It seems like every day the euro hits another high. At least, that’s been the story of the forex markets for the last five days. A combination of dollar weakness and the market’s belief in the Eurozone economy has pushed the euro to new heights. Yesterday was no different. Bear Sterns officially warned their hedge fund investors that there was no value left in the fund. With fears of the subprime crisis already strong in their minds, traders were worried that foreign investors would seek to move away from US assets. Especially after the recent diversification of foreign exchange portfolios (basically, the selling-off of US Treasuries), the Bear Sterns news triggered a dollar decline. Even the poor German ZEW survey released yesterday did little to stem US losses.
But today’s news may signal a top in the EUR/USD pair. Consumer prices in the United States rose 0.2% in June. It is the smallest gain in five months but still a reversal from the drop in headline PPI seen yesterday.  Core prices also rose 0.2% versus an expected increase of 0.1%. Housing starts also rose 2.3% this morning, providing further support for the greenback. Lastly, Fed Chairman Bernanke is scheduled to give his semiannual report to Congress at 10:30 AM. Today’s data probably eliminate the possibility of interest rate hikes in the near future, leaving Bernanke free to remain hawkish on inflation. That’s why DailyFX.com reports that his speech is likely to be dollar bullish. EUR/USD has been trading within a range of 80 points for the last five days, but if Bernanke’s speech goes as expected, we could see a dollar-positive breakout.
Euro bulls should also be concerned about recent developments regarding the European Central Bank. New French President Nicolas Sarkozy has called for European finance ministers to be granted more influence in monetary policy decision-making. The most direct consequence of such a move would be a loss of political independence for the ECB, and that would not be good news for the euro. German policy makers have traditionally been for an independent central bank, but a recent Bloomberg.com report suggests that German Chancellor Angela Merkel may be coming around to Sarkozy’s viewpoint. ECB President Jean-Claude Trichet has warned against the disastrous consequences of such a development, even suggesting that it may violate the European Commission Treaty. This is an important situation for traders to stay on top of because if Sarkozy is successful in imposing political control upon the ECB, we could see the bottom fall out of the euro soon afterward.
July 18, 2007 No Comments
In the highly volatile forex market the dollar rebounded slightly from a previous falling trend. A government report today unexpectedly showed a record level of U.S. securities bought by foreign investors in May. Holdings in U.S. stocks, bonds, and notes rose to a net $126.1 billion in May, up from a net $80.3 billion in April. This surge is an indication that confidence in the U.S. economy has not diminished. Economic data in May suggested that the housing slump did not necessarily spill into other sectors as had been feared. Economists had predicted that international investors would buy a net $72.5 billion in U.S. long-term securities for June, but in fact a net $105.9 billion was bought.
The dollar traded at 122.30 yen at 9:42 a.m. in New York up from 121.89 yen yesterday. Against the euro the U.S. currency traded at $1.3783, a significant increase from the July 13th record low level of $1.3814. Earlier gains in the dollar were due to a report showing an increase core prices for May. Core prices, which exclude energy and food, rose 0.3 percent giving investors reason to speculate that the Fed will not be cutting interest rates. However, it remains to be seen what Fed Chairman Ben Bernanke will report during tomorrow’s testimony before Congress.
The gains made by the dollar are only short term. Investors should be careful and not overly optimistic as both the European and England Central Banks are about to raise interest rates. European Central Bank Council Member Nicholas Garganas is wary of inflation pressures from stronger than expected economic growth. This would prompt the ECB to raise the interest rate above the six-year benchmark of 4 percent. Likewise, inflation in England exceeded the central bank’s 2 percent target level for a 14th month in June. Interest rates will likely be increased to cool the economy. Â
July 17, 2007 No Comments
The forex market has not been kind to the US dollar recently. Losses have been sustained across the board, and DailyFX.com has even proclaimed the dollar as on the ropes. And there is plenty of data to support that assertion. Retail Sales printed last week at a loss of 0.9% versus an expected gain of 0.2%. That by itself triggered huge concerns in the currency market because of the influence that retail sales has on consumer spending, which is 2/3 of the US economy.
This overall dollar weakness was felt throughout the forex markets. USD/JPY finally saw some real unwinding in the carry trade, further weakened by the decision made by Iran to accept yen in payment for oil. The decision may signal an overall shift away from dollar-dominated international trade. GBP/USD continues to test multi-decade highs, confounding industry “experts,†primarily through the central bank’s hawkish stance on inflation. The commodity currencies continue to kill in the market on the back of high oil and gold prices. Even the euro is threatening record levels, despite the historic unwillingness of the ECB to allow that kind of appreciation.
But investors might be underestimating the resiliency of the US dollar. The recent releases concerning job and wage growth both surprised to the upside, suggesting that the situation surrounding consumer spending might not be as dire as we may think. The New York Fed Factory Index printed this morning at 26.5, surprising a market that was only expected 18. The state of manufacturing nationwide looks pretty rosy and it can only be helped by the weaker US dollar. But that’s still not the main reason that I am still bullish on the greenback.
It’s because of inflation; more specifically, it is because the Fed continues to be worried about inflation. There is a growing movement internationally to focus on headline inflation, instead of core inflation, which is more commonly considered now but excludes energy and some food prices. Oil is still above $70/bbl and according to Bloomberg.com, we might be experiencing the biggest boom in food commodity prices in years. Headline inflation is likely to stay high because of those two factors, and that is likely to keep interest rates up. The only thing the Fed can really control is prices and as long as that is its focus, the dollar will not be lacking in support.
July 16, 2007 No Comments
Recent developments in the forex market do not bode well for the US dollar. Short-term economic data is bearish. The long-term outlook for the US economy is getting worse every day. And the currency crosses are not just about dollar weakness as there is strong support for the other highly traded currencies (even the yen). To exacerbate matters for dollar bulls, there is a movement to unravel the dollar’s preeminent position as the financial medium of choice internationally.
A good place to start is the economic data released today: US Retail Sales. The Commerce Department reported a drop of 0.9% blowing past initial estimates of a drop of only 0.1%. It is the largest one month drop since August 2005. With oil prices above $70 per barrel and home values tumbling, consumers are being stretched further than many economists had anticipated.
The recent numbers put the US economy in a precarious position. Higher job and wage growth should be conducive for a steady pace of expansion. But the retail sales number is particularly significant. Retail Sales accounts for one half of all consumer spending which itself accounts for two-thirds of the economy. A slowdown in this sector could be a harbinger for a larger contraction.  Concern over this matter, coupled with the continuing problems over subprime loans sets the stage for greater bond demand and lower interest rates.
As if that wasn’t enough bad news for the US dollar, Iran has made some very troublesome moves. Bloomberg News has reported the National Iranian Oil Co. just asked Japanese oil refiners to pay for their oil imports ($10.1 billion worth) with yen instead of dollars. With rising tensions with the United States, the Iranians are trying to hedge their risk by limiting their dollar exposure. To this end, Iran is also seeking to diversify their foreign exchange holdings, limiting US dollar reserves to 20% of the total while buying more euros and yen. Central bankers in Venezuela, Indonesia and the United Arab Emirates are pursuing much the same course with regard to their foreign exchange reserves. USD/JPY is now down 0.22% to 122.13. Much of the reason the US dollar has been able to maintain much of its strength all these years despite long-term double deficits is because of its preeminent position as the currency of exchange throughout the world. If that position is being eroded (and it looks like it might be), then the decline of the dollar might be just beginning.
July 13, 2007 No Comments
It’s become a common refrain among traders that emerging markets are the place to be if you want to make real money. Investments in developed economies carry less risk, but in emerging markets, you have the possibility of higher returns. The same is true with currency trading. The forex markets in developed countries are more developed, more liquid, more safe. The currencies of developing countries are more volatile but, if good, also more profitable. And at the forefront of profitable emerging market currencies is the Brazilian real.
The real is up 61.8% against the dollar over the last three years. Over the past six months alone, the real has gained 13.8% against the dollar, the best-performing of all the sixteen most actively traded currencies. As of 9:45 this morning, the currency was valued at 1.8762 per dollar. The reason why forex traders are so in love with the Brazilian real is pretty simple. High interest rates and robust economic growth, the key to any strong currency, are on full display in South America’s largest economy.
Brazil’s high yields should continue to serve as an attracting force for foreign investment. As such, look for the real to appreciate even further in the second half of this year. Brazil has an out-of-this-world 12% interest rate, and even after accounting for relatively high inflation, its real interest rate is 8%.
There are some forex analysts that are preaching caution with regard to the Brazilian currency. There is a sense that the surging demand will produce inflation that outpaces interest rate growth. And that would certainly cut demand for the real and drop it back down to earth.
But I think Brazil is still a great bet. The economy is looking great, with exports of iron ore, soybeans and orange juice to the United States surging. They have a compliant pending with the WTO regarding US farm subsidies, and if they win that case, they should be able to export even more to their largest trading partner. And let’s not forget the fact that Brazil and India have the two most stable governments of all the emerging markets in the world and how attractive that fact is. I am very bullish on the real, and I don’t think we have seen the last of its rise.
July 12, 2007 No Comments
The problems with sub prime mortgages might not be as contained as some observers have tried to claim. The S&P announced yesterday that they may cut the credit ratings on $12 billion worth of bonds backed by sub prime mortgages. And it is increasingly likely that if this decision is made, it will force a reevaluation of all similar assets in the US market. Rather than have the crisis confined to a particular sector, the mortgage situation reveals a poor and rotting basis for the entire economy.
This is bad news for the US dollar. The sub prime fiasco will spill over into the overall market for US securities and bonds. With US dollar-denominated assets less attractive, demand for the US dollar in the forex market goes down. The domino effect does not end there, however. The US market is the most important one globally, and problems there will trigger another bout or world-wide risk aversion. What that means for currency traders, primarily, is an unwinding of the carry trade. The problems with sub prime mortgages and CDO’s in the United States have some currency analysts suggesting that it may not even take an interest rate hike by the Bank of Japan to end the carry trade. Investors have even started to abandon US assets for Japanese ones, driving Japanese bond prices to their highest levels since last August, with USD/JPY nearing 122.00.
Dollar weakness is running rampant throughout the currency markets today. EUR/USD is approaching stratospheric heights with concerns in the dollar compounded by the likelihood of higher interest rates in Europe. A similar situation (although with better fundamental data) is playing out with the cable, as it crashes through 2.0300.  And the irony is this entire situation is that the US economy is generally pretty healthy. According to Bloomberg, growth is at the moderate target level and inflation is under control. Economically, the country is humming along like a trusted old car; it is not going to impress anyone but it isn’t going to give you any problems either. Despite all that, you might want to stay away from the greenback until further notice.
July 11, 2007 No Comments
European Central Bank President Jean Claude-Trichet spoke to a group of students and economists recently on the overwhelming success of the euro. Europe as a whole is definitely going through a boom period right now with unemployment in the continent at a 25-year low and steady growth. Much of that success, Trichet claims, should be credited to the unified economic and monetary policy. I want to spend some time this morning talking about that assertion and how the euro has been good (and bad) for Europe.
Now the economic virtues of the European Union are numerous, but I want to just focus on the currency today. One of the advantages of the euro is that weak economies get to piggyback on strong ones. And by strong ones, I mean Germany. For the last 60 or so years, Germany has been the engine that drives European growth, and its currency, the Deutschemark, has been Europe’s most stable. What the euro does is it allows countries like Italy, which had a notoriously bad currency, to benefit from the international confidence in German stability. Germany’s reputation basically grants a halo effect to the rest of Europe. This is essential for the central and eastern European countries because as emerging markets, their currencies might otherwise be subjected to dangerous volatility levels.
Another benefit is the political independence of the European Central Bank. Before European monetary policy became aligned, the central banks of many countries were headed by the finance ministers in those countries. But finance ministers are politically appointed, and so the economic and monetary decisions were often dependent on political gain or loss. The independence of the ECB from European governments has allowed for more stability in monetary policy. This is an especially important front to pay attention to as French President Nicolas Sarkozy continues to push for more input from finance ministers. Let’s hope that ECB can withstand this misguided effort.
While the stable monetary policy has been mostly a good thing for Europe, it does have its share of problems. A unified monetary policy eliminates some independence for individual areas. If most of Europe is going through a bust cycle, the bank will lower interest rates. But if Belgium is experiencing growth, this decision will lead to inflation in Belgium.
One great example of this scenario is Germany after re-unification. The government faced a need to invest in what used to be East Germany, and increased investment led to inflationary pressures. The German government needed to raise interest rates to combat this threat. France faced no such threats, but had to raise interest rates as well to maintain the integrity of the fixed Exchange Rate Mechanism (ERM). The French economy experienced a recession, and plans for a unified monetary policy almost fell apart eight then.
This problem is evident today as well. Most western European economies are stable and developed. Growth is consistent, but not especially fast. Unemployment and inflation are usually at manageable levels. But the newer EU countries, those from Eastern Europe, are at a different stage in their economic growth. They are, as a whole, growing faster as developing countries. Ideally, the different parts of Europe would have different monetary policies to accommodate the different conditions, but the euro would make that impossible. Sharing a currency means sharing a monetary policy. So while the euro is mainly a good thing, it might not be a good thing for everyone involved.
July 9, 2007 No Comments
The recent report on U.S. jobs growth came in stronger than expected. The forecast for new jobs in June was 125,000, but instead the report showed 132,000 new workers being added. This is below the 190,000 workers added in May, but it beat expectations nevertheless. Wages also increased as reports showed average hourly earnings to have increased by 3.9 percent in June. Further reports showed the unemployment rate to be held steady at 4.5 percent for the third month.
In response to this news of strong economic performance treasury yields have increased as investors are worried about inflation. During this week, the rate on the 10-year note climbed 15 basis points. This has been the biggest increase since the 16 point increase in the week of June 16, 2006. The economy has been doing better than expected amid the subprime mortgage crisis. This has given bond holders reason to believe that there is potential for increases in inflation, and thereby, have increased demand for higher yields. If inflation does go higher than the target level, then the Fed is likely to increase interest rates to cool to economy.
On the other hand, Janet Yellen, President of the San Francisco Federal Reserve Bank, has indicated that the Fed should not change interest rates. According to Yellen, the best way to achieve faster growth while maintaining a low level of inflation in the current state of the economy is by keeping interest rates steady. Despite a very robust economy, Yellen indicates that inflationary pressures are not strong enough to hurt the goods and labor markets. She is more worried about future problems that are yet to come from the subprime mortgage defaults.
It is difficult to say where the value of the U.S. dollar will stand in the next two months. There are mixed opinions among investors and policymakers as to where interest rates will be held. The next FOMC meeting is not until early August.
July 6, 2007 No Comments
The forex market has become used to dollar strength against the yen. This year, the yen is the worst performing currency against the dollar among all the highly traded currencies. But there are conflicting opinions as to whether that trend is likely to continue into the second half of the year. The majority of currency analysts call for a push upwards in USD/JPY, but there are some influential voices calling for caution for dollar bulls.
The Non-Farm Payrolls Report came out this morning, and the US economy added 132,000 jobs last month, versus the market prediction of 125,000. Job growth in May was revised upwards from 157,000 to 190,000. Wage growth also picked up, and unemployment remained at the 6-month low of 4.5%. Primarily, this data should signal a rebound in consumer spending, and it confirms the anti-inflationary bias for the Fed. At the very least, growth no longer seems to be a concern, and US interest rates are not likely to go down.
During their meeting last week, the Fed said that the low jobless rate created the potential for inflation. They were expecting a moderate pace of growth, with most economists predicting growth in 2.75% in the second half of this year. Seeing as how today’s NFP Report validates this thinking, the Fed’s hawkish stance on inflation is likely to continue.
And that spells bad news for the yen. Early morning trading today saw the dollar gain the most in three weeks against the yen. While much of this characteristic of overall greenback strength across the board, it also could signal a resumption of the USD/JPY carry trade after some time of profit-taking. The interest rate differential and the differing pace of consumer demand in the two countries reinforce the carry. The yen is also hurt by rising US yields, as treasuries took a beating with ten-year yields going to 5.18%. Also important to note, the ten-year bonds rose faster than the two-year bonds, suggesting an uptick in expectations of inflation.
But dollar bulls are not without significant opposition in the currency market. As first reported by Bloomberg.com, Federal Reserve Bank of San Francisco President Janet Yellen is somewhat dovish on interest rates. She advocates leaving interest rates unchanged for a long time, as that would best encourage growth and discourage inflation. Yellen warns carry traders specifically, arguing that “‘carry trades’…expose investors to ‘substantial exchange-rate risk’ that they may be underestimating.†The low borrowing costs in Japan have created an untenable situation.
Standard Chartered Plc, a London-based bank, does even further in its analysis of a possible carry trade unwind. Currency analysts at the bank argue that volatility in the dollar-yen exchange rate will decline as the interest rate differential closes up. Standard Chartered claims that by the end of the year, US rates will decline 0.25 percentage points to 5.00% and the overnight lending rate in Japan will increase 0.25 percentage points to 0.75%. These two moves, when coupled together, will kill volatility in the currency pair. The final diagnosis is that the dollar will fall to 122 yen by the end of the year.
When the analysis leads to two divergent positions (as we have now), how can we profit? The good news is that most of the disagreement is over the long-term positions of the two currencies. In the short-term, there is a forex market consensus of dollar strength. As Boris Schlossberg of DailyFX.com points out, retail investors in Japan just keeping hopping aboard the carry trade gravy train. We should see the pair test 125.00 soon, and possibly break the resistance on the back of today’s positive data.
July 6, 2007 No Comments
As U.S. interest rates remain unchanged at 5.25% for the 8th straight Federal Reserve meeting, and as terrorist arrests in London spur worldwide concern, the U.S. dollar has dropped against major currencies. The dollar fell 0.5% to 1.3605 per euro and 0.6% to 122.44 yen. Investors have become more risk-averse with the recent geopolitical events. As a result, demand for the yen and the swiss franc, a haven for security, has increased. According to Derek Halpenny, senior currency strategist at the Bank of Tokyo-Mitsubishi UFJ in London, interest-rate differentials will continue to move against the U.S. dollar as a result of the unchanged U.S. monetary policy. Â
This trend may continue in the long run. Despite recent positive reports of increased retail sales and job growth, investors are worried that losses from hedge funds owning subprime mortgage bonds will slow economic growth. This increase in risk aversion has caused an increase in holdings of risk free debt. Treasury holdings are at 35% of funds overseeing $315 billion in bonds. This is 1% higher than holdings in corporate and sovereign debt for the second consecutive week. In the previous month for the first time in a year, U.S. treasuries have outperformed corporate and emerging-market bonds.
Investors like Bill Gross of Pacific Investment Management Co. are speculating that the housing slump will restrain the economy for the rest of the year. The subprime mortgage crisis is the worst since 1991, and the effects may even be felt next year as well. Investors are speculating that the Federal Reserve will be forced to lower interest rates in the long run in order to induce consumption.
What will lower interest rates mean for the value of the U.S. dollar? Lower interest rates will cause a drop in the value for the U.S. currency. If the Fed does in fact decide to lower interest rates, in the attempt to avert further dampening effects on the economy by the housing meltdown, currency traders will decrease demand for the U.S. dollar. A decrease in demand in will bring down the value of the currency. Â
July 2, 2007 No Comments
Our monthly reports tell you what countries and currencies offer the best deals. Travel and buy smart!