle to return.
Having a stronger currency has afforded members of the EU an opportunity to amass goods and services over the last few years. Now that the party is over, it’s time to cut back. This is classic story of the ant and the grasshopper, where there were too many grasshoppers (spenders) and not enough ants (savers). If the EU can pull together and make the tough decisions necessary to return to financial health, then they will see progress maybe not today, but definitely tomorrow.
Especially if world powers band together to tackle the next major crisis or impediment to global recovery: China. The Chinese currency peg as allowed them to prosper on the back of every other nation in the world. This has upset the “natural economic balance” that the free market provides, effectively stealing gains from other regions around the globe. This has caused a massive misplacement of capital as the Chinese attempt to do in 20 years what has taken the rest of the world 100 years.
So due to the EU debt crisis, China is on borrowed time. They should begin to prepare themselves for currency appreciation once the EU is on stable footing. The unfair currency peg has allowed China to amass humungous surpluses, which will be partially offset if they are forced to re-value. Stay tuned!
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