The EURUSD extended its two day advance during the overnight trade to reach an intraday high of 1.3730 amid speculation of an Irish bailout. At the same time, strong U.S. manufacturing figures yesterday are fueling investor sentiment. Meanwhile, International Monetary Fund Managing Director Dominique Strauss-Kahn spoke at a conference in Frankfurt today and said that the Greek government is bold, and is doing what is needed, while adding that growth in Europe is very low. At the same time, German Finance Minister Wolfgang Schaeuble said that Europe can act “any time” to avoid a crisis, and noted that consequences of a sovereign crisis would be “dramatic.” Indeed, the EURUSD has reversed course at the 50.0 percent Fibonacci retracement on the 11/25 to 6/7 downswing, with the next key level of resistance at 1.390, which is the 61.8 percent retracement. Going forward, we may witness price action test this level as risk appetite regains its footing. However, the euro will likely come back under pressure in the coming months as governments implement tough austerity measures in order to battle their high budget debts.
The economic docket during the overnight session was fairly muted as the only notable scheduled event was German producer prices. Figures rose 0.4 percent in October after climbing 0.3 percent the month prior amid expectations of 0.3 percent. At the same time, the annualized rate advanced 4.3 percent. Taking a look at the breakdown of the report, producer prices excluding energy climbed 0.2 percent from the previous month prior, while the heating oil component tapered the overall advance and dropped 2.3 percent. It is worth noting that the annual price of capital, consumer, and basic goods push higher for the month, indicating that domestic demand is strengthening. The report is of great importance due to the fact that higher producer prices are a leading indicator of inflationary pressures because producers tend to pass higher costs onto households. Looking ahead to next week’s trade, developments from Ireland will likely dictate price action as the calendar is relatively light.
The British pound extended yesterday’s advance and now looks poised to test 1.62 as technical indicators continue to point to further gains in the pair. The slow stochastic has crossed over to the upside, while the pair recently bounced off of the rising trend line dating back to May. The fundamental developments from the U.K. as of late have been better than expected and validate additional gains in the currency for the near term. Annualized inflation topped expectations in October, while the PMI manufacturing report rose to the highest level since July of this year. At the same time, the BoE has yet to follow the Fed and add onto their asset purchases, and the recent minutes of the meeting showed a three way split for the second consecutive month. Increased concerns surround Irish woes have rattled the U.K. due to the fact that banks in the region have a larger exposure to the Irish financial system than any other country. So long as Irish concerns are pushed to the side for the time being, market participants should not rule out further upside risks in the British pound heading into December.
The greenback weakened against most major currencies during the overnight session and may continue into next week’s trade as forex markets increase their appetite for risk. As the economic docket remains rather light for Friday, sentiment is likely to dictate price action for the major currencies, but speeches from BoE’s Paul Tucker and ECB’s Constancio could spark volatility in the currency markets as investors weigh the outlook for future growth.
By Michael Wright, Currency Analyst
19 нояб. 2010 г.
Aussie Gains on Outlook for Rates & Ireland’s Bailout
The Australia dollar rose today as the speculation about the possible bailout for Ireland increased demand for the higher-yielding assets, increasing the bets on the rates hike by the central bank.
Ric Battellino, the Deputy Governor of the Reserve Bank of Australia, said that the inflation pressure will likely persist. He stated that “over the next couple of years as a result of the resources boom, the challenge will be to manage the economy in a way that keeps economic growth on a sustainable path, with inflation contained” and that the strength of the nation’s currency is “a natural consequence of a resources boom and, at the aggregate level, is helpful in allowing the economy to adjust”.
The speculation about the Ireland’s bailout really spurred the markets today. The Standard & Poor’s 500 Index rose as much as 1.7 percent. The MSCI Asia Pacific Index gained 1.1 percent after four days of losses. It’ll be interesting to see how long the optimism will persist.
AUD/USD rose from 0.9794 today as of 23:40 GMT. EUR/AUD went down from 1.3807 to 1.3786. AUD/JPY rallied from 81.47 to 82.62.
If you want to comment on the Australian dollar’s recent action or have any questions regarding this currency, please, feel free to reply below.
Ric Battellino, the Deputy Governor of the Reserve Bank of Australia, said that the inflation pressure will likely persist. He stated that “over the next couple of years as a result of the resources boom, the challenge will be to manage the economy in a way that keeps economic growth on a sustainable path, with inflation contained” and that the strength of the nation’s currency is “a natural consequence of a resources boom and, at the aggregate level, is helpful in allowing the economy to adjust”.
The speculation about the Ireland’s bailout really spurred the markets today. The Standard & Poor’s 500 Index rose as much as 1.7 percent. The MSCI Asia Pacific Index gained 1.1 percent after four days of losses. It’ll be interesting to see how long the optimism will persist.
AUD/USD rose from 0.9794 today as of 23:40 GMT. EUR/AUD went down from 1.3807 to 1.3786. AUD/JPY rallied from 81.47 to 82.62.
If you want to comment on the Australian dollar’s recent action or have any questions regarding this currency, please, feel free to reply below.
17 нояб. 2010 г.
Easing Concerns Over Ireland Lift Risk Appetite, Pressure Buck
The dollar index suffered its first daily loss in the last five sessions on Wednesday as stabilizing equities lifted risk appetite and fears began to ease regarding Ireland’s obstinacy to accepting an aid package. The index started the day brightly enough as concerns regarding Ireland’s ability to manage its financing needs alone put the euro under pressure and lifted the buck. However, risk appetite was given a boost early in the North American session from solid consumer prices data and rising equities putting the greenback under the cosh. The index managed to pare its loss a tad into the NY close as US stocks gave back their gains as financials slipped dragging down the broader sentiment. But the dollar got a further knock late in the day as expectations started to rise that Ireland would in fact accept aid from the EU and IMF, lifting the euro once again. The easing of sovereign debt fears early in Asia helped Chinese and Japanese stocks to consolidate after the previous sessions weakness, keeping the pressure on the buck.
Looking ahead, as we approach the European open the index is under mild pressure, but at present this looks little more than consolidation after solid gains over the past couple days. We will only begin to be concerned about the door being opened to further losses in the index if we breach the 78.00 level, which is still some ways off. We therefore maintain our bullish slant in the index and favour this up-move to continue up above the psychologically important 80.00 level and encounter some resistance around 81.00.
Looking ahead, as we approach the European open the index is under mild pressure, but at present this looks little more than consolidation after solid gains over the past couple days. We will only begin to be concerned about the door being opened to further losses in the index if we breach the 78.00 level, which is still some ways off. We therefore maintain our bullish slant in the index and favour this up-move to continue up above the psychologically important 80.00 level and encounter some resistance around 81.00.
New Zealand Dollar Advances as Producer Prices Rise
The New Zealand dollar strengthened today against its US counterpart after the report showed that the producer prices rose more than the economists anticipated, causing the speculation that the central bank may raise the interest rates further.
New Zealand output producer prices rose 1.2 percent in September, while it was expected to increase only by 0.6 percent. The PPI input rose 0.7 percent, compared to the median forecast of the 0.4 percent growth. Previously the New Zealand dollar fell on the speculation that China, the biggest trading partner of New Zealand, would take steps to curb its inflation.
The experts say that the rising prices suggest that the inflation pressure still exists in New Zealand. This may give the reason for the Reserve Bank of New Zealand to raise the interest rates, which are already high at 3 percent compared to such countries as the US and Japan, in the beginning of the next year.
NZD/USD went up from 0.7676 to 0.7705 as of 23:45 GMT today, following its decline to the intraday low of 0.7631. EUR/NZD rose from the opening level of 1.7551 to 1.7566 after it advanced previously to 1.7662.
If you want to comment on the New Zealand dollar’s recent action or have any questions regarding this currency, please, feel free to reply below.
New Zealand output producer prices rose 1.2 percent in September, while it was expected to increase only by 0.6 percent. The PPI input rose 0.7 percent, compared to the median forecast of the 0.4 percent growth. Previously the New Zealand dollar fell on the speculation that China, the biggest trading partner of New Zealand, would take steps to curb its inflation.
The experts say that the rising prices suggest that the inflation pressure still exists in New Zealand. This may give the reason for the Reserve Bank of New Zealand to raise the interest rates, which are already high at 3 percent compared to such countries as the US and Japan, in the beginning of the next year.
NZD/USD went up from 0.7676 to 0.7705 as of 23:45 GMT today, following its decline to the intraday low of 0.7631. EUR/NZD rose from the opening level of 1.7551 to 1.7566 after it advanced previously to 1.7662.
If you want to comment on the New Zealand dollar’s recent action or have any questions regarding this currency, please, feel free to reply below.
British Pound Remains at the Crossroads Ahead of the U.K. Retail Sales Report
Retail sales in Great Britain are expected to rise 0.4 percent in October after falling 0.2 percent the month prior. At the same time, sales excluding auto fuel are estimated to rise 0.2 percent during the same period. Indeed, this may be the last push higher heading into the Christmas season. A rise in tomorrow’s figures will be the first increase since July of this year where the National Statistics in London said that sales rose 0.9 percent. I expect non specialized store sales to extend September’s advance, while clothing and footwear sales will likely reverse last month’s decline.
In the upcoming months, retail sales are expected to come back under pressure as higher value added taxes will weigh on household spending. These measures are estimated to begin in January. At the same time the massive spending cuts recently announced by the government will also put downward pressure on retail sales. The fiscal tightening measures proposed by Chancellor George Osborne marks the largest cuts in decades, and will in turn weigh on growth. All in all, a reading exceeding expectations will bode well for the British pound, but the advance may be short lived as sales and overall growth in the region will likely come back under pressure in 2011 amid tough austerity measures by the government in order to battle its high budget debt. However, a disappointing result could push the pound lower and lead to a key reversal in the GBPUSD.
Technical Outlook
GBPUSD Daily Chart
Charts Created Using Intellicharts – Prepared by Michael Wright
GBPUSD: The pair has extended its two day decline and is now testing the rising trend line dating back to the middle of May. Failure to break back below this level of support may lead the pair back towards the 1.59 area. However, yesterday’s drop below the key 1.60 level is of great concern as the dollar index has worked its way into a tight ascending channel on the daily chart. Unless the greenback buckles, I do not rule out a reversal in the GBPUSD in the near term.
In the upcoming months, retail sales are expected to come back under pressure as higher value added taxes will weigh on household spending. These measures are estimated to begin in January. At the same time the massive spending cuts recently announced by the government will also put downward pressure on retail sales. The fiscal tightening measures proposed by Chancellor George Osborne marks the largest cuts in decades, and will in turn weigh on growth. All in all, a reading exceeding expectations will bode well for the British pound, but the advance may be short lived as sales and overall growth in the region will likely come back under pressure in 2011 amid tough austerity measures by the government in order to battle its high budget debt. However, a disappointing result could push the pound lower and lead to a key reversal in the GBPUSD.
Technical Outlook
GBPUSD Daily Chart
Charts Created Using Intellicharts – Prepared by Michael Wright
GBPUSD: The pair has extended its two day decline and is now testing the rising trend line dating back to the middle of May. Failure to break back below this level of support may lead the pair back towards the 1.59 area. However, yesterday’s drop below the key 1.60 level is of great concern as the dollar index has worked its way into a tight ascending channel on the daily chart. Unless the greenback buckles, I do not rule out a reversal in the GBPUSD in the near term.
16 нояб. 2010 г.
Currencies Consolidate in Very Quiet Wednesday Trade; Euro Eyes 1.3335
Eurozone sovereign debt concerns continue to dominate the markets at present, with broader sentiment being weighed down on the prospects that a timely and acceptable resolution to these problems will not be achieved at anytime in the near future. This has weighed heavily on the Euro over the past several days, while all other major currencies have also traded lower against the buck in sympathy. Also seen weighing on global sentiment have been fears that China will continue to take measures to tighten monetary policy and curb growth on escalating concerns over rising inflation. This has contributed to a decline in global equities and commodities prices, with the Greenback also very much benefiting from these fears.
So far in early Wednesday trade price action has been less than compelling, with all of the major currencies consolidating their latest setbacks against the US Dollar. But any mild bids that have been seen in currencies, have been attributed to some accommodative comments from various Fed officials, with Fed Rosengren, Evans and Lockhart all more than expecting the Fed to fully utilize the $600B in additional quantitative easing. Still, with the broader negative sentiment, negative Eurozone and negative China forces at play, we see the risks for additional upside in the Greenback over the coming days, with 1.3335 the next key level to watch in Eur/Usd. As such, our recommendation would be to continue to look to sell currencies on overdone intraday rallies against the buck.
Looking ahead, the Bank of England Minutes and UK employment data (6k jobless claims change expected, 7.7% unemployment expected) is due out at 9:30GMT, followed by Eurozone construction output at 10:00GMT. US equity futures are tracking moderately higher into the European open, while commodities trade flat and consolidate their latest declines.
So far in early Wednesday trade price action has been less than compelling, with all of the major currencies consolidating their latest setbacks against the US Dollar. But any mild bids that have been seen in currencies, have been attributed to some accommodative comments from various Fed officials, with Fed Rosengren, Evans and Lockhart all more than expecting the Fed to fully utilize the $600B in additional quantitative easing. Still, with the broader negative sentiment, negative Eurozone and negative China forces at play, we see the risks for additional upside in the Greenback over the coming days, with 1.3335 the next key level to watch in Eur/Usd. As such, our recommendation would be to continue to look to sell currencies on overdone intraday rallies against the buck.
Looking ahead, the Bank of England Minutes and UK employment data (6k jobless claims change expected, 7.7% unemployment expected) is due out at 9:30GMT, followed by Eurozone construction output at 10:00GMT. US equity futures are tracking moderately higher into the European open, while commodities trade flat and consolidate their latest declines.
FOREX: Dollar Rally Fortified by Crucial Reversal in S&P 500, Risk Appetite
Dollar Rally Fortified by Crucial Reversal in S&P 500, Risk Appetite
For the dollar, the critical technical breakout happened Monday. To start the week, the trade-weighted Dollar Index overtook a month-long range top; while the FX market’s most liquid currency (EURUSD) put in for a confirmation of this past Friday’s lows. However, for gauging conviction and trend, Tuesday’s price action was far more significant for validating a singular outlook across the market. From a purely price action standpoint, the session would lead the Dollar Index to a necessary break of resistance that was rendered meaningful by the confluence of a prominent trendline, Fibonacci retracement and 50-day simple moving average. And, in the meantime, it would mark a fresh seven-week high. From the liquid majors, we would finally see participation in the dollar rally that extended beyond the early reversal patterns from EURUSD and USDJPY. GBPUSD finally dropped below 1.5950, USDCHF has moved up to a near-two-month high just below parity, USDCAD surged higher and AUDUSD fell for the sixth time in seven active trading days. Though, all of this taken into account, the most meaningful development for the dollar was the S&P 500’s decisive break from a two-and-a-half month rising trend.
Between technical and fundamental progress for the greenback, the latter has greater pull when it comes to establishing a trend. With the break of the benchmark equity indexes this past trading session, we have seen a meaningful shift in power. Many may say it is simply a line that was breached; but that simple pattern is especially meaningful to a market that is heavily populated by speculative traders (versus passive investors). With this changing of the guard, investors will lose the straightforward investment of low-yield funds into otherwise risky assets that have produced consistent and quick capital gains over the past few months. We could attribute this reversal in the crowd’s sentiment to Europe’s troubles – Ireland may very well have exacerbated financial concerns surrounding the entire region by brushing off calls to ask for financial support. However, pressure has been building against sentiment for some time now. We should remember that growth has shown signs of moderating across the globe, speculative-favorite China has taken clear steps towards cooling its economy, policymakers have been given a green light to curb the influx of ‘hot capital’ into their economies and true rates of return (yields, dividends) have not shown meaningful growth. All of this plays towards uncertainty and the dollar’s role as a harbor from unpredictability in its liquid and liberally-supported market.
For more domestic concerns, the op-ed letter written by market participants demanding the Fed not follow through with the second round of its stimulus program was refuted by central banker Dudley. He remarked that inflation concerns were overstated as the policy authority could easily hike rates while maintaining its unorthodox programs. In the meantime, there are early rumblings amongst politicians to redefine the Fed’s dual mandate to a singular focus on inflation. Keeping the focus on policy, the PPI data would add little to the interest rate argument – event at 4.3 percent annual growth. The CPI data due tomorrow will be more focused; but less influential. Other data highlights included the record selling of Agency Debt by foreign central banks in the TIC data and tomorrow’s housing starts figures.
Related: Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: Patience for Dollar and Euro Trades as Risk Appetite Folds
Euro’s Future Even More Murky after Ireland Resists Financial Aid, Greek Support Falls Apart
Despite a clear deterioration in the market’s perception of Ireland’s financial health, officials refused to seek aid from the EU through the EFSF rescue program. For some, this is a promising development; because country is avoiding greater debt obligations to pay off later down the line – as both the Prime Minister and Finance Ministers have said, the government is fully funded through the middle of 2011. On the other hand, speculative fears are rarely soothed by politicians’ self-severing reassurances. To many, Ireland’s opposition to asking for support at the monthly EU meeting is a step that merely pushes the country and region deeper into a crisis of confidence. While the nation’s government may be fully funded for the next six to eight months, its banking system is very clearly struggling. Irish banks accounted for 20 percent of the ECB’s loans in October; and that lending was equivalent to 80 percent of Irish GPD. Ignoring this issue clearly doesn’t make it go away.
In addition to Ireland’s troubles, financial troubles continue to pop up in other corners of the market. Following the EU’s revision of Greece’s 2009 deficit, Austrian officials said they may withhold the next 190 billion euro contribution to the troubled economy’s bailout fund. Elsewhere, Germany’s Deputy Finance Minister warned they would not back off pressure for a permanent rescue mechanism (saddle bond investors with losses) while fear continues to build that Portugal is soon to follow on the heels of Greek and Irish crisis.
British Pound Helped by High CPI Reading, Hindered by BoE Reiteration for No Hikes
If the market simply followed economic releases, the pound may have surged Tuesday with news that October CPI accelerated to a 3.2 percent rate (a clip that is well above the BoE’s tolerance band). However, the promise of interest rate hikes was completely squashed with BoE Governor King’s statement. Though he did see inflation peaking at 3.7 percent, it was reiterated that they may undershoot medium-term.
Australian Dollar Remains Preoccupied with Rates, Risk as Growth Forecast Indicator Stagnates
The only thing that can seem to stop the Aussie dollar’s advance is underlying risk appetite itself. And, with the S&P 500 leading other capital markets lower, there is a growing wave of uncertainty shaking investors out of their positions. Yet, despite the faded taste for risk and anti-carry push now; economic and interest rate expectations for Australia are still exceptionally robust. When markets turn, the Aussie will lead the move.
New Zealand Dollar Will Find Little Trading Impetus in Upstream 3Q Inflation Figures
Like its Australian counterpart, the New Zealand dollar is beholden to risk appetite trends. In fact, with a less sound economic and financial foundation, the currency is perhaps a little more sensitive to changes in confidence. However, perhaps improved interest rate speculation can improve the currencies standing. We will get upstream 3Q inflation figures early tomorrow; but they won’t carry the same influence as CPI data.
For the dollar, the critical technical breakout happened Monday. To start the week, the trade-weighted Dollar Index overtook a month-long range top; while the FX market’s most liquid currency (EURUSD) put in for a confirmation of this past Friday’s lows. However, for gauging conviction and trend, Tuesday’s price action was far more significant for validating a singular outlook across the market. From a purely price action standpoint, the session would lead the Dollar Index to a necessary break of resistance that was rendered meaningful by the confluence of a prominent trendline, Fibonacci retracement and 50-day simple moving average. And, in the meantime, it would mark a fresh seven-week high. From the liquid majors, we would finally see participation in the dollar rally that extended beyond the early reversal patterns from EURUSD and USDJPY. GBPUSD finally dropped below 1.5950, USDCHF has moved up to a near-two-month high just below parity, USDCAD surged higher and AUDUSD fell for the sixth time in seven active trading days. Though, all of this taken into account, the most meaningful development for the dollar was the S&P 500’s decisive break from a two-and-a-half month rising trend.
Between technical and fundamental progress for the greenback, the latter has greater pull when it comes to establishing a trend. With the break of the benchmark equity indexes this past trading session, we have seen a meaningful shift in power. Many may say it is simply a line that was breached; but that simple pattern is especially meaningful to a market that is heavily populated by speculative traders (versus passive investors). With this changing of the guard, investors will lose the straightforward investment of low-yield funds into otherwise risky assets that have produced consistent and quick capital gains over the past few months. We could attribute this reversal in the crowd’s sentiment to Europe’s troubles – Ireland may very well have exacerbated financial concerns surrounding the entire region by brushing off calls to ask for financial support. However, pressure has been building against sentiment for some time now. We should remember that growth has shown signs of moderating across the globe, speculative-favorite China has taken clear steps towards cooling its economy, policymakers have been given a green light to curb the influx of ‘hot capital’ into their economies and true rates of return (yields, dividends) have not shown meaningful growth. All of this plays towards uncertainty and the dollar’s role as a harbor from unpredictability in its liquid and liberally-supported market.
For more domestic concerns, the op-ed letter written by market participants demanding the Fed not follow through with the second round of its stimulus program was refuted by central banker Dudley. He remarked that inflation concerns were overstated as the policy authority could easily hike rates while maintaining its unorthodox programs. In the meantime, there are early rumblings amongst politicians to redefine the Fed’s dual mandate to a singular focus on inflation. Keeping the focus on policy, the PPI data would add little to the interest rate argument – event at 4.3 percent annual growth. The CPI data due tomorrow will be more focused; but less influential. Other data highlights included the record selling of Agency Debt by foreign central banks in the TIC data and tomorrow’s housing starts figures.
Related: Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: Patience for Dollar and Euro Trades as Risk Appetite Folds
Euro’s Future Even More Murky after Ireland Resists Financial Aid, Greek Support Falls Apart
Despite a clear deterioration in the market’s perception of Ireland’s financial health, officials refused to seek aid from the EU through the EFSF rescue program. For some, this is a promising development; because country is avoiding greater debt obligations to pay off later down the line – as both the Prime Minister and Finance Ministers have said, the government is fully funded through the middle of 2011. On the other hand, speculative fears are rarely soothed by politicians’ self-severing reassurances. To many, Ireland’s opposition to asking for support at the monthly EU meeting is a step that merely pushes the country and region deeper into a crisis of confidence. While the nation’s government may be fully funded for the next six to eight months, its banking system is very clearly struggling. Irish banks accounted for 20 percent of the ECB’s loans in October; and that lending was equivalent to 80 percent of Irish GPD. Ignoring this issue clearly doesn’t make it go away.
In addition to Ireland’s troubles, financial troubles continue to pop up in other corners of the market. Following the EU’s revision of Greece’s 2009 deficit, Austrian officials said they may withhold the next 190 billion euro contribution to the troubled economy’s bailout fund. Elsewhere, Germany’s Deputy Finance Minister warned they would not back off pressure for a permanent rescue mechanism (saddle bond investors with losses) while fear continues to build that Portugal is soon to follow on the heels of Greek and Irish crisis.
British Pound Helped by High CPI Reading, Hindered by BoE Reiteration for No Hikes
If the market simply followed economic releases, the pound may have surged Tuesday with news that October CPI accelerated to a 3.2 percent rate (a clip that is well above the BoE’s tolerance band). However, the promise of interest rate hikes was completely squashed with BoE Governor King’s statement. Though he did see inflation peaking at 3.7 percent, it was reiterated that they may undershoot medium-term.
Australian Dollar Remains Preoccupied with Rates, Risk as Growth Forecast Indicator Stagnates
The only thing that can seem to stop the Aussie dollar’s advance is underlying risk appetite itself. And, with the S&P 500 leading other capital markets lower, there is a growing wave of uncertainty shaking investors out of their positions. Yet, despite the faded taste for risk and anti-carry push now; economic and interest rate expectations for Australia are still exceptionally robust. When markets turn, the Aussie will lead the move.
New Zealand Dollar Will Find Little Trading Impetus in Upstream 3Q Inflation Figures
Like its Australian counterpart, the New Zealand dollar is beholden to risk appetite trends. In fact, with a less sound economic and financial foundation, the currency is perhaps a little more sensitive to changes in confidence. However, perhaps improved interest rate speculation can improve the currencies standing. We will get upstream 3Q inflation figures early tomorrow; but they won’t carry the same influence as CPI data.
Loonie Falls on Stocks, Oil & Concerns for European Debt Problems
The Canadian dollar declined today as the concerns about the sovereign debt in the European countries caused the investors’ sentiment to shift toward the risk aversion, damping the appeal of the commodities and the stocks and decreasing demand for the growth-related currencies.
The futures on crude oil, Canada’s key export, dropped as much as 3.3 percent to $82.10 per barrel, the lowest level this month. The MSCI World Index of equities in developed nations posted the decline for the seventh day, tumbling 2.1 percent in the longest losing streak of declines since January. The stocks also dropped on the speculation that the China would perform measures to trim its inflation.
The Canadian dollar was the second worst performer today after the Norwegian krone, which also depend on the oil prices. The analysts expect the loonie, as the Canadian currency often nicknamed, to decline to $1.30 level in the short term.
USD/CAD jumped from 1.0096 to 1.0217 as of 22:19 GMT today. EUR/CAD rose from 1.3717 to 1.3786, following the advance to 1.3875.
If you want to comment on the Canadian dollar’s recent action or have any questions regarding this currency, please, feel free to reply below.
The futures on crude oil, Canada’s key export, dropped as much as 3.3 percent to $82.10 per barrel, the lowest level this month. The MSCI World Index of equities in developed nations posted the decline for the seventh day, tumbling 2.1 percent in the longest losing streak of declines since January. The stocks also dropped on the speculation that the China would perform measures to trim its inflation.
The Canadian dollar was the second worst performer today after the Norwegian krone, which also depend on the oil prices. The analysts expect the loonie, as the Canadian currency often nicknamed, to decline to $1.30 level in the short term.
USD/CAD jumped from 1.0096 to 1.0217 as of 22:19 GMT today. EUR/CAD rose from 1.3717 to 1.3786, following the advance to 1.3875.
If you want to comment on the Canadian dollar’s recent action or have any questions regarding this currency, please, feel free to reply below.
12 нояб. 2010 г.
Dollar Ready to Rally as Europe Devolves into Crisis, G20 Sanctions Speculative Capital Curbs
Dollar Ready to Rally as Europe Devolves into Crisis, G20 Sanctions Speculative Capital Curbs
The dollar’s performance Friday was relatively disappointing on a close-to-close basis. Though volatile and setting a new monthly high on a trade-weighted basis early in the session, the currency would ultimately end the day little changed and slightly in the red. However, this particular aspect of performance is not what we should be concerned with. The fundamental and speculative potential lying ahead of the market is what we should be focused on. While it is no guarantee, the capital markets are at their greatest risk of reversal since the most recent bull phase began back at the start of September. We can see this potential in the benchmarks for investor sentiment and capital flows. In equities, the Dow Jones Industrial Average has tentatively broken its multi-month rising trend with a move below 11,200 – even though the S&P 500 has yet to do the same. For commodities, crude has suffered a massive reversal and gold put in for its biggest decline since July 1st. Even corporate bonds and Treasuries have taken a hit. This same sense of risk can be established in the currency market. Favorite investment currencies have started to retrace gains while overlooked safe havens have put in for a slow recovery. This shift led AUDUSD to drop back below parity and USDJPY has even threatened its long-term bear trend. Yet, it is EURUSD that will likely benchmark the dollar’s future.
Through Friday’s close, we have seen the foundation set for a few very important fundamental trends that stand to significantly benefit the greenback. Among the three top catalysts for the currency are the potential for speculative curbs to retain US capital in US investment, a European crisis spurring reinvestment to the liberally-supported US market and a general deterioration in risk appetite trends. In reality, all three of these dynamics would likely work in conjunction; but any one of them could spark a meaningful recovery for the dollar. The first driver to highlight was put into action Friday; but it could potentially take time to develop. From the G20 statement that followed the close of the two-day meeting, it may seem that policy officials avoided a meaningful effort to collaborate on exchange rate volatility and isolated asset bubbles. Yet, one notable feature that should not be overlooked is the endorsement for emerging market economies to adopt regulations aimed at curbing capital inflows. On the one hand, this can make a meaningful dent in the development of asset bubbles and it will certainly cool risk appetite. But, more than that, reducing the options for high return means investors will be less likely to take on cheap leverage in the US and place subsequent yield bearing positions elsewhere (a process that naturally includes selling dollars). Instead stimulus will be put to work in on the US market.
In comparison, financial troubles in Europe have only started to gain traction as a catalyst. That said, this particular theme could easily be the dollar’s top driver in the near future. This past week, we have seen yields on sovereign debt and credit default swaps for key European economies surge to record highs. Given the long-term troubles this region faces and the market’s growing uncertainty, authorities may be forced to act with another bailout. This would boost the appeal of the dollar two-fold. First, such a move would undermine the speculative drive that has inflated capital markets the world over. While there will be some latent sense of the dollar offering a safe haven, it will more importantly see inflows on the unwinding of positions that were founded on US-based stimulus. What’s more, the liquidity between these two economies will naturally direct capital from Europe to the US. Now we wait and watch to see what happens across the Atlantic.
Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: GBPUSD Takes Profit, EURUSD Top Concern Next Week
Euro: What is the Likelihood of a Second Crisis and How Would the Euro React to such an Outcome?
The euro was the fundamental focal of the currency market Friday. Third quarter GDP readings for the region reported modestly below forecasts. However, missing expectations wasn’t the full extent of this data. Its real influence would be found in the woeful comparison between stalwart Germany and those EU members that are struggling - and failing - to balance austerity with growth (Greece, Portugal, Spain). Where fear really comes into the picture is the pressure such important data adds to the already fragile financial system. Yield spreads on Irish, Greek and Portuguese government bonds accelerated their surge to record highs. And, it seems at least one of these economies is nearing a breaking point. According to a Reuters report released Friday, unnamed EU officials said Ireland is in fact seeking rescue funds.
Whether the Celtic Tiger has put its hat out or not will be the top concern going into next week. If they have indeed asked for assistance, they will almost certainly receive it. Where the scenario really becomes interesting is establishing how such a move would impact the euro. A bailout would curb fears that the Irish government will be swamped and may stall gains in yields. However, looking beyond the very short-term, this move will be seen as a clear step towards more stimulus (akin to the US) while the moral hazard and effectiveness concerns will balloon.
Japanese Yen will Have to Prove Itself as Risk is Stirred and 3Q GDP Data Quickly Approaches
Once again, FX traders are distracted by heady fundamental concerns. A potential European crisis can keep the yen stationed as a safe haven alternative – though near record highs, it will be interesting to see how far this scene can continue to play out. Perhaps the 3Q GDP figures due very early Monday morning in the Asian session can help remind investors of the Japanese currency’s own troubles.
British Pound may not Enjoy its Stimulus-Postponement Rally for Long
The 19-month low in the Nationwide Consumer Confidence survey would have relatively little influence over the sterling Friday. Instead, pound traders are more concerned about the future. On one hand, the market is wary of the spillover effects of a Euro-Zone financial crisis. On the other, we have growth and inflation data from the UK due next week which can help to redefine stimulus and interest rate speculation.
Australian Dollar: A Hearty Fundamental Backdrop can Prevent a Major Selloff but not a Risk Reversal
If risk appetite is collapsing, it is a relatively straightforward assessment to say the Australian dollar will suffer. The unwinding of speculative positions will naturally weight he currency. However, in a market where everything is relative; we should consider the Aussie’s performance against say the kiwi. The Australian dollar has the yield, growth and financial stability to sustain itself. Expect a decline here to be less dramatic.
The dollar’s performance Friday was relatively disappointing on a close-to-close basis. Though volatile and setting a new monthly high on a trade-weighted basis early in the session, the currency would ultimately end the day little changed and slightly in the red. However, this particular aspect of performance is not what we should be concerned with. The fundamental and speculative potential lying ahead of the market is what we should be focused on. While it is no guarantee, the capital markets are at their greatest risk of reversal since the most recent bull phase began back at the start of September. We can see this potential in the benchmarks for investor sentiment and capital flows. In equities, the Dow Jones Industrial Average has tentatively broken its multi-month rising trend with a move below 11,200 – even though the S&P 500 has yet to do the same. For commodities, crude has suffered a massive reversal and gold put in for its biggest decline since July 1st. Even corporate bonds and Treasuries have taken a hit. This same sense of risk can be established in the currency market. Favorite investment currencies have started to retrace gains while overlooked safe havens have put in for a slow recovery. This shift led AUDUSD to drop back below parity and USDJPY has even threatened its long-term bear trend. Yet, it is EURUSD that will likely benchmark the dollar’s future.
Through Friday’s close, we have seen the foundation set for a few very important fundamental trends that stand to significantly benefit the greenback. Among the three top catalysts for the currency are the potential for speculative curbs to retain US capital in US investment, a European crisis spurring reinvestment to the liberally-supported US market and a general deterioration in risk appetite trends. In reality, all three of these dynamics would likely work in conjunction; but any one of them could spark a meaningful recovery for the dollar. The first driver to highlight was put into action Friday; but it could potentially take time to develop. From the G20 statement that followed the close of the two-day meeting, it may seem that policy officials avoided a meaningful effort to collaborate on exchange rate volatility and isolated asset bubbles. Yet, one notable feature that should not be overlooked is the endorsement for emerging market economies to adopt regulations aimed at curbing capital inflows. On the one hand, this can make a meaningful dent in the development of asset bubbles and it will certainly cool risk appetite. But, more than that, reducing the options for high return means investors will be less likely to take on cheap leverage in the US and place subsequent yield bearing positions elsewhere (a process that naturally includes selling dollars). Instead stimulus will be put to work in on the US market.
In comparison, financial troubles in Europe have only started to gain traction as a catalyst. That said, this particular theme could easily be the dollar’s top driver in the near future. This past week, we have seen yields on sovereign debt and credit default swaps for key European economies surge to record highs. Given the long-term troubles this region faces and the market’s growing uncertainty, authorities may be forced to act with another bailout. This would boost the appeal of the dollar two-fold. First, such a move would undermine the speculative drive that has inflated capital markets the world over. While there will be some latent sense of the dollar offering a safe haven, it will more importantly see inflows on the unwinding of positions that were founded on US-based stimulus. What’s more, the liquidity between these two economies will naturally direct capital from Europe to the US. Now we wait and watch to see what happens across the Atlantic.
Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: GBPUSD Takes Profit, EURUSD Top Concern Next Week
Euro: What is the Likelihood of a Second Crisis and How Would the Euro React to such an Outcome?
The euro was the fundamental focal of the currency market Friday. Third quarter GDP readings for the region reported modestly below forecasts. However, missing expectations wasn’t the full extent of this data. Its real influence would be found in the woeful comparison between stalwart Germany and those EU members that are struggling - and failing - to balance austerity with growth (Greece, Portugal, Spain). Where fear really comes into the picture is the pressure such important data adds to the already fragile financial system. Yield spreads on Irish, Greek and Portuguese government bonds accelerated their surge to record highs. And, it seems at least one of these economies is nearing a breaking point. According to a Reuters report released Friday, unnamed EU officials said Ireland is in fact seeking rescue funds.
Whether the Celtic Tiger has put its hat out or not will be the top concern going into next week. If they have indeed asked for assistance, they will almost certainly receive it. Where the scenario really becomes interesting is establishing how such a move would impact the euro. A bailout would curb fears that the Irish government will be swamped and may stall gains in yields. However, looking beyond the very short-term, this move will be seen as a clear step towards more stimulus (akin to the US) while the moral hazard and effectiveness concerns will balloon.
Japanese Yen will Have to Prove Itself as Risk is Stirred and 3Q GDP Data Quickly Approaches
Once again, FX traders are distracted by heady fundamental concerns. A potential European crisis can keep the yen stationed as a safe haven alternative – though near record highs, it will be interesting to see how far this scene can continue to play out. Perhaps the 3Q GDP figures due very early Monday morning in the Asian session can help remind investors of the Japanese currency’s own troubles.
British Pound may not Enjoy its Stimulus-Postponement Rally for Long
The 19-month low in the Nationwide Consumer Confidence survey would have relatively little influence over the sterling Friday. Instead, pound traders are more concerned about the future. On one hand, the market is wary of the spillover effects of a Euro-Zone financial crisis. On the other, we have growth and inflation data from the UK due next week which can help to redefine stimulus and interest rate speculation.
Australian Dollar: A Hearty Fundamental Backdrop can Prevent a Major Selloff but not a Risk Reversal
If risk appetite is collapsing, it is a relatively straightforward assessment to say the Australian dollar will suffer. The unwinding of speculative positions will naturally weight he currency. However, in a market where everything is relative; we should consider the Aussie’s performance against say the kiwi. The Australian dollar has the yield, growth and financial stability to sustain itself. Expect a decline here to be less dramatic.
Japanese Yen to Rise Against Most Currencies, Decline vs US Dollar
The US Federal Reserve’s reboot of quantitative easing (QE) stands as the central driving force behind Japanese Yen price action, albeit in two distinctly different ways. Twenty-day percent change correlation studies reveal USDJPY price action is torn between its long-term link with the US-Japan bond yield spread and a rejuvenated inverse relationship with risk appetite. This leaves the door open for a variety of outcomes in the week ahead.
As we discussed in our weekly forex trend monitor, Ben Bernanke and company delivered just about what the markets had been expecting, leaving traders without a renewed catalyst to drive the rally in risk appetite that began in August when policymakers first introducing the idea of additional stimulus at the central bankers’ summit in Jackson Hole. This has left the door open for some much-needed retracement on the back of profit-taking into the end of the year. Indeed, in the first week following the QE announcement, the safety-linked US Dollar rose while stock markets sank, both by the largest margin since the five days ending August 13. Considering the newly strengthened inverse correlation between USDJPY and the MSCI World Stock Index, a continuation of this dynamic points to Yen strength as a broad-based pullback across the spectrum of risky assets stocks gains in the perennial funding currency.
All is not cut and dry however considering relative yields remain important, with USDJPY still showing a close correlation to the 2-year US-Japan rate spread. The Fed has officially started buying securities, meaning US yields are due to come under pressure. Meanwhile, the Bank of Japan is topping up its own QE efforts with a 5 trillion yen asset purchase fund. Interestingly, the 2-year yield gap has shifted decisively in favor of the US Dollar since the Fed QE announcement, hinting the BOJ is likely to outdo its American counterpart and pointing toward USDJPY upside.
On balance, the outlook for the Yen looks clouded as it remains uncertain which reading of the post-QE landscape proves dominant in the week ahead. We suspect the currency will rise against most of its major counterparts on risk aversion with the solitary exception of USDJPY, where we suspect the Dollar will prevail with the yield spread seemingly as due for a retracement in favor of the greenback as sentiment at large.
As we discussed in our weekly forex trend monitor, Ben Bernanke and company delivered just about what the markets had been expecting, leaving traders without a renewed catalyst to drive the rally in risk appetite that began in August when policymakers first introducing the idea of additional stimulus at the central bankers’ summit in Jackson Hole. This has left the door open for some much-needed retracement on the back of profit-taking into the end of the year. Indeed, in the first week following the QE announcement, the safety-linked US Dollar rose while stock markets sank, both by the largest margin since the five days ending August 13. Considering the newly strengthened inverse correlation between USDJPY and the MSCI World Stock Index, a continuation of this dynamic points to Yen strength as a broad-based pullback across the spectrum of risky assets stocks gains in the perennial funding currency.
All is not cut and dry however considering relative yields remain important, with USDJPY still showing a close correlation to the 2-year US-Japan rate spread. The Fed has officially started buying securities, meaning US yields are due to come under pressure. Meanwhile, the Bank of Japan is topping up its own QE efforts with a 5 trillion yen asset purchase fund. Interestingly, the 2-year yield gap has shifted decisively in favor of the US Dollar since the Fed QE announcement, hinting the BOJ is likely to outdo its American counterpart and pointing toward USDJPY upside.
On balance, the outlook for the Yen looks clouded as it remains uncertain which reading of the post-QE landscape proves dominant in the week ahead. We suspect the currency will rise against most of its major counterparts on risk aversion with the solitary exception of USDJPY, where we suspect the Dollar will prevail with the yield spread seemingly as due for a retracement in favor of the greenback as sentiment at large.
Euro Posts Gains, but Trend Remains Bearish
The euro jumped today on the speculation that the European Union would support its most indebted nations. The euro resumed its decline later as the traders weren’t convinced.
The speculations suggested that Ireland’s government discussed with the EU leaders the possibility of the bailout for Ireland. The EU officials dismissed such suggestions as mere rumors. The traders weren’t much convinced by the attempts of the EU leaders to improve confidence in the European economy, therefore the euro’s gains were limited.
The decline of the stocks and the commodities also curbed the gains of the shared 16-nation European currency. The Standard & Poor’s 500 Index went down 1.3 percent, while the Reuters-Jefferies CRB Index of raw materials slumped as much as 3.6 percent.
EUR/USD closed at 1.3692 after it opened at 1.3667, reached the intraday low of 1.3575 and the intraday high of 1.3775. EUR/JPY opened at 112.72 and closed at 112.87, following the decline to 111.05 and jump to 113.38.
If you want to comment on the euro’s recent action or have any questions regarding this currency, please, feel free to reply below.
The speculations suggested that Ireland’s government discussed with the EU leaders the possibility of the bailout for Ireland. The EU officials dismissed such suggestions as mere rumors. The traders weren’t much convinced by the attempts of the EU leaders to improve confidence in the European economy, therefore the euro’s gains were limited.
The decline of the stocks and the commodities also curbed the gains of the shared 16-nation European currency. The Standard & Poor’s 500 Index went down 1.3 percent, while the Reuters-Jefferies CRB Index of raw materials slumped as much as 3.6 percent.
EUR/USD closed at 1.3692 after it opened at 1.3667, reached the intraday low of 1.3575 and the intraday high of 1.3775. EUR/JPY opened at 112.72 and closed at 112.87, following the decline to 111.05 and jump to 113.38.
If you want to comment on the euro’s recent action or have any questions regarding this currency, please, feel free to reply below.
11 нояб. 2010 г.
Fed’s Easing Spurred Commodities and Bolstered Ruble
The Russian ruble posted gains today as the prices for crude oil rallied and the quantitative easing in the US spurred the demand for the riskier assets.
The quantitative easing weakened the dollar and boosted commodities, including oil, the main source of Russia’s export revenue. Crude oil reached $87.63 per barrel yesterday, the highest price in more than two years. The ruble also strengthened as the Federal Reserve kept the interest rates near zero, prompting the investors to seek markets with higher yield, like Russia with its 5 percent repurchase rate.
The ruble dropped 1 percent against the US dollar and 2.7 percent versus the euro last month, becoming the third worst performing emerging market currency versus both the greenback and the euro. The one of the reason for the losses was the narrowing Russia’s trade balance surplus.
USD/RUB dropped from 30.801 to 30.630 as of 22:04 GMT. EUR/RUB went down from the opening level of 42.4375 to 42.2120.
If you want to comment on the Russian Ruble’s recent action or have any questions regarding this currency, please, feel free to reply below.
The quantitative easing weakened the dollar and boosted commodities, including oil, the main source of Russia’s export revenue. Crude oil reached $87.63 per barrel yesterday, the highest price in more than two years. The ruble also strengthened as the Federal Reserve kept the interest rates near zero, prompting the investors to seek markets with higher yield, like Russia with its 5 percent repurchase rate.
The ruble dropped 1 percent against the US dollar and 2.7 percent versus the euro last month, becoming the third worst performing emerging market currency versus both the greenback and the euro. The one of the reason for the losses was the narrowing Russia’s trade balance surplus.
USD/RUB dropped from 30.801 to 30.630 as of 22:04 GMT. EUR/RUB went down from the opening level of 42.4375 to 42.2120.
If you want to comment on the Russian Ruble’s recent action or have any questions regarding this currency, please, feel free to reply below.
The Australian dollar fell from parity with its US counterpart today as the unemployment rate increased, even though it was supposed to fall. The Aussie extended its gains against the euro. The Australian employers added 29,700 jobs in October, following the 49,600 increase in September. That was better than the expected 20,200 employment change. The better-than-expected employment change hasn’t helped to decrease the unemployment rate, though, which was at 5.4 percent last month. The Australian unemployment rate was at 5.1 percent in September and was expected to go down to 5.0 percent in October. The Standard & Poor’s 500 Index dropped as much as 0.8 percent, decreasing demand for the riskier assets. The futures for crude oil reached the highest level in two year of $88.63 per barrel, supporting the Aussie somewhat. AUD/USD dropped from 1.0052 to 0.9976 today as of 20:36 GMT. EUR/AUD went down from 1.3709 to 1.3688 after it rose to the intraday high of 1.3776. If you want to comment on the Australian dollar’s recent action or have any questions regarding this currency, please, feel free to reply below.
The Japanese yen rose today, before returning to the opening level, on the speculation that the accelerating inflation in China would prompt the government to take steps to cool the economy.
The consumer prices in China grew 4 percent in October, the biggest advance since October 2008, following the 3.6 percent increase in September. The rapidly growing prices and the increasing trade surplus caused concerns among the Chinese policy makers about the possible asset bubble. The concerns caused the People’s Bank of China to increase the reserve requirements for the lenders by 50 basis points from November 16th.
The yen slumped yesterday heavily and unexpectedly. This may be partly because of yesterday’s rally of the dollar, which made more attractive than yen in the role of the safe haven.
USD/JPY traded at about 82.14 as of 2:07 GMT after rising yesterday from 81.68 to 82.26. EUR/JPY traded near its opening level of 113.39 after it jumped yesterday from 112.50 to 113.38. GBP/JPY traded at 132.75, following the advance of the previous session from 130.56 to 132.26.
If you want to comment on the Japanese yen’s recent action or have any questions regarding this currency, please, feel free to reply below.
The consumer prices in China grew 4 percent in October, the biggest advance since October 2008, following the 3.6 percent increase in September. The rapidly growing prices and the increasing trade surplus caused concerns among the Chinese policy makers about the possible asset bubble. The concerns caused the People’s Bank of China to increase the reserve requirements for the lenders by 50 basis points from November 16th.
The yen slumped yesterday heavily and unexpectedly. This may be partly because of yesterday’s rally of the dollar, which made more attractive than yen in the role of the safe haven.
USD/JPY traded at about 82.14 as of 2:07 GMT after rising yesterday from 81.68 to 82.26. EUR/JPY traded near its opening level of 113.39 after it jumped yesterday from 112.50 to 113.38. GBP/JPY traded at 132.75, following the advance of the previous session from 130.56 to 132.26.
If you want to comment on the Japanese yen’s recent action or have any questions regarding this currency, please, feel free to reply below.
Dollar Finds Depreciation In-Line with FOMC Stimulus, Where To Now?
The Australian dollar fell from parity with its US counterpart today as the unemployment rate increased, even though it was supposed to fall. The Aussie extended its gains against the euro.
The Australian employers added 29,700 jobs in October, following the 49,600 increase in September. That was better than the expected 20,200 employment change. The better-than-expected employment change hasn’t helped to decrease the unemployment rate, though, which was at 5.4 percent last month. The Australian unemployment rate was at 5.1 percent in September and was expected to go down to 5.0 percent in October.
The Standard & Poor’s 500 Index dropped as much as 0.8 percent, decreasing demand for the riskier assets. The futures for crude oil reached the highest level in two year of $88.63 per barrel, supporting the Aussie somewhat.
AUD/USD dropped from 1.0052 to 0.9976 today as of 20:36 GMT. EUR/AUD went down from 1.3709 to 1.3688 after it rose to the intraday high of 1.3776.
If you want to comment on the Australian dollar’s recent action or have any questions regarding this currency, please, feel free to reply below.
The Australian employers added 29,700 jobs in October, following the 49,600 increase in September. That was better than the expected 20,200 employment change. The better-than-expected employment change hasn’t helped to decrease the unemployment rate, though, which was at 5.4 percent last month. The Australian unemployment rate was at 5.1 percent in September and was expected to go down to 5.0 percent in October.
The Standard & Poor’s 500 Index dropped as much as 0.8 percent, decreasing demand for the riskier assets. The futures for crude oil reached the highest level in two year of $88.63 per barrel, supporting the Aussie somewhat.
AUD/USD dropped from 1.0052 to 0.9976 today as of 20:36 GMT. EUR/AUD went down from 1.3709 to 1.3688 after it rose to the intraday high of 1.3776.
If you want to comment on the Australian dollar’s recent action or have any questions regarding this currency, please, feel free to reply below.
Dollar Finds Depreciation In-Line with FOMC Stimulus, Where To Now?
The biggest fundamental threat/catalyst the dollar has faced in months has come and gone. The FOMC rate decision last week held significant sway over the future of the greenback as evidenced by the market’s drive on the mere speculation of what impact a second stimulus program could have on the economy and currency. That said, policy officials were obviously aware of the influence their decision could have on a highly leveraged market. After polling the primary dealers that participate in Fed market operations and Treasury auctions, the central bank announced an $850 to $900 billion in government debt purchases over the coming eight months. This may seem more expansive than the popular $500 to $600 billion consensus; but the breakdown shows they are only planning $75 billion lot purchases each month over the period and setting a range of $250 to $300 billion through the reinvestment program which was already underway. Therefore, this is generally an in-line outcome. So, where does the market go from here? Presumably, this shift was priced in before its actual release. However, the notion that the Fed is leaning heavily towards stimulus will present a constant weight on the greenback. To counter this bearish drift, a fundamental crosswind is needed. The G20 is a potentially topical driver should there be a coordinated effort to stabilize the dollar. More likely, risk aversion has the greatest potential – particularly if it is borne from a European financial crisis.
A Closer Look at Financial and Consumer Conditions
We continue to see a divergence between asset prices and the prevailing sense of financial stability. Under normal circumstances, we would see financial markets accurately reflecting the potential for investment threatening ripples. That would be the case today if there weren’t so many distorting factors to artificially stoke speculative interest. With the Fed’s effort to pump stimulus into the system, they are leveraging the accessibility of capital to speculators and offering an implicit guarantee to support the markets should conditions deteriorate. However, in the background, we see economic activity slowing, the US housing market is threatening a new financial crisis through foreclosures and stimulus itself is being horded at banks. There are exogenous risks as well.
Though the focus from the FOMC decision this past week was on the stimulus program; there is far more than a speculative slant to this policy. In pursuing such an expansive policy, the central bank has risked inflation and other warping side effects theoretically to encourage a recovery in employment (one of the bank’s two primary benchmarks along with inflation). Indeed, we see that the group noted that progress towards growth was “disappointingly slow” and that joblessness was more firmly set than the felt comfortable with. That said, the broader economy looks to have found some level of balance. Now the argument becomes whether additional stimulus will actually translate into growth. Many Fed members doubt it will be a significant gain. This will be an ongoing argument as US GDP eases into the first half of 2011.
The Financial and Capital Markets
Speculativeoptimism was fueled into the FOMC’s November rate decision. For savvy fixed income traders, the purchase of Treasuries offers a very direct front running opportunity. More importantly, for the majority of market participants, the stimulus effort lowers interest rates, expands the money supply and offers a tacit guarantee of government support for rising capital markets. Through reduced lending rates and increased money supply, the net effect is reduced costs for leverage which encourages a buildup in speculative activity. As for the guarantee, a flexible and long-duration (the Fed is targeting investments with a maturity of 5-6 years) program suggests the central bank will ratchet up support should the markets start to sour. So, while there is a very clear economic explanation for the Fed’s efforts; it can be argued that the central bank’s primary objective is to target asset prices and help out the economy indirectly. That strays from their official mandate and quickly becomes a battle even the world’s largest monetary authority cannot fight. If investor sentiment sours globally, the wave will easily be too large for the central bank to hold back. In the meantime, we turn our focus to the questionable progress to be made by the G20 and the recent surge in European government bond yields as the word “crisis” starts to return.
A Closer Look at Market Conditions
If the Federal Reserve is feeding the capital markets, then why not leverage your risky positions? In the September and October, the promise of stimulus and the desire to front run the actual announcement of such support pushed all risky assets higher. Yet, given this aggressive move and the essentially in-line outcome for one of the biggest speculative events of the year, it is reasonable to step back and reevaluate the stability of these aggressive bull trends. This past week, we have seen the benchmarks (S&P 500, commodities) show a very modest correction as debate picks up. Will confidence truly support though? We will soon see.
Once again, we are not seeing an accurate representation of the risks that would naturally accompany such a remarkable rally in capital markets. It is important to note that if risk trends were highly accurate, there would be no room for speculation; and no individual would rally make any market because that would denote a constant fair value is being represented in current price. So, where do we look for our signs of risk? Asset prices themselves are concerning. Multi-year – and under some circumstances, record – highs should clue us into trouble. At such extremes, we would expect an extraordinarily robust outlook for growth and yields. We do not have that. Keep an eye on the tolerance for Treasuries, European Debt and currencies.
A Closer Look at Financial and Consumer Conditions
We continue to see a divergence between asset prices and the prevailing sense of financial stability. Under normal circumstances, we would see financial markets accurately reflecting the potential for investment threatening ripples. That would be the case today if there weren’t so many distorting factors to artificially stoke speculative interest. With the Fed’s effort to pump stimulus into the system, they are leveraging the accessibility of capital to speculators and offering an implicit guarantee to support the markets should conditions deteriorate. However, in the background, we see economic activity slowing, the US housing market is threatening a new financial crisis through foreclosures and stimulus itself is being horded at banks. There are exogenous risks as well.
Though the focus from the FOMC decision this past week was on the stimulus program; there is far more than a speculative slant to this policy. In pursuing such an expansive policy, the central bank has risked inflation and other warping side effects theoretically to encourage a recovery in employment (one of the bank’s two primary benchmarks along with inflation). Indeed, we see that the group noted that progress towards growth was “disappointingly slow” and that joblessness was more firmly set than the felt comfortable with. That said, the broader economy looks to have found some level of balance. Now the argument becomes whether additional stimulus will actually translate into growth. Many Fed members doubt it will be a significant gain. This will be an ongoing argument as US GDP eases into the first half of 2011.
The Financial and Capital Markets
Speculativeoptimism was fueled into the FOMC’s November rate decision. For savvy fixed income traders, the purchase of Treasuries offers a very direct front running opportunity. More importantly, for the majority of market participants, the stimulus effort lowers interest rates, expands the money supply and offers a tacit guarantee of government support for rising capital markets. Through reduced lending rates and increased money supply, the net effect is reduced costs for leverage which encourages a buildup in speculative activity. As for the guarantee, a flexible and long-duration (the Fed is targeting investments with a maturity of 5-6 years) program suggests the central bank will ratchet up support should the markets start to sour. So, while there is a very clear economic explanation for the Fed’s efforts; it can be argued that the central bank’s primary objective is to target asset prices and help out the economy indirectly. That strays from their official mandate and quickly becomes a battle even the world’s largest monetary authority cannot fight. If investor sentiment sours globally, the wave will easily be too large for the central bank to hold back. In the meantime, we turn our focus to the questionable progress to be made by the G20 and the recent surge in European government bond yields as the word “crisis” starts to return.
A Closer Look at Market Conditions
If the Federal Reserve is feeding the capital markets, then why not leverage your risky positions? In the September and October, the promise of stimulus and the desire to front run the actual announcement of such support pushed all risky assets higher. Yet, given this aggressive move and the essentially in-line outcome for one of the biggest speculative events of the year, it is reasonable to step back and reevaluate the stability of these aggressive bull trends. This past week, we have seen the benchmarks (S&P 500, commodities) show a very modest correction as debate picks up. Will confidence truly support though? We will soon see.
Once again, we are not seeing an accurate representation of the risks that would naturally accompany such a remarkable rally in capital markets. It is important to note that if risk trends were highly accurate, there would be no room for speculation; and no individual would rally make any market because that would denote a constant fair value is being represented in current price. So, where do we look for our signs of risk? Asset prices themselves are concerning. Multi-year – and under some circumstances, record – highs should clue us into trouble. At such extremes, we would expect an extraordinarily robust outlook for growth and yields. We do not have that. Keep an eye on the tolerance for Treasuries, European Debt and currencies.
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