Forex Market Looks Set For a Move to Settle Out December

December 3, 2012 By Leave a Comment

It is turning into a two-way market as traders look to the USD and JPY to guide them through the early part of December.

The ‘fiscal cliff’ situation is turning into a Eurozone-type affair. Not so much in the negative impact just yet, but more the uncertainty of the outcome. There appears to be an underlying sentiment that an agreement on taxes will be reached, but there is little certainty on when. A recent proposal by President Obama was turned down and there is no doubt that the solution will need to be co-ordinated by both sides. However, the USD will begin to move in a RORO trend as investors turn to the US currency and then away from it.

The Japanese Yen is in a similar position. As it stands, a form of intervention or weakening of the Yen is required to rescue the struggling economy. Presidential frontrunner, Abe, began by talking of his aggressive policies to weaken the Yen, allowing inflation to move to up to 3% and introduce negative interest rates. Recent comments have seen him retract this position, now claiming that he will leave the BoJ to handle what should be its affairs.

December will be an interesting month, particularly with the Eurozone bubbling. (JKM)

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Aint No Sunshine in Spain – outlook continues to darken for the Spanish Economy, Germany lacks sympathy

July 23, 2012 By Leave a Comment

What was meant to be a quiet, sunny day in the financial markets turned into the usual ‘European doom & gloom.’ The Eurozone has managed to keep itself under wraps and out of the media for some time, but bond sales today has changed all that.

Bond sales now pushed through the 7.5% in Spain, as investors demanded higher returns for what they view as a ‘fairly risky’ investment. The 7% level is often seen as the level at which an economy cannot sustain debt. We have seen Greece and Ireland fail as their bond prices exceeded this 7% mark, the market view of Spain is no different. The Spanish themselves are in split on what they can do about their situation. Some within the government claim that they have done all they can with regards to Austerity whilst others, such as PM Rajoy, seem defiant to undertake further Austerity measures.

Germany has stated clearly that they feel that enough has been done to help Spain and that they are reluctant to make any additional contributions to the European Union. The suggestion of expansion of bail-out funds to the banks has been met with a fairly firm ‘absolutely not.’ On one side you can understand the Germans concern on taking on more debt, but on the other, being a bully and pointing the finger won’t help either.

Somehow I get the feeling there is more to come from the Eurozone this week (JKM)

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Moody Britain Doesn’t Feel Like Spending….

July 19, 2012 By Leave a Comment

Britain doesn’t feel like spending and who blames her with David Cameron suggesting that budget cuts and austerity measures may continue into 2020? As economic growth slows and austerity accelerates, it was expected that shoppers would become less active.

Retail sales figures confirmed the desperate state of the economy in the UK and consumers stayed at home. There are expectations to see a rise in retail sales, mainly because of the Jubilee celebrations. Some will blame the weather, as always, others will cite the opportunity to go abroad as another reason. The honest truth is that with consumer spending accounting for the majority of the GDP figure, falling retail sales is a bad indication for GDP figures that follow.

Think back to the most recent MPC minutes. Talk about cutting rates, talk about further expansion and an overall dovish tone. Now add in that GDP figures are likely to show the UK is in a deeper recession. It appears that maybe the MPC and the Bank of England will engage further in stimulus, although the possibility of a rate cut is still relatively low.

Hopefully the Olympics will prove to be the golden ticket for the UK Economy. (JKM)

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Nothing Said – Nothing Done: Bernanke and King chose to say what we have heard before

July 17, 2012 By Leave a Comment

Before I go into what Mervyn King and Ben Bernanke had to say, or rather not say, it is worth mentioning CPI in the UK. CPI has continued to track downward, as predicted by the Bank of England, as it fell again today down to 2.4% and looks set to continue to press down to the 2% target by the end of 2012. Well done Mr King!

Many Forex traders accept that this falling inflation will open the door to more Quantitative Easing by the MPC. As inflation falls, the MPC are given greater room to engage in QE which has shown strong success in the past. With the Eurozone slowing down, there is a continual fear that it will swallow in economies already caught in contagion. There was an expectation that Mervyn King would shed light on the possibility of further QE today, instead, however, he was caught up in the ongoing LIBOR scandal. What is interesting to note on LIBOR is that many international banks have pulled out of ‘quoting’ for LIBOR-type lending around the world for fear of the regulatory footprint. This in turn is expected to cause inter-bank lending rates to increase and become less reliable. Behind the scenes, the Bank of England has been making money available to small institutions and private borrowers to ensure a strong level of liquidity in the lending markets.

Over in the US, Ben Bernanke made his formal address. Bernanke, a known supporter of further easing measures in the US, had his shot to push for a pro-active policy in the US today. Instead, he held back and played his hand the same way the FOMC and the FED would have. We all know they are ready to ‘engage’ and ‘take the necessary steps’; the frustration is that they may not see what the steps are.

The week moves on tomorrow with Bank of England minutes and UK Unemployment. Catch the Morning Note on Twitter for up to date commentary. (JKM)

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Not The Brightest Summer Day – US Retail Sales Continue to Decline, IMF Slashes UK Optimism

July 16, 2012 By Leave a Comment

This is a week of strong economic data and a good week for trading a mid-summer session. With so much economic news having had the headlines, this week is data-dominated for a change.

We begin the trading week with US retails which has become closely linked with US economic policy. As expected, US retail sales came in negative for the third report in a row. This continuous decline in consumer spending will be a big worry for the US economy, which is driven mainly by consumer spending. The discussions of the FED engaging in more than just ‘Operation Twist’ have continued, with most analysts criticising the FOMC and FED for effecting ‘useless’ economic policy. The US are under a little pressure, with deficits and trade balance figures, to engage in mass easing programmes, however, without firm action the US economy will continue to lag behind – as the rest of this week’s data may prove!

Talking about worsening economies, the IMF today claimed the UK economy ‘worsened more than any other advanced economy’ leading to the prospect of growth being slashed… again. The reasons for this slashing are constant and obvious as ever; Eurozone contagion and poor global economic outlook. The Bank of England has acted by expanding QE to £375bn as well as making up to £80bn available in cheap liquidity to smaller institutions and households in the UK. It’s a tough ask to beat Eurozone contagion but the Bank of England appear to be well aware of the ‘clear threats’.

What is obvious from data today is that spending is the key. It may be unpopular to say, but the only way out is spending. (JKM)

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The US Might Be Right…. Although the markets probably know better

July 12, 2012 By Leave a Comment

With a previous slump in the global and US economy, the markets were expecting strong action from the FED in the coming weeks. However, the FOMC minutes showed that, although the FED had the capability to act, it was unlikely that QE would be an option. The worry of course is that ‘Operation Twist’, as a stimulus programme, is unlikely to work as bond dealers won’t let go of their bonds.

In a show of confidence from the US economy, jobless claims fell far more than expected. This is the data that surrounds the number of people making a first-time claim for jobless allowances. The figure shows a reduction by 26,000 in the number of people registering as first-time claimants for unemployment benefits. Of course, this figure doesn’t show the unemployment figure in the US, but does act as a good indication of what to expect. The effect of the auto industry is assumed to have provided slightly skewed data, which may cause a knee-jerk reaction in the Forex markets, although most traders have priced such a movement into the market already.

Going to avoid talking about the euro today, simply because there could be some interesting news shortly… (JKM)

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Spain Squeezes Itself Whilst We Wait on the FOMC to Expand – Tale of two sides

July 11, 2012 By Leave a Comment

Spain, thrown another life line by the EU yesterday, looked to move forward and deal with the on-going crisis. With an extra year in hand to reach Austerity targets, Rajoy in Spain focused on generating more revenue by increasing VAT by 3% and announcing a squeeze of €65bn. Although the increase in VAT may have little effect, the positive steps by Rajoy were well perceived in the market place as bond yields fell. As expected, his plans were met with rejections by Spanish people on the streets in Spain but Rajoy refused to back down and elected to employ a hard hand in dealing with the protestors in reflection of the hard line that he employed in dealing with state of the economy. The good news for Spain is that it looks like the wrath of the markets are shifting toward Italy who are struggling to keep borrowing costs down and despite stating that they won’t require a bailout, they are considering taping into Eurozone facilities to ease the compounding pressures.

Today really is the day for the US with the focus on the minutes of the FOMC meeting due to be released. After the Fed elected to extend ‘Operation Twist’, bond dealers refused to ‘play ball’ and the pressure is back on the FED to act. The forex markets have already priced in QE in the US, with many forex traders looking at a USD downside. When Trade Deficit figures narrowed this morning, many predicted an opening door to QE. The market will be keen to read into FOMC meeting minutes to establish whether QE is a realistic prospect. If not, there could be interesting moves as forex markets will have to price in the effect of Italy asking from the EU, UK potentially ruling out any more QE and the US standing still as the world moves on by.

Have I mentioned gold yet? It is all happening now. (JKM)

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It’s All About Spain – EU Meet Again; This Time to Defy a Spanish Disaster

July 10, 2012 By Leave a Comment

“There is no emergency here, there’s a clear path towards stabilisation” proclaimed Luc Freidman, finance minister in Luxembourg. Well, there were decisions made regarding the stabilisation, although the markets felt they fell short of the action required.

To begin with, Spain was given an extension to 2014 to bring austerity measures into check. It has been clear from previous EU meetings that the ‘great push for austerity’ was a massive failure, pushing many Eurozone countries towards bankruptcy. Eventually, the Eurozone agreed that this austerity-focused approach has its downsides and that there must be an equal focus on growth, illustrated by an extension to the Spanish austerity target.

The ESM as a whole sits on tenterhooks, awaiting final German approval. As it stands, the apparent German commitment, if the ESM were to be approved, is in the region of €190bn – a figure that the Germans will not be too comfortable with. This, of course, will be long debated in German houses and the further the ESM is delayed, the more potential damage could be done in the Eurozone. In the meantime, €100bn has been set aside for the ‘Spanish Bailout’ of which €30bn may well be available in late July if required.

Minutes from the recent FED meeting are released tomorrow. With ‘Operation Twist’ being beaten by bond dealers in the US, there is a focus on what the FED can do next. As much as the US would like to undertake more effective stimulus, the debt ratio in the US means that there are only limited options available. The OECD holds the view that growth around the world will remain stagnant and unemployment will increase… there is no doubt the US will have to come up with something special.

Can’t help reflecting on the fact that Europe, the UK and the US are all waiting on Angela Merkel to ‘agree’ to ending the crisis. (JKM)

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Central Banks Somewhat Powerless – ECB Rate Cut Has Little Effect Whilst Dealers Defy Bernanke’s ‘Operation Twist’

July 9, 2012 By Leave a Comment

Central Banks are meant to be the all-powerful, independent bodies that hold the reigns to our economy. Their job is to guide us gently to safety and away from the hostile environment that the markets exist in. In reality, we have seen Central Banks becoming less and less influential as markets begin to dictate what route the economy should take.

The ECB cut interest rates last week in a bid to reduce the cost of borrowing, which was starving European governments steeped in debt as well as drying small businesses and investors out of the economy. The IMF had called for action in response to Spanish bonds exceeding the disastrous 7% level. Despite a cut in interest rates, little has been achieved with regards to releasing liquidity to the markets and the rate cut has had virtually no impact on bond prices. The rate on the deposit rate facility also fell to virtually 0% which has caused an exodus of investors from the Eurozone. We have seen outpours of the euro in the past and the latest interest rate changes means we could see it all again.

In the US, ‘Operation Twist’ may already have failed to capture the hearts and minds of the people; now it has failed to capture the support of the dealers. Dealers have refused to sell on bonds to the Federal Reserve, believing that the bonds could be quite valuable in the medium to short-term. ‘Operation Twist’ is based on the trade-off between short-term bonds and longer-dated bonds. This is supposed to keep the cost of borrowing down and boost supply in the economy. It looks like dealers have beaten the Federal Reserve on this one. Perhaps it is time for QE in the US.

Looks like Central banks will need to do much more than ‘wink wink, nudge nudge’. (JKM)

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Central Banks Stepping Forward – Rate Cuts in Europe and China as well as Asset Purchases in the UK

July 5, 2012 By Leave a Comment

Finally, Central Banks in Europe, China and the UK took action towards dealing with the imploding financial crisis. Economic data and failed government efforts made it clear to Central Banks that they will have to act to look for growth and push towards a stable economic climate.

The ECB acted in accordance with the wishes of greater financial institutions as it sought to put a lid on rising debt costs in the Eurozone. Bond prices soared as it became obvious that Eurozone nations (apart from Germany) were focused on austerity measures and thus were unable to post growth figures, which resulted in markets buying bonds at unfavourable rates. With the cost of borrowing soaring, the ECB were requested to intervene, which they did by cutting interest rates. The Bank of England also acted today, finally extending Quantitative Easing by £50bn. Inflation threats in the UK have subsided and CPI now appears to be on course to reach the 2% target. However, the UK economy has slipped into a recession and is unlikely to recover without assistance. Previous efforts of Quantitative Easing have been successful in the UK and there is every expectation to see a positive outcome from an expansion to this policy. In a surprise move, China cut bench interest rates to continue to push for growth across a dull economic outlook. With the FED having undertaken further rounds of ‘Operation Twist’, it appears Central Banks are keen to take the necessary steps to move to a more certain economic climate. Criticism across the city is that action needs to be bolder than the current ‘maintenance policy’ that is being adopted by Central Banks, something the Forex market would certainly enjoy.

Non-Farm Payrolls in the US tomorrow, should be an interesting afternoon. (JKM)

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