Tomorrow is the one for all the marbles. The single most important economic announcement for the USD takes place tomorrow: Non-Farm Payrolls (NFPs). Despite today’s very important announcement of US GDP for Q2, the EUR/USD essentially stood pat around 1.56. What is special about NFPs is that, unlike announcements such as rate decisions or GDP results, predicting the outcome is often like finding a needle in a haystack. The unpredictability of this announcement, coupled with its importance, generally make it the largest “market-moving†announcement for the USD.
Given the hazy future of both the USD and the US economy, tomorrow’s results take on added importance. Good results could potentially enable the Federal Reserve to make market movements in the coming months. If, however, the news mirrors the tone of today’s disappointing results, then the Fed is likely to be stuck for the near future. The last time NFPs were announced, Bernanke pushed the results aside, as employment was not his paramount concern. However, should the numbers approach dangerously high levels, actions will likely need to be taken to curb rising unemployment.
The current expectations are around 75,000 new lost jobs. Should that number turn up around 100,000, there could be a rapid reaction by the government. If unemployment starts creeping towards 6% and beyond, we could witness a further crunch in the credit market, as the unemployed usually have more difficulties in repaying their debts. That problem would reverberate through the financial sector, weakening an already fragile industry. And as Bernanke has declared that the strength of that sector is his top priority, it would be in his best interests to do what he can to combat rising unemployment numbers in the coming months.
Upcoming Figures
USD Total Vehicle Sales (Jul)
JPY Vehicle Sales (Jul)
AUD RBA Commodity Index SDR (JUL)
EUR French Purchasing Manager Index Manufacturing (Jul)
USD Change in Nonfarm Payrolls (Jul)
USD Unemployment Rate (Jul)
USD ISM Manufacturing (Jul)
EUR Italian Budget Balance (Jul)
July 31, 2008 No Comments
With mixed news coming out of the world’s remaining superpower in recent weeks, the recent US dollar rally induced widespread befuddlement. With Europe suddenly looking economically worse-off than America, it is easy to understand why the USD has rallied against the EUR. However, the USD has rallied against many of the major currencies, including the JPY and the CHF. In other words, it is not only bad news coming out of the Euro-Zone that is fueling this USD rally. So, the important question is what exactly is causing this rally?
One obvious corollary is oil prices. Having fallen about $20 (or about 15%) in the past week or so, relaxed oil tensions have allowed the USD to achieve solid gains. However, the Forex market is rarely so simple in its explanations of cause and effect, so it would be unwise to solely attribute this USD rally to oil prices. However, the main theory that I am proposing is related very closely to oil prices, whose unprecedented levels are causing rising inflation all throughout the globe.
The hidden culprit, I believe, is foreign government entities. As the bulk of the commodity world – including oil – is priced in US dollars, the weakened state of the USD has been a primary component of the widespread inflation. The issue of permanently lowering oil costs (or oil demand) has not dissipated by any stretch. In lieu of a radical shift in the energy industry, however, is a simpler, temporary solution: a stronger USD. As countries have come to witness the terrible effects that the oil situation is wreaking on their economies, I believe that they are beginning to act in a manner to try to build up the USD.
It is unclear if the past few days are indication of any real changes or if they are just testament to the EURUSD being in a range-bound market. However, if the USD continues to rally and oil continues to fall, then perhaps we could be witnessing a long-overdue correction. Should that occur, inflation concerns could begin to lessen, and then central banks might be able to focus more on fixing other problems. As always, only time will tell.
Upcoming Figures
EUR German IFO Current Assessment (Jul)
EUR Euro-Zone Current Account (May)
GBP Retail Sales (Jun)
JPY Consumer Price Index (Jul)
July 23, 2008 No Comments
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)
June 24, 2008 No Comments
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.
June 23, 2008 No Comments
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
June 16, 2008 No Comments
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.
June 13, 2008 No Comments
Financial markets look to be rebounding after their huge drops in the last couple of weeks. Markets have seen an uptick in value and, and recent news only seems to support that trend. The primary effects of this movement on the foreign exchange market have been twofold: providing the Fed with justification to slow down the easing process and giving Mrs. Watananbe the ability to resume the carry trade.
Let’s look first at how the financial markets have returned to a relative state of calm. The four biggest US banks borrowed $500 million each from the Fed’s discount window yesterday. None of the four actually need the money, but the act is a symbol of trust in and acceptance of the Fed’s recent decision to lower the discount rate. Bank of America also took a new $2 billion stake in Countrywide Financial, the nation’s biggest lender of home loans, a catalyst that drove down corporate bond risk and drove up stocks. Once thought to be on the verge of bankruptcy, Countrywide appears to have survived the crisis, signaling hope for the larger economy. Looking at the broader equities market, the VIX index feel even more yesterday, now sitting more than 40% lower than the highs hit last week.
All this good news might indicate that the Fed doesn’t have to ease rates to the extent that futures traders have priced in. And indications from US central bankers point to the Fed not really wanting to lower rates just now (the moral hazard problem). The Fed has a number of different options as to what it could do in September and October, but it has to realize that the credit problems are still far from over. Commercial paper is still being ignored to a ridiculous degree, and if a wide scale easing program is not implemented, then we could see the problems of Wall Street spread to Main Street.
A spread to the wider economy is not out of the realm of possibility. Layoffs in mortgage companies are coming, and the big banks are already shutting down their subprime units. More troubling is what happens to mortgage rates if the Fed keeps rates steady. Adjustable rate mortgages are set to be re-priced next month, and with credit conditions as they are now, we will see consumers swamped with enormous debt service bills. Consumers are the engine of the US economy, and any slowdown in that sector because of higher bills could be disastrous. That said, if the Fed keeps rates steady, it would also be bullish for the US dollar in the short-term. As corporate profits shrink and equities markets decline, we would see a strengthening of the dollar’s safe-have bid, and USD/JPY, especially, would see the bottom fall out.
But with the stock market reasonably strong and most market participants sure of a Fed funds interest rate cut, the US dollar is seeing some capital outflow and so is the Japanese yen. The dollar-yen hit 117 last night, and the carry trade seems to be returning. Mrs. Watanabe saw in the recent drops the same buying opportunity that hedge funds proclaimed (and quantitative funds have made back most of their losses this week). We should see at least two rate cuts this year in the United States and that should generally prove bullish for the carry trade. But as always, be careful.
August 23, 2007 No Comments
Yesterday, we wrote that when the US sneezes, the rest of the world still gets a cold. Now there are reports from DailFX.com comparing the Asian financial crisis of 1997-98 to the US subprime fiasco. But while the starting points may be similar, there is reason to believe the reactions by international central banks will be different.
In 1997, traders and investors were highly leveraged in risky investments in emerging markets in Southeast Asia. When the Thai government floated the baht, all hell broke loose. In the current situation, traders and investors were highly leveraged into complex debt instruments backed by risky mortgages. When foreclosures reached record highs, the credit market went into a state of panic. If the parallels continue, then we should be looking at multiple interest rate cuts by the end of this year.
But the major difference in this case is that Fed Chairman Ben Bernanke has proven different than his predecessor Alan Greenspan. Bernanke seems to be less inclined to bail out investors suffering in times of falling markets, especially if that bailout would include an interest rate cut. Recent reports on Bloomberg indicate that the Fed has not decided on a course of action with regard to interest rates, instead hoping to give the increased liquidity time to work and the market time to digest the effects of the discount rate cut. Senator Chris Dodd, Chairman of the Banking Committee, even pressed last night for more banks to take advantage of that rate cut.
That comment took place after a meeting with Secretary of the Treasury Henry Paulson and Chairman Bernanke. The meeting was important on a number of different levels. It occurred amid a backdrop of hawkish comments by a couple of Fed officials. Futures traders, who had priced in a 100% chance of an interest rate cut in September, dropped their projections after the meeting to a 50% chance of a rate cut. But one analyst for DailyFX.com still regards it as almost a certainty that the Fed will lower rates by at least 25 basis points (and maybe even 50) during their meeting on September 18.
The interesting thing about this scenario is that even in the midst of all these problems in the credit markets, the broader economy is still doing well. Fundamentally, US growth remains on track, above the standard 2.0% level. Unemployment remains low, and inflation seems to be relatively contained. Even the debt market appears to be balancing itself out, as yields have begun to bounce back (the Fed is even considering accepting commercial paper a collateral for its discount loans). Volatility is retreating, with the VIX down 30% off its 4-year highs last week. Equities trades might cry foul, but the best decision right now might be to leave the Fed Funds rate unchanged. And at least with regard to the foreign exchange market, that is good news for dollar bulls.
August 22, 2007 No Comments
Yesterday, we stated that there would be little empirical effect of the discount rate cut on the international credit crunch. Until the Fed actually cuts the Fed Funds rate (and that will not happen until September at the earliest), markets around the world are going to continue to be wary. The equities markets are sending mixed signals about the health of the financial economy. But the real signal is the credit markets because that is the epicenter of the crisis. And it is there that we see the negligible effect of the Fed’s decision: yields on one-month and three-month bills are skyrocketing.
Asian stocks, led by the Nikkei, rebounded from their horrendous fall last week. But European traders have been more cautious, and the net result on the Continent is a downward trend on equities. The German ZEW survey of analyst sentiment did not help, printing at -6.0 vs. -1.0 expected. Investors have been more accepting of risk than in recent days, as signs of a carry trade rebound have shown up in the market. As evidence of that phenomenon, the yen crosses have begun to edge higher.
But looking at the credit market, there is still reason to remain bearish on international prospects. Commercial paper is being avoided like the plague, not only in the United States but in Europe and Asia as well. As an alternative, investors are rushing to US Treasuries, as they are really the only completely safe investment left. Yields are being driven to multi-year highs. Even the Bank of England, which stood on the sideline all of last week, is beginning to get involved in easing the credit crunch.
Forex sentiment on the US dollar is mixed. The run of Treasuries should provide a strong support for bids at the moment. But the housing recession and credit problems started here, and their final effects are likely to manifest themselves most strongly here. Although that probably means bad news for the entire world, as when the US sneezes, the rest of the world still gets a cold. Foreign exchange traders should remain bearish on the USD/CAD and bullish on EUR/USD and GBP/USD, especially considering the coming Fed Funds rate cut.
But there might be a problem with that scenario as well. Recent reports show inflation in developing countries to be as strong as ever. In China, the only real solution to that is to let their currency appreciate, something the government is still loath to do. In India and Brazil, global demand has prices skyrocketing. Developed economies may be experiencing a credit crunch, but emerging markets around the world may actually be confronted with excess liquidity. A loosening of credit conditions in the United States could lead to an exporting of inflation internationally, and the primary job of a central bank (no matter what Bernanke or any politician might say) is still price stability. Which means we might not see that rate cut in September after all. And then we should prepare for all hell to break loose in the financial markets.
August 21, 2007 No Comments
The Fed cut the discount rate from 6.25% to 5.75% before trading opened Friday morning, and US stocks responded. Green numbers showed up for the first time in weeks. The Nikkei rebounded from its shocking fall on Friday.  But it is impossible to tell right now if the cut will provide a lasting calm to financial markets worldwide.
There is a possibility for the Fed’s decision to have a big, positive effect on the credit market. Much of the liquidity crisis has been a result of the inability of securities firms to obtain loans based on their assets. The Fed has announced that it will take asset-backed securities and mortgages as collateral for the thirty-day (maximum) loans. Securities firms cannot go to the Fed directly, but they can go to banks with their goods and the banks can go to the Fed. In theory, this should solve the problems of the credit crunch.
But if you check out how the discount rate is used in practice, you see that the effect of Friday’s decision may be pretty small. Only $11 million dollars changed hands last week through use of the discount window, a laughably small number. A rate decision cannot really affect the market if no one borrows at that rate.
The real effect of the discount rate cut is probably psychological. The decision signals that the bank is ready to do something to ameliorate the liquidity crisis. The FOMC statement on August 7 was hawkish and preoccupied with inflationary risks. The Bernanke Fed has prided itself on transparency, and in order to leave itself the room to lower rates in September or October, the bank needed to alter that statement. Ignoring the effect of the financial crisis was a rookie mistake, but the Fed fixed that problem without indiscriminately bailing out the idiots of the subprime crisis.
The effect this will have on the credit market depends on the Fed’s willingness to lower rates. If they do not cut the Fed Funds rate in September, we will see a resumption of instability and dollar-bullishness. But the effect on the equities market is a little more complex. Risk aversion should trend downwards, allowing for greed to surpass fear as a market mover. But the fundamentals of the global economy are still troublesome, as the housing problems haven’t exactly gone away. So investors should be wary of volatility; the VIX index registered its highest level even after the discount rate announcement.
For the US dollar, the Fed’s concern with economic growth over price stability is bad news. Traders will now value the greenback’s safe haven status less highly. An easing of the monetary policy should promote growth in the United States over the longer term; we are already seeing American growth outpace European growth for the first time in years. And that phenomenon should continue. But with investors hungry for yield and with the forex market as competitive as it is now, we are looking at a bearish outlook for the US dollar.
August 20, 2007 No Comments
Our monthly reports tell you what countries and currencies offer the best deals. Travel and buy smart!