Category — Fundamental

With this week’s ECB’s decision all but official, a more important question looms: what’s next? The ECB is a bank whose primary focus – witnessed in both its charter and its past actions – is price stability. Despite poor economic performance in recent months, the ECB essentially has to raise rates this week, as the Euro-Zone’s current inflation level is double the target of 2%. While President Trichet and his peers may pray that a single, small hike will be enough to curb rising inflation, the more likely scenario is that the policy move will not have a huge effect. So, the question remains: what’s next?

What’s next is a big decision. The age old debate (or as old as central banks have existed) between pursuing policies that facilitate growth or inflation is front and center in many prominent economies around the globe, and Europe is no exception. Rising energy costs have not helped the problem, leading some analysts to publically worry about stagflation rearing its ugly head. In a perfect world, high growth rates allow central banks to raise rates in the never-ending war on inflation (e.g. Australia). However, growth is unquestionably slowing all throughout Europe, and many fear that a rate hike could severely impact many of the smaller economies in the Euro-Zone.

In the long-run, Trichet (or whoever is in charge of the ECB in the future) has no choice; the ECB must focus on price stability first and foremost. However, in the next six months, what the ECB will do is anybody’s guess. One popular school of thought is that the ECB will employ a wait-and-see attitude; they will raise rates now and then observe the resulting economic data for a few months. Others feel that the ECB’s mandated focus on inflation will lead to a series of hikes, regardless of the costs. For many years, West Germany’s Bundesbank produced astounding economic prosperity, a result that many attributed to the Bank’s dedication to price stability. The ECB is a descendent of the Bundesbank, and so in my mind, I think that the ECB will not be done raising rates for the year after this week.

Of course, they could shock the world and not raise rates. You never know what will happen in the world of foreign exchange…

Upcoming Figures
AUD Reserve Bank of Australia Rate Decision
USD ISM Manufacturing (Jun)
USD ISM Prices Paid (Jun)

The markets are closed, Wall-E is opening in theatres, and by now most people have at least a foot out the door for the weekend. After writing all week about the USD, the Fed, and about how I am a better forecaster of market movements than my colleague John, I have decided to do the second piece in the Random Country Report Series. Excluding Antarctica and its rather inactive central bank (please see below), the continent with the least amount of coverage in the world of foreign exchange is Africa. So today let’s examine a country known for its history, architecture, and lamb kabobs: Egypt.

Egypt has come a long way from the time of the pharos and the pyramids, being one of the first – and longest lasting – republics in the Muslim world. Its currency is the Egyptian Pound (EGP), which is currently trading at 5.35 EGP to 1 US Dollar and 8.4479 EGP to 1 GBP. Today the Central Bank of Egypt raised interest rates to 10.5%, and unlike many of the major banks around the world, promised to actively combat inflation. If necessary, the CBE promised to bring rates even higher in the future should price stability (inflation) continue to be a problem.

The US Federal Reserve, along with other prominent central banks, is confronting the problem of simultaneously rising costs and slowing growth. As a result, it left rates unchanged the other day. Fortunately for Egypt, however, growth has not been a problem. In fact, the Egyptian economy is expected to expand more in this year than in 2008. As a result, the CBE has what would be seen as a gift by many other central banks: the chance to fight inflation without worrying about growth.

There are, of course, some problems in the Egyptian economy. Inflation is right under 20%, yet this problem is at the forefront of the CBE’s conscience. Many Egyptians also live with a low standard of living – a problem that the government has not yet been able to fully remedy despite recent moves such as wage increases. Another area of worry is rising food costs, as Egypt is the worlds’ second leading wheat importer due to their inability to grow the crop in the bleak Sahara Desert. As commodity prices continue to rise, Egypt should become concerned about their need to import so much wheat.

Still, in all, the outlook seems solid for Egypt. The International Monetary Fund (IMF) has rated the country as being one of the top countries in the world undertaking economic reforms, as they have taken steps in the past decade to become more transparent and liberalized economically. Politically, despite having the largest population of any Muslim country, Egypt is a voice of moderation in an ever-volatile region. By avoiding political turmoil and pursuing sound monetary policy, Egypt has produced consistent growth, and should be seen as a model for nearby economies that also don’t have access to enormous natural oil resources.

Antarctica’s Central Bank’s most recent meeting:

As I have explained before, there are some days when there is little of note in the FOREX world, so I get the chance to research a random economy somewhere in the world. Today (and I’m sure tomorrow) is not such a day. Everyone’s favorite superpower, the United States of America, came out with important economic data today, and will have even more important data tomorrow. US Consumer Confidence was lower then expected, and the lowest it has been since 1992. While some analysts are often critical of the fickle nature of this statistic, it nevertheless measures an important aspect of the market: what consumers are thinking about the economy. Partially as a result of this data, but mostly because investors are really waiting for tomorrow’s events, the US Dollar did little today.

A day after bad news came out of Europe’s largest economy, the second largest released better then expected data. Yesterday Germany announced that a measure of business confidence was lower than expected, but today Consumer Spending results in France surprised many by showing solid results. The Euro, like the USD, moved little today relative to the other major currencies. It is very likely that the news coming out of the US tomorrow (see below) will send currency pairs flying even if the USD is not in the pair. If the announcements fall into line as expected, the EUR should enjoy a good day as investors move away from the USD.

If you have an opinion about what the FOMC will say, tonight is a great time to get in before the market moves tomorrow. If you are unsure, I encourage you to try to find out what has been announced as soon as you can, and then look to jump on board if the market seems to be moving. Good luck!

Upcoming Figures
EUR German Consumer Price Index (Jun)
EUR Italian Retail Sales (Apr)
USD Durable Goods Orders (May)
USD New Home Sales (May)
USD Federal Open Market Committee Decision @ 2:15PM EST
NZD Current Account Balance (Q1)
NZD Current Account Deficit – Gross Domestic Product Ratio (Q1)

In some weeks, the news highlight in the FOREX world is an Italian report on car sales. Other weeks, the major headline is that Nigerian workers are striking against the oil companies. However, this week, there’s plenty to be excited about, especially the most important gathering since the meeting of the Five Families: the U.S. Federal Reserve Open Market Committee Meeting.

Ladies and Gentlemen, start your engines.

Ok, perhaps this is not quite as important as Don Corleone and Co., but in the FOREX world, there are few planned events that can have as much impact as this one. Ever since Fed Chairman Bernanke announced an end to rate cuts a few weeks ago, anyone and everyone has circled this week on the calendar. Most analysts, traders, and “people in the know” are not anticipating a rate change, which would be the first time that FOMC has met and not done so in some time. However, despite a general sense of confidence that rates will be held constant, everyone connected to the market will be reading between the lines to try and get a glimpse of the Fed’s future moves.

With energy costs going nowhere but up, it has been argued that the Fed’s main concern might be that issue instead of their stated focus: inflation. Should the meeting’s outcome go as forecasted (no rate change), that would be a signal that inflation is not the only problem that the Fed is attempting to solve. If inflation is rearing its ugly head, the standard call out of the Central Bank’s Playbook has been to raise rates. However, there is a general worry that such a hike would only aid energy prices in their climb. As a result, most are predicting that the Fed will stand pat for now.

Though not this week, the ECB will be meeting soon, and will face a tough decision of their own. While the Fed only said that they are done cutting rates, the ECB has stated that they plan on raising rates. The problem with President Trichet’s plan, however, is that the economic data reported since that announcement has indicated that a rate cut might not be the smart move. Growth in the Euro-zone is slowing, and unless Trichet wants to play chicken with the economy and see who backs down first, a rate cut is being seen as less and less likely. However, Trichet is considered one of the most hawkish heads of a central bank in the world, so anything is possible.

Some days, I know exactly what I’m going to write about. On days that I don’t, I usually peruse through the news, trying to find something that piques my interest. Today’s top headlines in the currency sector centering on the US Dollar not doing anything as there’s little to trade on… thanks for the help world. So, I have decided that on days such as this, a day with little of note on the economic calendar, I would focus on a country (and its currency) that rarely gets much discussion in the world of FOREX. Today, that country is India.

For those of you who were unaware, the currency in India is called the rupee. Should you be traveling to India soon, it would be in your best interest to know that the USD is currently worth about 43 rupees. The country is dealing with high inflation, rising energy costs (who isn’t?), and a weakened rupee. As a response to all three, the Reserve Bank of India recently increased its benchmark repurchase rate and raised interest rates. As a result of this responsible policy move, many analysts now expect the rupee to strengthen against the USD to around 41:1 by the end of the year.

Like many other countries around the world, India has suffered from crude oil prices. As they import about 70% of their oil, their rupee has suffered in kind. Still, not all is bad, as India has produced very impressive growth over the past decade. While that growth is crucial to India’s long term development, the Reserve Bank of India has sent a message that it is willing to sacrifice some of that growth today for improved economic indicators tomorrow. Unlike its neighbor, China, whose policies have led to – and sustained – very high inflation, India has decided to confront the problem.

As for the long term, most analysts remain optimistic. With its enormous population, the economic potential for India is still very strong. The country does sustain a sizeable current account deficit, but much of this could likely be attributed to energy costs. Personally, I applaud India’s commitment to keeping its inflation and rupee at acceptable levels. Instead of just continuing to focus on growth regardless of the long term consequences (ex. China), India is positioning itself to experience excellent growth for a long time by fixing its economic problems now.

Upcoming Figures
CHF Trade Balance (May)
CHF Swiss National Bank Rate Decision
GBP Retail Sales (May)
CAD Consumer Price Index (May)
USD Phildelphia Fed Business Survey (Jun)

Last week I mentioned that though the G8 conference would impact the US dollar in the short term, the ultimate fate of the USD will ultimately be determined more by Bernanke than by anyone else. The Group of Eight’s meeting has come and gone, offering little good news for the USD. In the FOREX market, that “little good news” led to bad news for the USD, as the greenback surrendered some of the territory it had gained last week. So with the conference in the rear-view mirror… let’s look ahead.

In his most recent column, Robert Novak wrote that despite his publically hawkish stance, Bernanke is more concerned with growth rates. Furthermore, Bernanke feels that oil and gasoline prices, if they continue to rise, could lead to the dreaded state of halted growth in addition to rising inflation. Assuming that what Novak is reporting is accurate, it would seem that Bernanke’s pronouncements last week were a charade. In other words, Bernanke isn’t likely to walk the walk. However, this might not be a bad thing. Many see the economy as not yet ready for a rate hike, and so perhaps holding rates constant for the next several months would be the best thing for the US economy.

The USD has ended the rally it began last week, and while the short term prospects are dimmer than they were several days ago, the jury is still out regarding the long term. On the one hand, disappointing economic data that keeps coming out (most recently in the US: poor manufacturing results) would indicate that the USD is in for more stormy seas. However, analysts are noting that it has been years since people have held such bullish opinions about the USD. Many feel that the dollar is “due,” meaning that after taking its lumps for years, it is poised to finally recover. With the Saudis agreeing to pump more oil, perhaps the stars are aligning for a USD recovery. However, it’s hard to know the future for certain. As it is written in one of the Harry Potter books, we humans are not very good at reading the stars.

Upcoming Figures

AUD Reserve Bank of Australia’s Board Minutes (Jun)

EUR Italian Trade Balance (Euros) (Apr)

GBP Consumer Price Index (May)

EUR Euro-Zone Trade Balance (Euros) (Apr)

USD Current Account Balance (Q1)

USD Housing Starts (May)

JPY BoJ to Publish Minutes of Board Meetings

Fundamental analysis can be daunting, but this is what drives the market. I don’t care how many doji’s or buy signals Deutche Bank saw on the eve of the Russian Debt default. I guarantee they where glued to International news stations not there computer’s technical chart analyzers. That being said, where do traders locate news events that move the market? DailyFX has a great economic calendar to show you what events are coming up and what the numbers are. These numbers move the market and each event is marketed with a simplistic high, medium, low rating as to whether or not traders place trades regarding the outcome

The Fed, the ECB, and the Swiss National Bank (SNB) all have websites. Google them and you won’t be disappointed. I must admit like all things European the ECB and SNB website’s are aesthetically pleasing, but they both hold a plethora of information. The information on these site’s can give you crucial information, easily access statistics and other information that will help you make informed currency trades. The Fed website on the other hand is a lot like the mid-west, boring but full of endless bounty. There is no window dressing and it gives you links to libraries of statistics complied by the (BEA) the bureau of economic analysis. There are the minutes from each FOMC meeting and statements made by Fed Governor’s regarding the feds directives.

All the sites have a mission statement of each central bank, while the Fed’s is more fluid and allows the Governors to tailor monetary policy to each situation. The ECB in stark contrast state in the second sentence of there mission statement underline that they will ensure price stability at all costs. The SNB otherwise known as the central banker’s central bank have objectives are a hybrid like the Fed, they acknowledge that price stability is key but other developments may prevent the feasibility of this objective. Basically the SNB and the Fed are free to conduct responsible monetary policy at their discretion. While the ECB’s independence is mandated by the Maastricht treaty they are treated like children when it comes to monetary policy. Germany made this a pre requisite for signing the treaty because they feared the monetary irresponsibility of there Southern brethren notably Italy and Spain. The ECB must keep inflation below 2%, good luck in the coming years. Good for traders to know because over the last year the Euro has killed the dollar. I’m not going to give you a homework assignment that will benefit you in your trading but if I’m placing money on the Euro, US dollar, or Swiss franc then I’d want to have an intimate relationship with their central banks.

The surprising rally of the US Dollar this week has inevitably led to what seems like everyone and their niece predicting just how long it will last. My 10-year old niece doesn’t like the dollar, and though she’s a very bright girl, please note that she based her reasoning on the Canadian dollar looking a lot cooler than its American counterpart. Given that for several years the USD has done little but suffer, it’s of little surprise that few people are giving the greenback a chance.

Predicting the future can be a tricky business, so it’s important to follow some upcoming events that could determine the USD’s long term prospects. Some people throw caution to the winds regarding the future, such as Doc Brown, “Roads? Where were going, we don’t need roads.” In the world of Foreign Exchange, however, should you find yourself without a Flux Capacitor, it is very important to look at these events. They have guided currencies for as long as the market has existed.

In the short term, the upcoming G8 meeting could set the tone for the USD’s future. Should the USD become a focal point at the meetings (as it is expected to), one possible outcome would be a new dedication to strengthen the USD. There is a history of nations working to correct currency weaknesses, such as the Plaza Accord. However, while that agreement was aimed at the US facilitating the recover of the Japanese Yen, the tides have now turned.

Two more reasons for foreign countries to aid the USD are that commodities (such as oil!) are generally priced in dollars, and that the many countries holding dollar reserves would love to see those reserves have higher value. However, the results of the G8 will not be the only piece in shaping the USD’s future. The most important factor rests in the hands of Chairman Bernanke, and whether or not he can walk the walk as much as he has talked the talk regarding interest rate hikes.

Upcoming Figures

CHF Adjusted Real Retail Sales (Apr)

EUR Euro-Zone Consumer Price Index (May)

USD Net Long-term TIC Flows (Apr)

USD Total Net TIC Flows (Apr)

JPY Tertiary Industry Index (Apr)

Leverage allows any trader to control large amounts of capital; it is every trader’s best friend and worst enemy. We all realize that investing involves risk, and no one makes money without some degree of risk. That being said excess risk has another name: margin call. This isn’t the CME were your broker gives you a courteous call saying “pay up sucker,” no this is online currency trading. Or maybe you’re so confident in your trades that you never lose. Probably not if you’re like the rest of us then listen up, anything over 8:1 leverage is not smart. Some term it irrational exuberance, froth, or undue risk I call it stupidity. Moral of the story is, don’t swing for the fences. Chances are you’re a new trader and you have this wow I can control 1 contract with one thousand dollars feeling. Let me tell you there is only one George Soros, and you’re not him. Listen kimosabe go 100:1 and odds are tomorrow you will be margin called and have to explain to your self how you lost $1,000 in less than an hour. What’s worse you’ll stop trading leaving all the profits to the gnomes of Zurich.

Here are some rules to live by the first rule is 100:1 is a sucker bet don’t do it. The second when you start on margin know Wall Street almost never goes above 8:1. Be humble because the currency market is a 24 hour market so you’re competing with the legendary gnomes of Zurich, the PRC, and hedges funds on Wall Street. While something may seem obvious to you, there is probably a counter argument developed by someone with a lot more money to allocate and therefore leverage than you. We can’t forget what Keynes said regarding the market, “The market can stay irrational longer than you can stay solvent.” Do your self a favor stay solvent long enough to gain market experience because once you’ve become hooked it’s better than heroin and you have a good chance of making money too. The best way to stay solvent long enough to enjoy the market is let me hear you yell, “…..” you should know but if you’re the slow type it’s supposed to be, don’t over leverage.

Something monumental has happened: the US dollar has done well, and it didn’t require a divine intervention.

With most of the trading week gone, the USD has walked all over the Euro to the tune of over 2%. And perhaps the most interesting detail was that this rally did not start on the heels of some unexpected economic recovery; it started with Bernanke finally utilizing his clout. When he became Chairman, he stated that inflation would be his foremost concern. Two years later, after letting Wall Street bully him into a series of rate cuts, Big Ben has finally dug his heels into the sand.

Among other events, this week has witnessed dramatic rise in US unemployment, the ECB announcing that a rate hike is coming soon, and oil prices hovering around all-time highs. So, what does Bernanke do? He goes out and says that inflation is his top priority, the US economy will avoid recession, and the USD’s strength is also a focus for the Fed’s future actions. Are things actually turning around? Will the Fed really raise rates soon? I don’t think that anyone is certain… but that’s largely irrelevant. What is relevant is that Bernanke put on a brave face and exuded optimism, and the markets responded in a big way.

Elsewhere, the big players in the Euro zone are still trying to figure out what the best move is. First Trichet said that hikes are coming, and then several other ECB figures have clarified that announcement. Now the French Finance Minister has publicly pleaded with the ever-hawkish Trichet to rethink his coming actions. The uncertainty and lack of unity over the future (unlike the Fed, which has displayed a unified stance) has likely been a contributing factor to the USD sticking it to the EUR. As we move towards the close of the week, it will be interesting to see if Bernanke’s words (along with any forthcoming data – see below) are enough to fuel the USD’s surge.

Upcoming Events

EUR Italian Consumer Price Index (May)

EUR Italian Consumer Price Index – EU Harmonized (May)

USD Consumer Price Index (May)

USD Consumer Price Index Ex Food & Energy (May)