A Forex View From Afar

A Trader's Look At A Trader's Life

Forex Analysis

Price Distribution For The Euro

Written by A Forex View From Afar on Wednesday, December 31, 2008

According to the data compiled from 2006 to the present day, the euro follows a relatively normal distribution. This means, an investor can determine, to some extent, how much the price will move over the following period, in order to gauge risk and determine the possible duration of a trade.

The attached charts show the probability that the close of the next 15 min, 4 hour or daily candle will be bigger than one half of a standard deviation. For example, there is a 70% chance, or one standard deviation that the euro will move ±10 pips over the next 15 min candle.

Knowing this, a trader or a system developer can very easily calculate the exposure to the market, or estimate how long an open order will last. If someone has a 70 pip stop loss, based on the 4 hour chart there is 5% chance, or even smaller, that the market will hit the Stop Loss within the current candle. This is useful when trying to avoid a release, or avoiding a specific time (U.S. open for example)

Euro Price Distribution Forex

The Euro: 10 years and 16 countries

Written by A Forex View From Afar on Tuesday, December 30, 2008

On the 1st of January, the euro will celebrate its first ten years of life, and furthermore, Slovakia will join the Euro-area, meaning the single currency will be used officially in 16 countries.

Initially launched on the first day of 1999 for accounting purposes, the euro was introduced to ease financial transactions, trading and tourism between the initial euro-area block. Back in 1999, the euro was used in 11 countries (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain). Three years later, the euro was introduced in physical form, taking shape in notes and coins. As years went by, four other countries joined the euro-area, Cyprus, Greece, Malta, and Slovenia. The fifth country to join the euro-area, and the 16th in total is Slovakia, scheduled on the 1st of January 2009.

In its history, the euro reached a low of 0.82, in late 2000. Since then, the euro has risen, as the world's leading central banks pledge to increase their euro reserves, thus raising its value. As a consequence, the central bank’s currency reserves held in euros rose from 18.8% in 2000, to 26.5% in 2007, being the second most held reserve currency after the dollar, which as of 2007, represented 63.9% of the total. By mid 2008, the euro reached the 1.60 area, helping the single currency to become the most widespread currency in nominal terms, and also helping the Euro-area almost equal the U.S. GDP.

It also should be noted that both the euro and the Euro-area received a high degree of criticism over its short history. Probably, the height of unfavorable judgment was reached in the summer of 2008, by the time the euro was heading towards the 1.60 area. Some argued that the Euro-area might split, as some countries will enter into a recession (requiring a more adaptive interest rate) while other will try to fight inflation (requiring a more rigorous monetary stance). Despite that these claims have been around since the monetary union first took shape, there has never been official talks (or hints) about such a radical decision.

How much does the S&P have to fall before the Fed contemplates a rate cut

Written by A Forex View From Afar on Sunday, December 21, 2008

When the business cycle changes and heads lower into a trough, usually the equity markets and the Fed Funds start to head lower. The Fed cuts interest rates in order to help the economy, while the equity markets drop as traders’ price in the gloomier earnings perspective.

In the attached chart, we examine the degree the S&P 500 has to fall, in order for the Fed to reduce the targeted Fed Funds rate by 1 basis point. We are going to compare both the S&P downturns in points and percentage, for a better analysis. The S&P crash is not a prerequisite for the Fed to cut, but they usually follow closely.

In the last two decades there have been four notable market downtrends. From each of them, we divided the amount the Fed had cut in basis points to the total points and percentage the S&P lost over the appropriate period.

For example, in the infamous 1987 market crash, the Fed cut 0.40 basis points (0.4%) for every point the S&P lost, while at the same time, the Fed cut 1.42 basis points (1.42%) for every 1% the S&P lost.

It’s interesting to see the similar response the Fed had in the early 90’s, and in current times. In 2001 and 2008, the Fed cut 10 basis points for every 1% the S&P fell. Similarly, the Fed cut roughly 2 basis points for every 1% the S&P lost both in 1987, 1990 and in 1998. Furthermore, it’s amazing to see that almost every crash started in the summer months, except for the Dot-com crash.

However, even back then, in 2001, the S&P was very close in value in the summer months as it was in March, when the high was reached. A short conclusion could be that if something smells funny in the summer months, protect your portfolio with some Calls.

S&P And the Fed

What exactly is the Fed trying to achieve

Written by A Forex View From Afar on Thursday, December 18, 2008

This week, the Fed announced in the FOMC statement that it will maintain expanding its balance sheet, through buying “large quantities of agency debt and mortgage-backed securities” and by open market operations. In the following article we are going to see what, exactly, the Fed is trying to achieve with this.

Having the inflation rate drop like a stone, from 5.6% to the current 1.1% in 5 months, the Fed fears the economy will face a deflationary period. The assets price will decrease, instead of following the normal uptrend, due to the scarcity of natural resources and/or due to the decline in the real value of money (which happens in a normal-working economy).

Generally speaking, deflation comes during recessionary times, although this has not always been the case. In modern times it is, because it shows that the money supply is shrinking due the credit crisis. In other words, despite the Fed’s auction to increase the money supply, the monetary base got thinner and thinner.

Until a few months ago, the Fed influenced the business cycle and the money supply by buying and selling Treasury notes. As we all know, these days, monetary policy has reached its limits, so now the Fed is trying to buy different classes of assets in order to lift their price.

For example, by buying mortgages, as it was said in the statement, the Fed shoots two rabbits with one bullet. It first increases the price for mortgage bills. Due to the reverse relationship between the price and the yield of a bond, yields drop, making mortgages more accessible. Secondly, it will increase the market liquidity, which pretty much dried out during the credit crisis. Thirdly, and more important, it will increase the price for various assets (houses for example) by stimulating demand, raising inflation expectations.

However, theory sometimes has little to do with reality. A similar approach was tried by the Bank of Japan in early 2000, but from my point of view, even now, the Japanese economy has not fully recovered.

Treasuries And Corporate Debt, Two Different Stories

Written by A Forex View From Afar on Tuesday, December 16, 2008

Even though lately, yields on the instruments the U.S. government uses to borrow, treasury notes, have fallen to zero, or close to it, the yields for corporate debt is trading at a record high.

For example, the long term debt paper issued by Verizon, which has an investment grade rating, yields around 9%, while, debt issued by Kodak Eastman yields a whopping 17% for a 5 year maturity period. At the same time, treasuries are trading at records lows and some investors are even accepting negative yields (theoretically the borrower should receive interest from the lender). The equivalent treasury yield for the Verizon loan is around 2.60%, 3 times less, while for Kodak’s debt is 1.50%, 11 times less.

This is pretty much a consequence of a very low liquidity environment and safety flights, not to mention the herd mentality. Investors are selling every possible asset, in order to buy treasury notes, lifting their price. Because of the reverse relationship between the price of a bond and its yield, when investors buy a bond, its yield drops.

Expensive debt means two important things. First, it adds additional expenses since the company would have to pay much more for their debt. Second, it threatens some companies with bankruptcy, because they cannot access liquidity for the daily operations or raise enough cash to water the credit crunch’s consequences.

This is not a healthy environment for business’ to prosper, and it spells trouble ahead. So tomorrow, even thought the Fed had cut 75 basis points, the only real winners are the treasury notes, and not the real economy.

Sentiment Shifting At The ECB

Written by A Forex View From Afar on Sunday, December 14, 2008

The money markets in the Euro-area are currently experiencing a rather unusual event. The EONIA rate or the reference rate in the Euro-area is trading above the ECB’s target of 2.75% for the first time in the last few months.

Furthermore, the EONIA swap contracts, which practically gauge the prime bank’s sentiment over future interest rates, show a humped yield curve, indicating that the market is shifting its view. This comes after the EONIA swap market had a reverse yield curve, which usually indicates that the market expects that the ECB will carry on reducing interest rates.

The most important thing that happens these days in the EONIA swap market is that the spreads between the short-term and the long-term maturity dates are converging, confirming that the market expects the ECB to alter its rate cut cycle. As seen in the attached chart, the spread between the 2 year maturity date and the 1 week has almost approached zero, while it was trading at -0.8 a few weeks ago. The big swing in the European money-markets happened around the same time, subsequent to Mr. Trichet’s speech held one week ago.

ECB interest rate expectations

At the same time, it looks like the currency market has had a similar shift. On the day Mr. Trichet held the usual press conference, the euro managed to find a bottom against the dollar and then gained approximately 600 pips, to reach the highest value for the last two months on Thursday.

The change in sentiment regarding the future ECB interest rate can be a plausible cause for the strong gains the euro posted lately. On Thursday, for example, the euro advanced a strong number of pips, despite U.S. futures running into the red. On negative equity markets, the low yielding currencies, like the dollar and the yen strengthen, however, this was not the case for the dollar. Today, it was the first time in the last few months when the euro advanced on negative U.S. futures. Also, the euro might have been helped by the extremely low yields on the U.S. Treasury notes.

The (un)Usefulness of Fed Funds Futures

Written by A Forex View From Afar on Thursday, December 11, 2008

When someone wants to gauge the market’s sentiment for the Fed Funds rate there are two big choices: take a simple look at the Fed Funds Futures, or extract the probability from the bond market, which is somewhat more complicated because it usually includes a premium.

However, these days, the Fed Funds Futures market is totally hopeless. Why? The answer is simple, but we need to first explain how the Fed works.

The Fed sets its Targeted Rate in the eight FOMC meetings scheduled throughout the year. The Targeted Rate is only a target for the overnight interbanking rate. In normal market conditions, the effective rate, the real banking rate, usually swings in close proximity to the targeted rate. But lately, this has not been the case.

In the last few weeks, the Fed has silently adopted a quantitative easing policy, the effective rate has literally plummeted to zero. For example, in the last two days, the effective rate was set at 0.12%, way under the 1% benchmark.

The Fed Funds Futures market tracks the effective rate, not the Targeted Rate, so, because the Fed lets the effective rate swing wild, the Fed Funds Futures have lost their ability to track the Fed’s next move. This will probably remain as such until the Fed decides to bring back the effective rate near the targeted rate.

A Look Over the New Stimulus Plan

Written by A Forex View From Afar on Tuesday, December 09, 2008

In a televised interview, President-elect Obama announced a new stimulus plan that some believe very likely to help the U.S. economy recover much faster from the credit crunch. Or will it?

Even though the plan was not fully disclosed, the overnight equity markets posted strong rallies. Not fully divulging the coming plan is not something new for U.S. administrations. It all started with Mr. Paulson’s $700 billion fund, of which it is still unclear for what the available funds will be used. The only reference made about the plan was that it will include a public spending program to expand the U.S. infrastructure (e.g. building roads and bridges).

However, from the beginning there have been doubts on how much it will actually help the real economy. The method of “spending the way out of a recession” was first developed in the 1930’s, by Keynes. Back then, most of the economy was based on industry, as extraction of raw materials and their conversion into finished goods. For example, in that period a staggering majority of the Dow Jones index was formed by steel, mining and rail companies.

History shows us that even back then, when the economy was still based on industry, the Keynesian plan did not work properly. First, the U.S. infrastructure is pretty efficient these days, so most investments may not justify their costs. Back then, in the 1930’s, infrastructure was mostly based on bad roads, and mobility was very low. Today, this is not the case. Secondly, if building roads, which eats up a lot of resources, did not help the economy when most of it was still based on industry, how much can it help today, when a huge part of the economy is based on the financial system?

Furthermore, Japan tried to implement an appropriate method to fight deflation in early 2000. Japan faced similar problems as the U.S. economy: credit markets drying up, risk of deflation and zombie banks. Japan invested huge amounts in building roads, highways and bridges, but at the end of the day it still did not help the economy revive in any way. Even today, the Japanese economy is still not working properly. The Japanese bridges and roads built in that period remain known as the “bridges to nowhere”.

In conclusion, there are doubts on how much the plan can actually help the real economy. The market’s answer was pretty strong, but even so, it is hard to see any effects other than widening the Government deficit in the short run. Referring to a longer period of time, the world economy is set to revive by the end of 2009, and from the way construction works, most of these projects will not even start by then

ECB Press Conference Analysis

Written by A Forex View From Afar on Thursday, December 04, 2008

• The Governing Council decided to reduce the key ECB interest rates by a further 75 basis points
• Since September there had been an intensification and broadening of the financial market turmoil
• Tensions have increasingly spilled over from the financial sector to the real economy
• Downside risks to economic activity that were identified previously have materialized
• Global economic weakness and very sluggish domestic demand persisting in the next few quarters
• The economic outlook remains surrounded by an exceptionally high degree of uncertainty
• It is of the utmost importance to maintain discipline and a medium-term perspective in macroeconomic policy-making
• Annual HICP inflation has declined substantially since July
• The significant decline in headline inflation since the summer mainly reflects the considerable easing in global commodity prices over the past few months
• Lower commodity prices and weakening demand lead us [ECB] to conclude that inflationary pressures are diminishing further
• The annual HICP inflation rate is expected to continue to decline in the coming months and to be in line with price stability over the policy-relevant horizon.
• A faster decline in HICP inflation cannot be excluded around the middle of next year, mainly due to base effects. However, also due to base effects, inflation rates could increase again in the second half of the year
• Unexpected further declines in commodity prices could put downward pressure on inflation
• Underlying broad money growth point to a sustained but moderating rate of monetary expansion in the euro area
• The intensification of the financial market turmoil since mid-September marks a potential watershed in the evolution of monetary developments. The most recent money and credit data indicate that this intensification has had a significant impact on the behavior of market participants
• For the euro area as a whole, there were no significant indications of a drying up in the availability of loans
• The underlying pace of monetary expansion has remained strong, bus has continued to decelerate further.
• The level of uncertainty remains exceptionally high
• The Governing Council will continue to keep inflation expectations firmly anchored in line with its medium-term objective
• The Governing Council considers it crucial that discipline and a medium-term perspective are maintained, taking fully into account the consequences of any shorter-term action on fiscal sustainability.

ECB Staff Projections

The ECB Staff Projections had been downgraded significantly from the latest report, published in September. Euro system staff project sees the annual real GDP growth between 0.8% and 1.2% for 2008, between -1.0% and 0.0% for 2009, and between 0.5% and 1.5% for 2010.

The initial GDP projections in September were standing between 1.1% and 1.7% in 2008 and between 0.6% and 1.8% in 2009. Throughout the December projection, the ECB asses the Euro-area will be in a full blown recession in 2009. This is quite a large swing, since earlier this year growth was seen to pick up in 2009.

Referring to inflation, the Euro system staff projections foresee annual HICP inflation of between 3.2% and 3.4% for 2008 and declining to between 1.1% and 1.7% for 2009. For 2010, HICP inflation is projected to lie between 1.5% and 2.1%.

Projections for the CPI read were standing in September between 3.4% and 3.6% in 2008 and between 2.3% and 2.9%. Even thought the initial numbers were rived much lower for 2009, the ECB does not foresee inflation “undershooting” its target, as the BoE does. Furthermore, the large downward inflation revision can also be charge to the strong declines seen in the commodity markets since September, mainly in the crude’s price.


Mr. Trichet put a lot of empathy on the high uncertainty surrounding the financial market and even noticing a change in the market’s behavior. Even though it was not clearly specified which was, Mr. Trichet was probably referring to the market’s risk-aversion.

Overall, the press conference did not bring any surprises, however, Mr. Trichet seemed unwilling to discuss if the Governing Council members had any other alternative than the 75 basis points rate cut. Most likely, opinions diverge during the interest rate meeting, but the Council takes its decisions “unanimously” and “the Council is never pre-committed”. This was the first time when Mr. Trichet refused to talk about the options the central bank had.

Asked if the ECB sees the Euro-area fighting deflation in the coming quarters, Mr. Trichet insisted that the Euro-area is experiencing disinflation (a decrease in the rate of inflation), rather than deflation (negative inflation rate). Also, Mr. Trichet said the ECB is not implementing a quantitative easing policy, but the ECB’s balance sheet had expanded at a strong pace because the bank accepts any bid at a fixed rate. Before the credit crunch, the ECB had auction style open market operations.

Ahead of the ECB

Written by A Forex View From Afar on Wednesday, December 03, 2008

The market awaits the ECB’s interest rate decision tomorrow expecting the bank to cut another 50 basis points, down to 2.75%. The calls for a rate cut have received strong support lately, as the economy is heading towards a full-blown recession and the CPI read is starting to show deflation, rather than any price increase.

Last week, the Euro-area Flash CPI report showed that inflation dropped 1.1% in November to 2.1%, the biggest one month drop on record.
Most analysts say that with this huge drop in the inflation numbers, the ECB has a clear path to ease its monetary policy in the coming meetings. The Euro-area overnight rate, called Eonia, reached 2.91% yesterday, much lower than the ECB’s targeted rate of 3.25%. The difference between the targeted and the overnight rate shows that inter-banking markets now expects at least a 25 basis point rate cut. Some analysts had even increased their forecast for the next meeting held on December 4th, to a 75 basis point rate cut.

However, analyzing the CPI by its components, the biggest increases came from the energy sector. Lately, oil touched a 3-year low, declining close to 60% from the top reached earlier this year. Because of the way the CPI is calculated, rather to absorb over a long term price shocks, the CPI read will continue to decline in the coming months, well under the ECB’s target of 2% over the medium term, giving much more room for the ECB for rate cuts.

The question that comes now is how much exactly has the market “priced in” for any further rate cuts? The euro closed today around the same value it closed on November 6th, after the central bank had slashed the interest rate by 50 basis points. In the last few weeks the euro has managed to find a solid base, but if things do not go as planned tomorrow, we might see a test of recent support areas.

Mr. Trichet’s speech that closely follows the interest rate decision might give some additional clues about the next move the ECB is planning. Until now, the ECB has communicated very clearly with the market, especially when a change in the interest rate direction was prepared. Clear statements are an essential tool for any central bank trying to implement its policy, so a very clear message is expected tomorrow.

Furthermore, traders might find some additional clues about the future interest rate in the ECB’s staff projections, which will be updated tomorrow. The latest projections were released in September, and back then the GDP was set to grow between 1.1% and 1.7% in 2008 and between 0.6% and 1.8% in 2009. It’s very likely these numbers will be downgraded much lower. Also in September, the CPI was projected to grow between 3.4% and 3.6% in 2008 and between 2.3% and 2.9% in 2009. Most say the CPI read will be revised significantly lower.

Looking at Tonight’s BoJ Meeting

Written by A Forex View From Afar on Monday, December 01, 2008

The Bank of Japan has scheduled an emergency meeting for tonight, in response to the strains in the corporate debt market.

This comes, after at the last BoJ meeting, the governing council asked the bank’s members to study the possibility of extending the collateral base to also include corporate debt. The market is expecting this to be one of the main announcements the bank will make.

The decision to include corporate debt will have a positive effect on the Japanese economy. Banks will be able to raise liquidity from the central bank, using corporate loans, which make up a large part of the financial system. As a consequence, the corporate debt market would once again become liquid, making loans less costly for firms.

In the past week, the Governor of the BoJ said, in a number of speeches, that the cost of corporate debt is rising at a very fast pace, not seen since the deflationary period a decade ago. In addition, the Japanese finance minister also announced the economy may experience deflation in the coming years; something that the BoJ has battled since the mid 1990’s but has never really succeeded.

Peoples Bank of China Cut Rates

Written by A Forex View From Afar on Thursday, November 27, 2008

The People’s Bank of China cut the interest rate by 108 basis points, down to 5.58%, the fourth interest rate cut in the last three months.

This was the largest rate cut in the last decade for the Chinese central bank. The last time the bank cut by this magnitude was during the 1997 Asian crisis, when many of the Southeast Asian countries were paralyzed by huge declines in the value of the national currencies and escalating foreign debt. Back then, the IMF had a couple of dozen countries knocking at their doors for a loan. The Chinese Government has also announced a stimulus plan, in order to support the economy. It is said, the rescue package will reach nearly $600 billion.

For the moment, the biggest threat for the Chinese economy is the high number of unemployed persons. Due to the global slump in demand, factories laid off workers to reduce costs. China, a country in which industrial production has had impressive growth during the past few years, has been hit very hard by the tough international business conditions. The Chinese unemployment rate is expected to rise to the highest level seen in the last few years. The official unemployment number is 4.2% for the moment, but this number does not include large populated areas from the rural parts of the country.

If China, which is practically the world’s back engine, is preparing for hard times ahead, having both the central bank and the government taking pro-active actions, means the world may face some very hard times. Currently, most central banks expect growth to pick up in the third quarter of 2009, but chances are, these estimates will be changed to a later date.

Preparing For A Tough Holiday Season

Written by A Forex View From Afar on Thursday, November 27, 2008

Asian shares advanced overnight, even though the gains were modest. The European markets continued the positive momentum, advancing for the fourth consecutive day. The U.S. markets will be closed today.

Today, the U.S. will celebrate Thanksgiving Day, the date that unofficially marks the start of the holiday season. However, things are not so rosy ahead. Consumer spending dropped in October the most since 2001, marking the fourth consecutive month of declines. Spending makes up about 70% of the economy, so this report only increases the chances of a full recession in the coming quarters. In addition, consumer sentiment hit a 28-year low in November.

The two reports show that the coming holiday season might not be as it once used to be, with strong retail sales. Both retailers and manufacturers derive an important part of their profit from this part of the year. Most analysts expect the holiday earning season to miss the initial estimates. If so, the market will have another round of disappointment come the following earnings season.

U.K. Banks Still In Need Of Capital

Written by A Forex View From Afar on Tuesday, November 25, 2008

In testimony today, Mr. King, head of the Bank of England said banks still need much more capital, before they will be able to function near normal conditions. Right now, credit lines are starting to dry up in the U.K., sending the economy into a recession for the first time since 1991.

In the last few months, the U.K. Government nationalized the three largest banks, HBOS, Lloyds and Royal Bank of Scotland in a $56 billion bailout. Furthermore, Mr. Brown, the U.K. Prime Minister announced a plan for a $38.7 billion stimulus plan by next year, roughly 1% of the economy.

Most analysts expect the central bank to continue the rate-cut cycle, in order to support the economy and avoid a dangerous deflationary period ahead. The current 3% overnight rate is already the lowest seen in the last few decades.

The direct implications of these two actions, in normal market conditions, (not driven by the fear factor), are a weaker currency. The stimulus plan would take the government deficit to the highest level since the late 1980’s, implying that more currency would have to be printed, and put further downward pressure on interest rates.

Until now, reports have shown that the U.K. economy was the hardest hit among the G7 from the credit crunch, contracting 0.5% in Q3, or 2% annualized. As such, the pound is expected to continue to weaken against the other major currencies, including the dollar, as long as the market is in a risk aversion mode.

The ironic thing is that, Britain was the place where the technique of “spending” the way out of a recession by increasing the Government’s expenses and devaluating the currency, first derived. The genius behind this method was Keynes, and the practice helped revive the world economies after the Second World War. Wonder if it will work now?

Paulson Expected To Announce New Strategy

Written by A Forex View From Afar on Tuesday, November 25, 2008

Sources say the Treasury together with the Fed will announce today a new plan in order to support the consumer credit market with the remaining $350 billion left in the bailout fund.

The plan to boost liquidity in the consumer credit market is not new, since it was announced two weeks ago by the Treasury Secretary, Mr. Paulson. After the announcement, equity markets plunged on concerns that the rest of the bailout money will not reach the banking system. Some suggest Mr. Paulson is adopting this plan because of the pressures coming from the two political parties to help the real economy rather than Wall Street bankers.

The Treasury expects credit card rates to drop lower, as a consequence of the new lending program, helping consumption to pick up. At the same time automobile purchases and college education lending programs will also be targeted. The press conference is expected today, at 10 a.m. EST.

Government Announces Plan to Rescue Citi

Written by A Forex View From Afar on Tuesday, November 25, 2008

Citigroup is set to receive a lifeline from the U.S. government, in order to avoid bankruptcy. More than $300 billion worth of bad debt will be guaranteed by the Treasury in the coming months. In addition to the security package, the bank will receive a $20 billion cash infusion, totaling $55 billion received from the Treasury through the Troubled Asset Relief Program (TARP).

Last week, Citi’s shares plunge a record 60%, as the bank was trying to sell itself to avoid Chapter 11. Even though these rumors had never been confirmed, the bank fell to the lowest price in the last decade. Throughout this period, the bank’s officers and executives insisted the bank is very well capitalized and has strong reserves of liquid assets. Now, it seems that was not the case after all.

At the current share value, the bank’s market cap is around $20 billion, far less than the write-downs that would have resulted from the portfolio of $300 billion worth of bad debt.

The move to save another bank will probably have a positive effect on the equity markets, as it shows the government is not about to let another Lehman situation happen any time soon. However, futures traders have not yet reacted to the news release, as the S&P Futures are down by 15.70 points, currently.

Expectations From the RBA

Written by A Forex View From Afar on Wednesday, November 19, 2008

In a speech held on Wednesday, the Reserve Bank of Australia Chairman, Mr. Glenn Stevens, confirmed to some extent, the market’s expectations that more rate cuts are coming in the following period.

The Australian economy is set to suffer a major slowdown next year, but some analysts say it will manage to avoid a recession, if the necessary steps are taken. The Australian central bank has already taken the steps towards monetary easing, by cutting a total of 200 basis points within the last three meetings. In his speech, Mr. Stevens announced support for the government expansionary policy, which usually implies increasing the government expenses.

Right now, the markets are expecting at least a 50 basis point rate cut at the next meeting, down to 4.75%. The market’s expectations have full chances of materializing, since the RBA adopts an inflation-targeting regime, in which anchoring future expectations is a crucial tool in implementing the monetary policy. A similar behavior (anchoring future expectations) can be seen at almost every major central bank.
Mr. Stevens has also declared “the cycle of greed and fear cannot be regulated away”, referring to the credit crunch and its origins.

Furthermore, the RBA Chairman said central bankers should focus more on asset swings and leverage, and trying to anticipate bubbles while they are forming. This is a remark that will probably model the financial system in the coming years, since many fingers point to the Fed for letting the housing market enter into a bubble and at the same time allowing the banking system to over-leverage itself. These two (bad) decisions were the main causes of the credit crunch.

GM and the EconomyGM and the Economy

Written by A Forex View From Afar on Tuesday, November 18, 2008

During his testimony at the House Financial Services Committee, Mr. Paulson rejected the idea of using bailout money in order to secure the balance sheets of the auto-industry.

It is quite interesting how a man who is in charge around $350 billion, refuses to use $25 billion to save the three U.S. car makers. At the same time, it is curious how fast the government came up with a plan to save the financial system, compared to the lethargic response to GM’s (desperate) calls. Who knows, maybe the lobbying party was larger for the financial corporations than for the auto-industry.

All told, the three car manufacturers: GM, Ford and Chrysler, add up to around 3 million jobs throughout the whole U.S. economy, not to mention the branches spread around the world. Earlier this month, GM declared that it might not have the necessary cash to finish the year. Well, the year still has more than a month to finish, meaning that GM is in a very difficult situation. As of 2004, GM losses reached a massive $72 billion.

Allowing GM to fail would be another huge hit for the U.S. economy. Such an action would probably have the same effect on the economy as the Lehman bankruptcy in the financial sector. My view is that the auto-industry must not be allowed to fail, because if it does, the equity markets will post record declines in the period ahead, and the U.S. recession will be much deeper than previously thought

The Recessionary Group of Seven

Written by A Forex View From Afar on Monday, November 17, 2008

Despite all the measures taken by the world’s major governments and central banks, it is hard to believe the developed economies will have the power to avoid the recessionary path.

Today, Japan was just the latest developed country to join the slump list. Also on that list, the euro-union’s biggest countries including Germany, U.K, Spain and Italy, but surprisingly not France. Most analysts say that it is only a matter of time until Switzerland, Canada and the U.S. economies put their names on the list of countries with two (or more) consecutive negative quarters. As such, the G7 (Group of Seven) should be renamed the RG7 (The Recessionary Group of Seven).

It looks like the financial markets are not eager to price in such news. This is understandable since the major indexes have lost around 40% so far this year. Most analysts have dramatically diluted their outlook expectations for the economy in the coming quarter, from just a few months earlier. The latest forecasts say that economic growth will pick up somewhere in the third or fourth quarter of 2009. From my point of view, expectations for a bottom in the equity markets before the year-end are pretty low, especially if we look ahead to the first and second quarters’ earnings. Right now, consumers are feeling the full-blow of the credit crunch, and without consumers’ spending, earnings will come in weak to very weak. However, until then let us see how many corporations will avoid Chapter 11 in the coming months.

The Economy Is Running Out Of Credit

Written by A Forex View From Afar on Tuesday, November 11, 2008

Markets plunged today as earnings forecasts for almost every company listed has been cut, while others are taking large strides towards possible bankruptcy (read GM).

There is no big surprise here since most of the U.S. economy runs on consumption which is sustained by credit lines. But it is important to understand how it all ties in. In the first place, the credit crunch means harder access to credit lines, which in time erodes consumption.

The most affected industries are obviously the ones in which consumers need credit lines in order to raise the necessary funds to pay for services or assets. Two of those industries are easily identifiable as the housing the auto industry, but they are by no means the only ones.

Generally speaking, companies first need to see (or anticipate) demand picking up before they will start making investments and hiring new people again. However, this is not happening now, as the unemployment rate is set to rise a few full percentage points in the coming year. As the unemployment rate grows, consumption will lessen, since the two factors usually move in a vicious cycle.

To make a long story short, no credit means sluggish consumption, which results in labor cut offs. As unemployment rises, the consumption continues to decline. What can break this cycle is cheap and easy credit, but it looks like this will not happen in the near future. So please Mr. Wall-Street-Banker, start to do what you are supposed to do, lend money

Has the monetary policy reach its limits?

Written by A Forex View From Afar on Tuesday, November 11, 2008

Futures markets are currently pricing in at least a 25 basis point rate cut at the next Fed meeting, which will be held 16th of December.

However, is there a real need for another rate cut? In order to answer this question, we first need to know exactly how the Fed works.

The Federal Open Market Committee, or FOMC, meets eight times a year to adjust the bank’s monetary stance. At these meetings, the FOMC sets the Targeted Fed Funds Rate, which is currently set at 1%. From the last sentence, the word “targeted” should be noted, because the FOMC only sets the target, which should be achieved in the inter-banking market.

The nominal rate or the real rate at which banks make overnight loans is called the Fed Fund, which is now running at 0.27%, a historical low, and at the same time, way below the targeted rate. More accurately, the spread between the target rate and the effective rate is one of the biggest on record, these days.

The question that now arises is ‘how much would the real economy benefit from another rate cut given that the spread between the targeted rate and the effective rate is almost 75 basis points?’ Another rate cut will reduce the effective rate by a few extra points, but it would still not match the 25 basis point cut in the targeted rate.

From this point of view, it seems the inter-banking market has fully priced in a few rate cuts. This means that another rate cut will have a very limited impact for the real economy, since the effective rate is so low. We are experiencing the limits of monetary policy and this is a strong sign the government should enact another stimulus/bailout plan rather quickly, before the Fed runs completely out of power.

More Funds For Banks From The Fed

Written by A Forex View From Afar on Friday, November 07, 2008

Recently, the Fed made a revolutionary decision (which, by the way is used by the most central banks) to pay interest rates on the bank’s funds that are held at the central bank.

U.S. based banks are required to hold a portion of their deposits and notes at the central bank. Depending on the bank’s activity, the reserve requirements can vary from one day to the next. Therefore, some banks will have a surplus, while others will need additional funds to meet the minimal reserve requirements.

Now here comes the Fed: until the credit crunch reached its peak, the Fed did not pay an interest rate for these funds, so banks saw no need to hold any excessive funds. However, the developments in the financial markets pushed Congress to vote the measure into law, so the Fed could actually encourage banks to lend to each other in the Fed Funds market.

Until now, the Fed paid for the minimal reserve funds, the Fed targeted rate minus 10 basis points, while for the excessive funds it paid the Fed’s targeted rate minus 35 basis points. However, the Fed has made the decision to alter the rates the banks receive for their available funds. From November 6, the Fed will pay for both the reserve requirements and excessive funds the Fed targeted rate over the maintenance period.

In the short run, the Fed will boost the cash available for banks, dragging the Libor rates lower. In addition, the decision to increase the interest paid on banks’ cash will help the Fed Funds Rate, which is now at 0.22%, to come closer to the targeted 1%.

ECB Press Conference Bullet Points And Analysis

Written by A Forex View From Afar on Friday, November 07, 2008

• the Governing Council decided to reduce the key ECB interest rates further by 50 basis points, following the previous coordinated interest rate cut on 8 October 2008
• high degree of uncertainty in large part stemming from the intensification and broadening of the financial market turmoil.
• The world economy is feeling the adverse effects, as tensions increasingly spill over from the financial sector to the real economy and from advanced economies to emerging market economies
• activity has weakened significantly, with sluggish domestic and external demand and tighter financing conditions
• important that the banking sector takes fully into account the significant support measures adopted by governments to deal with the financial turmoil
• These measures should be supporting trust in the financial system and should help to prevent undue constraints in credit supply
• downside risks to economic activity identified earlier have materialized, particularly those stemming from the financial market tensions
• HICP has been steadily declining since July
• high level of inflation is largely due to both the direct and indirect effects of past surges in energy and food prices at the global level
• significant increase in unit labor cost.
• sharp falls in commodity prices, as well as the ongoing weakening in demand, suggest that the annual HICP inflation rate will continue to decline in the coming months and reach a level in line with price stability during the course of 2009.
• some even stronger downside movements in HICP inflation cannot be excluded around the middle of next year. These movements would be short-lived and therefore not relevant from a monetary policy perspective
• growth rates of broad money and credit aggregates, while still remaining strong, continued to decline in September.
• upside risks to price stability are diminishing but that they have not disappeared completely.
• financial tensions has already had an identifiable impact, particularly in the form of outflows from money market funds and greater inflows into overnight deposits
• the euro area as a whole, up to September there were no indications of a drying-up in the availability of bank loans to households and non-financial corporations
• intensification and broadening of the financial market turmoil is likely to dampen global and euro area demand for a rather protracted period of time

Mr. Trichet appeared more bearish than usual over the Euro-area economy, especially as the financial crisis is affecting the real economy. In the bank’s words, the HICP is expected to come down in the following period, although Mr. Trichet had avoided calling a deflationary period. Furthermore, he suggested that some periodical, “strong downside movements in HICP” may appear in the following period, but this will not be relevant due to its short-term span.

In the Q&A section, Mr. Trichet said the Governing Council had to choose between a 50 and 75 basis points cut, but the final decision was “unanimously” to cut rates by 50 basis points, in order to assure price stability. When asked about the future interest rate decisions, the ECB Chairman said they are never pre-committed, even though later he added “we won’t exclude we can cut again”.

Both in the speech and in the question and answers session, Mr. Trichet put a lot of empathy on the banking sector, saying that “banks have to live up to their consequences” and that “banking sector takes fully into account the significant support measures adopted by governments”. Another issue addressed by the Chairman of the ECB was that banks do not set the rate cuts to the real economy, and instead of using the excessive funds in the money-markets, sending the Libor rates lower, banks place the excessive funds at the ECB’s deposit facility. Most likely, the central bank will make a decision in the following weeks to solve this problem.

As for now, futures markets are pricing in at least a 25 basis points rate cut next month. In the currency market, the Euro recovered during the speech most of the ground loss during the interest rate decision. In the last months, the euro had lost approximately 20% from the top reached in July.

A Look Over The Manufacturing Sector

Written by A Forex View From Afar on Tuesday, November 04, 2008

Manufacturing on both sides of the Atlantic took a beating in the last few months, as the limited access to credit and liquidity dampened consumption.

The Manufacturing ISM report showed that the U.S. manufacturing industry is contracting at the highest speed seen in the last 26 years. The read of 38.9 corresponds to a noticeable decline in the GDP numbers. The release also showed that exports, which until now were the only thing that helped keep GDP positive, fell to the lowest level since 1988. It seems the U.S. trade balance will have to wait another few years until someone starts to actually think about it. U.S. exports are set to decline as demand weakens at a strong pace in the biggest trading partners.

In the Euro-area, the Manufacturing PMI fell for the fifth consecutive month in October, to the lowest value on record, with many of the sub-indexes at record low values. The recent economic releases suggest the Euro-area may already be in a recession, after the second quarter GDP came in at -0.2%. In the U.K., manufacturing output also dropped at a record pace the release showed today. The main reason cited was that internal and foreign demand has been dampened.

All this put together shows the world’s major economies will face a very harsh period ahead. As the manufacturing sector becomes gloomier, the number of job cuts will increase. This will only make things hard in the short-term, adding more hurt to a global economy that seems to be in great pains.

Libor Starts To Move Lower. The freeze thaws.

Written by A Forex View From Afar on Friday, October 31, 2008

Following the global rate cuts and the impressive measures taken to ensure liquidity in the financial markets, the Libor rates are starting to show signs of relief.

The 3-month dollar Libor, or the rate at which banks borrow money from other banks with a maturity of three months, declined for a full 14 days, to 3.19%. The overnight dollar Libor rate, used to fund overnight activity, dropped to 0.79% a record low as the market expects more rate cuts to follow shortly.

Action taken by the ECB, looking for a similar outcome, driving the inter-banking rates lower, the central bank has pumped over a $1 trillion into open market operations. The euro 3-month Libor rate also declined yesterday for the 14th consecutive day, down to 4.83%.

However, even though short-term rates are at very low levels due to the huge liquidity central banks provide, banks still do not lend on longer maturities. The spread between the shorter-term and the longer-term loans is still very large, despite recent declines. The 3-month dollar Libor is 220 points above the Fed’s rate, compared with just a few dozen points in normal market conditions.

The question now is how low and how quickly will the rates fall. Central banks are now walking at the “extreme end” of monetary policy. Central banks operate by influencing short-term rates, and hoping (it is really hoping) to move the longer maturity rates; very similar to a whip. However, as banks are reluctant to loan to each other, a central bank has practically no control over the “end” of the whip, thus, the high spread between the shorter-term (which are at record lows) and the longer interest rates.

Expecting A Hold, But Secretly Wanting A Cut To 0.25%

Written by A Forex View From Afar on Friday, October 31, 2008

After the Federal Reserve cut interest rates by 50 basis points yesterday, markets have shifted their focus to the Bank of Japan, which is expected to hold firm the overnight lending rate, but there is rising speculation they will cut 25 basis points.

Speculation is increasing for a cut although just one week ago the chances for such a movement were minimal. If the bank does cut, as is speculated, the overnight rate will fall to 25 basis points, and remain the lowest among the developed countries.

The rate cut might see more support from the government rather than from the central bank. The Japanese economy may face a prolonged slowdown, as exports slide due to international tensions and the stronger yen. In the past, BoJ Governor, Masaaki Shirakawa, declared that the current rates are dangerously low.

However, if the central bank does not cut, the Japanese Yen may continue to strengthen. Looking at how the markets have reacted to risk lately, in the case of a hold decision from the bank, it would not be out of the question for the yen to test the 94.00 and 90.00 areas again.

Foreseeing A Currency Crisis

Written by A Forex View From Afar on Thursday, October 30, 2008

It was mentioned earlier that a number of currency crisis’ may emerge in the future as the world continues to head toward a recession and funding (money) becomes scarce.

Emerging economies have the most exposure to a currency crisis, because they usually have a high balance of payment deficit (with most of the debt attributed to the governments’ entities). If the country also has a pegged currency exchange, it can become a sitting duck.

The reason is that the debt must be supported by inflows of cash. If economic conditions and outlook deteriorates (as is happening these days for most of the world), inflows will slow down, and even switch to outflows. This puts double pressure on the currency, first that the government is near bankruptcy (can’t issue any more debt) and then the currency is set to depreciate due to money exiting the country.

This is where the rating agencies usually come into play, and cut the country’s debt rating. To make things worse, typically the same trade desks who issue a negative outlook for the country are the ones who initiate the currency attack, and force the country to drop the peg, or depreciate the currency at a very fast pace.

The country does not have too many options available, so it will be forced to adopt a flexible exchange rate. As the currency depreciates, the foreign debt will increase, making matters worse. These types of attacks are very well documented, such a case being the 1997 Asian Crisis and then a few years later the Argentinean crisis.

Looking to Central Banks for Intervention

Written by A Forex View From Afar on Tuesday, October 28, 2008

The Bank of Japan will very likely intervene and sell the Japanese Yen, in order to give a helping hand to Japanese exporters.

The Japanese Yen strengthened this month about 15% against the dollar and 29% against the Euro, as the currency is being bought to cover the short positions from carry trades.

European authorities declared that the Bank of Japan should do the intervention alone, with no help coming from the ECB. The reason behind this decision may very well be that both the ECB and European politicians are more than happy with the low value of the single currency, after more than a year of being criticized for a strong currency.

Sources have also said that other central banks have intervened in the foreign exchange market lately. The RBA stopped the Australian Dollar depreciating during the last few days, after it fell almost 30% from its peak reach in July. Others also pointed to the Swiss National Bank for supporting the Swiss currency lately, in an effort to reduce the intra-day volatility. Central banks from emerging countries have also supported their currency lately against speculative attacks.

Consequences of the Lehman Bankruptcy

Written by A Forex View From Afar on Tuesday, October 28, 2008

Since Lehman was declared bankrupt, it seems the financial world has gone completely mad. In the past few weeks the LIBOR rates have set new records, now the Fed funds rate is following.

However, what exactly is the “Fed funds rate”? The fund rate is the inter-banking rate at which U.S. primary dealers lend to each other to meet the minimum reserve requirements. In order for a bank to operate, it needs to build up a minimum reserve at the Federal Reserve. Due to diverse operations (lending, deposits) the minimum required figure changes from one day to the next. As such, banks that do not meet the minimum requirements borrow from those who have excess reserves.

When the Fed sets the interest rate, it actually sets the target for the Fed funds rate. It should be noted, that the Fed only targets a specific rate, but the real (effective) rate, fluctuates on a daily basis around the targeted rate.

Here is where the Fed’s problems come in. It looks like lately, especially after the Lehman collapse, that the Fed has lost control over the effective rate. A simple look over the attached chart can see the high volatility occurring in the Fed funds market. The yellow line shows the effective rate, while the straight line denotes the target rate. Notice how after the Lehman collapse, from the middle of September, the effective rate has gone haywire.

This is very important because it actually shows the loss of control over the Fed Funds, which through others, is the rate at which the central bank controls the whole economy and the business cycle. Losing the ability to control monetary policy, the central bank has practically tied its own hands.

With the effective rate staying at 0.95% (compared with the targeted rate of 1.5%) it looks like the Fed will only have to sign the paper on Wednesday, because the inter-banking market has already priced in a 50 basis point rate cut. The “cut joy” will be seen only in the stock market and for a limited amount of time.

Fed Funds Rate after Lehman

Nikkei: The Road To 1982 And Back

Written by A Forex View From Afar on Monday, October 27, 2008

The Japanese Nikkei tumbled 486 points overnight, falling to 7,162.90. So far this year, the Nikkei has fallen, in the face of the credit crunch, a little more than 50%.

The same level, 7,160 points, was last touched by the Japanese market back in 1982, when one of the biggest bubbles known to modern financial world was developing. The bubble continued until 1989, where it peaked at 40,000 points, more than 5.5 times today’s value.

In order to heal its wounds, the Nikkei retraced for 13 years, until 2003 when it fell to 8,400 points. At its peak, back in 1989, the earnings per share was standing at 70.00 compared with today’s 8.6..

On the macroeconomic scale, since the 1990’s, the Japanese economy has fought deflation and a fast ageing population. Due to the low inflation environment, the BoJ interest rates are already at a low level, 0.50%, leaving the central bank’s hands tied in the face of the global slowdown.

Hedge Funds and Random Walks

Written by A Forex View From Afar on Monday, October 27, 2008

During the last few months, despite the global slowdown and the upheaval going on in the financial markets, there was something that retail traders do not see very often: big guys losing money.

September was the worst month on record for hedge funds around the world since 2000. Almost every hedge fund posted declines, with funds specializing in investments made in European and emerging markets being the most affected. This debunks the myth that hedge funds post profits no matter if times are good or bad, regardless.

This raises the question, is it really worth investing in a speculation vehicle instead of picking your own stocks and developing your own trading strategy? The quote “a rising tide raises all boats” seems to work very well here, almost all funds post profits in a rising market. However, it is worth mentioning that there are also a small number of funds that can profit from the current situation. These funds trade “fat-tails”, described in statistics as very rare events, with a very small chance of occurring, 5% or less.

It really boils down to a number of factors including risk tolerance, time availability, investable funds, and financial knowledge. Hedge funds have to disclose performance but individual investors do not, and while there are sure to be some individual investors that have profited in recent times, the number is sure to be low.

Wrong Time to Catch Up for Emerging Economies

Written by A Forex View From Afar on Thursday, October 23, 2008

In the economic world, the term “catch up” describes an emerging country’s economy that tries to reach the standards of an industrialized economy.

When the small “insular” economies are catching up, deficit is starting to build up, threatening to throw the country into a burden of debt. However, this debt is what will help the economy progress, so it is often called a “necessary evil”.

The problem is, these days the emerging countries need inflows of cash in order to support the debt, something that is not happening now. The credit crunch, among other things has completely dried up the credit lines. As money leaves the emerging economies, usually for the safety of the bond market, the countries’ currency declines and the debt size increases, becoming unsustainable.

These effects could already been seen in countries were the deficit was built on foreign currencies. First, it was Iceland, which the entire financial system had only foreign owned debt. Now it is Hungary’s turn, which also has an large amount of their debt in foreign currencies and which has also helped some bank-runs after rumors emerge. In an attempt to save the local currency, the Hungarian forint, the central bank unexpectedly raised interest rates 300 basis points, or 3 percent to 11.50%. Just in the last month, the forint declined 15% compared with the euro and a massive 30% compared with the U.S. dollar. Intra-day volatility has been extremely high during this period.

At the start of the credit crunch, many analyst including myself, thought the crisis will have somewhat of a positive effect for the emerging economies, which were in danger of overheating due to the high inflation levels. However, something good quickly turned in a very strong danger and now, after the recent developments in the emerging economies (Argentina close to a default, lowest growth in recent years in China, and high depreciations in most emerging country’s currency) it seems the IMF will have some hard work ahead. To some extent, if the Fed bails out banks, the IMF bails out whole economies and countries.

If you are into longer-term trades, it is worth a look at some currencies from the emerging block. You can never tell when a speculative attack will come…

It May Get Rough, But not for the Jpy bulls

Written by A Forex View From Afar on Wednesday, October 22, 2008

As the markets head toward earnings season, things get clearer each day in regard to how companies see the period ahead; job cuts and lower earnings forecasts. With slowing demand, companies try to reduce expenses, and for the majority of companies, especially in the service based industry, the human work-force represents the single biggest expense. This is usually catalogued as a fixed cost, since no matter how big or small the backlog of orders, wages will remain the same. As a consequence, companies seek to reduce the work labor as much as possible. For example, Pfizer Inc. cut 11,000 jobs in the last period.

The second thing that affects the markets are lower earnings estimates, which are said to be the worst in recent memory. In addition, analysts foresee corporations trying to keep a stack cash available at any time, because of the credit crisis, which has already made both short and long term funding more expensive. S&P analyst say dividends might plunge another 10% this quarter, reaching the biggest decline since 1958.

Put the recent news one on top of these little gems, and we will end up with another reason not to be too enthusiastic when looking at the equity markets. Slowly, the yen may become the best performer this year of the major currencies, seriously, the lower yielder may shine through, even with a BOJ rate cut.

Second Stimulus On Its Way

Written by A Forex View From Afar on Monday, October 20, 2008

After the “free $600” stimulus and a bailout plan that was voted and still, we still find every day something new about it, as it looks like a third booster may be on its way.

In his testimony, before the House of Representatives Budget Committee, Mr. Bernanke said a third plan (or second stimulus) would be welcomed for the economy. This is quite a turn, since just a few months back, the Fed Chairman said it was to early to think of such a measure.

The big question is now, what should the markets focus upon? On the stimulus plan, which will ease some of the economic tensions, or on the fact that the stimulus would not have to come if the economy would start to perform better?

For the moment, the markets are buying the news and posting modest gains. The facts that scare the most is that a central bank is usually clear in its expectations, and since Mr. Bernanke described the outlook as “exceptionally uncertain”, things are not on the bright side. Furthermore, since the boost is expected to materialize in the following months, most likely after elections, it seems the Fed’s expectations are on the downside.

Bring Back The Specialist, Hank

Written by A Forex View From Afar on Saturday, October 18, 2008

Mr. Paulson said today, in a televised interview, that only banks would have accesses to the $700 billion fund, excluding hedge funds from the list. You know, hedge funds, those that are set up and allowed to short the market. Although this may not sound important, the underlying factors are that hedge funds are the undisputed champions when it comes to leverage. It is common for a hedge fund to use up to 1:30 leverage, beating even a retail trader in what can be levered from a single asset. You may say that forex traders use a 1:100 leverage, true, but we use this lever just for the open position, while hedge funds use a 1:30 leverage for their whole balance sheet. Big difference!

Going back to the implications of hedge funds not receiving apenny from the bank’s bailout money, things may get rough because of the high leverage that they put to use, and in order to achieve the high leverage they need to borrow their money from banks. The problems appear when hedge funds will have to write down the toxic debt they own. Having practically no market in which to sell the assets, the only solution is to mark them as losses. As the losses are marked the equity (net asset value) shrinks, increasing the leverage used to control the exposure.

Just a look at the Libor rate which tells us that banks do not lend too much to anybody these days, and certainly not to those that lever the debt, and rightly so many would say. Having the credit line removed means that hedge funds leverage can only go higher as the risk-exposure increases. If we generalize this, it is very likely that a systematic risk will hit the market, similar to when a bank (let us say Lehman) goes into bankruptcy.

The solution to avoid such a scenario is for hedge funds to de-lever their market exposure. There are two ways this can be achieved: either increase the net assets, which means attracting more investors – something very unlikely these days, or reduce the market exposure, meaning cutting down market positions, into an arena that is not buying debt. While hedge funds reduce their market exposure the asset price will fall down, being commodities, equities or all sorts of derivatives, and as market prices keep falling, more de-leveraging will be needed. The vicious cycle is what the markets are witnessing right now.

In order to draw a quick conclusion, not allowing hedge funds to sell their toxic assets is not such a good decision. However, any investment that is made in a highly leveraged investment machine comes with a risk, and the situation is showing that algorithm-based investments, made on complex risk models based on mathematical pricing formulas does not beat the market after all.

The halcyon days of having a specialist on the desk to float the market and create the liquidity are sorely missed, and now the M.I.T. graduates that were maintaining the computer coding in the black box may have to accept that supply and demand may after all trump debt ratings and quantum lines. Maybe now traders can start to look for a trend that lasts longer than the lunch break.

Government Private banks

Written by A Forex View From Afar on Wednesday, October 15, 2008

With the recent developments in the financial markets, it seems more and more banks will become nothing more than a government subsidiary, while the others left “free” will have the government as one of the biggest shareholders.

In the short term, this does not have major implications. Eventually, it will help banks build up their balance sheets and create a desire to lend to each other, at least this is what is being said right now. However, in the long run, the effects of having the government deep inside the shareholders structure, is not such a good thing.

A company’s job is to maximize its profits, which does not match too much to the government’s task list. The government would rather aim at full employment and a strong housing market.

Full employment means banks are likely to increase the number of workers, or simply not fire anyone. However, this would put additional pressure on the bank’s balance sheets. Furthermore, having control on the financial system, the government cannot only influence the bank’s decision, but the business cycles too.

The central banks control the money supply throughout the financial system; having the government owning an important part of it will end up with a duality that is not too healthy in the long run. If for example the central bank would want to raise the interest rates (choking growth), while the government would not want this to happen, it will just “suggest” that banks lend more. This way, the government will ensure a large number of people will keep their jobs, even if it is not the healthiest thing to do.

A second consequence is that the government will try to do everything possible to keep the housing market in an upward trend. Banks would be encouraged to lend to (no income) Average Joe, so he can afford a new house just like his neighbor. This is exactly what led to today’s credit crunch, and probably would be even stronger because banks (which are half state owned) will officially know that they will not be let to fail.

To put it more simply, history shows an impressive number of times that the government is one of the worst decision-makers when it comes to companies; Just think of the huge Federal Deficit, and all the money that is spent world-wide on bad state owned investments and initiatives. As a short period decision (referring to a few years), state owned banks are a good decision, but the government should also know when to pack his things in and make room for the capitalism, or the children of the free-markets.

First signs of relief are here

Written by A Forex View From Afar on Wednesday, October 15, 2008

The global markets indicate that the first signs of relief are here, after indicating investor fear and uncertainty for the last few weeks .

The so-called “fear index”, the VIX, fell from the all time top reached on Friday, and is now trading around the 53 point value, showing the market has found some confidence. Libor, the rate at which banks (should) lend to each other, declined this week as the recent government auctions restore the banks confidence, to some extent. The 3-month dollar Libor rate fell 12 basis points, the most since the middle of March, while the corresponding euro rate fell 7 points, the biggest one day decline this year. It also should be noted that despite recent developments, money rates still are at unusual high levels, much higher than in current market conditions.

For now, it looks like the government/central bank interventions were a success, at least with the money market rates. However, in the currency market, the latest actions had a limited affect. The market started to slowly buy risk, but so far, the currency pairs did not manage to break any important support or resistance levels, and most of the time they just moved around swing points. If no rumors will emerge again about bankruptcies and bank failures in the following sessions, it is very likely traders will start to look for overnight swaps, making the yen crosses move higher.

Another Step Into the Market for the Fed

Written by A Forex View From Afar on Tuesday, October 14, 2008

The world’s major central banks are taking more unprecedented actions to steer the global credit crisis. The Fed has agreed with the European Central Bank, Bank of England and the Swiss National Bank to offer unlimited dollar funds in repos with a maturity of 7 days, 28 days and 84 days. Also, in the release statement it said Bank of Japan “will be considering the introduction of similar measures”.

This is just one of the recent measures the major central banks have taken to ease the money-markets strains. The Fed has made this decision because the inter-banking market has dried up, with banks unwilling to lend unsecured funds. The central banks announced that open market operations would be held at fixed interest.

Such operations are usually held using auctions for a limited amount of money, but this would send the Fed Funds close to zero, so this is why the “fixed interest rate” solution was chosen. The only problem for banks would be now to produce feasible collateral in order to access money from the central banks.

State Owned RBS and HBOS

Written by A Forex View From Afar on Tuesday, October 14, 2008

The U.K. Government has decided to inject up to 37 billion pounds ($64 billion) in a bailout for the country's biggest banks. Royal Bank of Scotland, HBOS and Lloyds TSB are the banks that will receive the cash injection, split into 20 billion pounds for RBS and 17 billion pounds for HBOS and Lloyds.

Therefore, the major shareholder of HBOS and RBS will become the U.K. Government, which will hold a 58% stake in HBOS and 60% in RBS. Furthermore, both banks will have Government controlled seats in the board. The actions taken lately clearly show that central banks are ready to step into the market and save the financial system. The markets are rallying today, aided by the actions taken by the central banks.

However, as in the last few days this has not been reflected in the currency market, yet. The yen, which indicates the market’s risk-awareness, is trading below the Asian session open price, while the European pairs are trading virtually flat since the Asian session opened, even though the trading range was quite large. All eyes are now on the Libor rates, to see if the money markets tensions come down to some degree.

Not All of Them Cut

Written by A Forex View From Afar on Thursday, October 09, 2008

After the major central banks decided to cut the overnight interest rate by 50 basis points, we find out today that one of them was not so successful in achieving its objective.

The Swiss National Bank failed today in achieving the intended policy rate of 2.5%. The Swiss central bank, unlike other, tries to influence the Libor rate to control the country’s monetary policy. The logic behind it is that the population/companies/financial institutions access loans at the Libor rate, and by controlling that the SNB has direct control over monetary supply and demands.

However, the Libor rate is a little off these days, simply because banks are not lending to each other right now. As a consequence the 3-month Libor rate increased the SNB targeted rate, and things went higher instead of lower.

The 3-month Libor was fixed at 3.087%, way above the SNB’s target of 2.50%. It is very likely now that in the following days the SNB will flood the market with 3-months repos, in order to drag the Libor rate down. The direct effect of this action will be a cheaper Swiss Franc, which would mean the Usd/Chf is likely to be heading higher.

The same monetary policy the SNB tried to implement has proven to be very useful over the past few years. With the Confidence Crisis now embedded into the financial mind-set the SNB may have their work cut out over the next few days to scramble things together, and in the mean-time we will keep an eye on the swissy moves.

Government Banking

Written by A Forex View From Afar on Thursday, October 09, 2008

The U.S. Treasury is analyzing an initiative to inject money in the financial system by buying ownership stakes in banks. This comes after more analysts and politicians said this would be a possible solution in which taxpayers’ money would not be put at risk. Treasury sources have said the plan, in its current form, would allow authorities to make such a move.

The U.K. Government approached the same solution this week, injecting as much as $87 billion in the financial system. Some have said that the Government’s participation in banks’ equity shares could rise to as much as 30% of the four biggest banks in the U.K. In the 90’s, a similar solution was implemented by the Nordic countries; however, the financial system still needed a long time to recover. At the end of the financial crisis, the Nordic Governments were even able to make money by selling the banks’ shares.

Confidence Crisis, Still no relief

Written by A Forex View From Afar on Wednesday, October 08, 2008

The U.S. markets do not want to show any signs of relief, even after global central banks’ coordinated action to cut by 50 basis points on their overnight interest rates.

At the time of the announcement European equity markets rose from trading at -7%, moving to somewhere slightly above the break-even line initially. However, the joy was short lived and the major European indexes closed back into the negative territory, recording an average 5% declines. U.S. futures had a similar pattern of trading, they rose from -3% to the break-even level, however, soon went back into the negative territory. Heading towards the close the S&P 500 is positive by 1%. Today the VIX index, also know as the “fear index” rose to an all-time record of 59.00 points. At the beginning of September, the index was just above the 20 point benchmark, while in normal market conditions, the VIX trades somewhere around 10 to 15 points.

In the money markets, dollar Libor surged to a new intra-day high. Dollar Libor rose 144 basis points, to 5.38%, showing that banks are still charging huge premiums for unsecured loans. In normal market conditions the Libor is set just a few basis points above the Fed Funds Rate. It should be noted that the LIBOR rate was fixed before the central bank’s statement was made public.
All this put together shows that markets are still not ready to buy risk. In the currency market, the Japanese Yen, which strengthens in times of uncertainty, broke under the 100.00 yardstick on the Usd/Jpy pair. This is the second time in 2008 that the yen has broken this level, which had previously held since 1995.

The unprecedented action taken today clearly shows that the central banks are willing to fight the crisis of confidence, and now it is a possibility that these actions will inspire sufficient credibility that the markets can slowly find a bottom in the following days. If this happens, treasuries will be shorted for riskier assets, in a flight to “quality”, but first the VIX must head lower as Libor rates move lower and approach the fair value, which is far below the current read.

Attack on the Crown, version 2.0

Written by A Forex View From Afar on Tuesday, October 07, 2008

A little more then one year had passed since the credit crunch began, and the crisis is ready to proclaim its first victim among emerging economies: Iceland

Earlier this year, in April, the Icelandic Krona (which means crown) was under siege from a speculative attack, and as we reported at the time, it was likely to lead to a second round effect, which now spawns. Last time around sources said that the defunct Bear Stern was behind the speculative move, while today it seems the Icelandic economy is just a victim of the credit crunch, helped of course by some macro-funds and banks.

Iceland was forced to take a $5 billion loan from Russia today, after the country’s second biggest bank collapsed and another required a $500 million loan from the Central Bank. The country’s current account deficit (the difference between imports and exports) reached 34% of the GDP, becoming unsustainable for the real economy. As a consequence of the economic background the country’s debt rating has been cut to BBB, the lowest investment grade. If the debt rating is cut lower than this the country is in danger of defaulting, since most hedge funds and banks are not allowed to hold assets with a lower grade than ‘investment’.

The Icelandic Krona fell 40% in just one trading day, from 172.00 krona per euro to today’s 234 krona. The krona’s weakness came as the central bank took the decision to peg the currency to a trade-weighted index. "The emerging countries look very vulnerable, especially the ones with a high current account deficit. The Icelandic case raises some interesting questions, since the banks had still failed even tough the central bank and the government had provided liquidity, suggesting that it is a solvency problem" said Semar Bezau, European currency strategist at TheLFB-Forex.com. The small Icelandic economy looks to be the first victim of the credit crisis. The question is whether there are other economies that will follow.

Sell the Rumor for the aussie?

Written by A Forex View From Afar on Monday, October 06, 2008

The Reserve Bank of Australia is expected to cut the Cash Rate by 50 basis points, to 6.50% on Monday, and if so it would be the second cut in Australian interest rates this year. In September the central bank cut 25 basis points from the record 7.25% overnight rate at that time, quoting a reduction in forward growth potential. If market expectations come through the bank would be in its first cutting cycle since 2001, when the bank cut from 6.00% to 4.25% over a 20 month period.

In the last few months the aussie dropped as the market started to price in the fact that the yield differential would be reduced. From the high reached in July the pair has tumbled more than 2500 pips, or 27%. Add to that, today the pair tumbled nearly 700 pips, which is a record, for the time being. In addition to the expected rate-cut today there were other forces at work, including risk aversion and the steep drop in commodities from the last few weeks.

The market is very likely to remain in a risk aversion phase for the following days, adding selling pressure to the aussie. In addition, as the credit crunch deepens, the market’s expectations for further rate cuts from the RBA increases, something that is aussie negative. It is very likely that tomorrow we may see only the “sell the rumor” part, while the “buy the news” will be left without a job because of the current market circumstances.

Traders should take care going long after the news release on the aussie, and smaller targets/smaller lot size would be a recommended strategy. In the case that the market actually buys the aussie after the news, a retrace of today’s move would be welcomed, since it gives the market the chance to get additional momentum to break lower.

ECB press conference

Written by A Forex View From Afar on Thursday, October 02, 2008

• the Governing Council decided to leave the key ECB interest rates unchanged
• extraordinarily high level of uncertainty stemming from the financial market turmoil
• economic activity in the euro area is weakening, with contracting domestic demand and tighter financing conditions
• the world economy as a whole is feeling the adverse effects of the intensified and prolonged financial market turmoil
• The fall in oil prices from their peak and ongoing growth in emerging market economies might support a gradual recovery in the course of 2009
• outlook is subject to increased downside risks
• financial market tensions affects the real economy more adversely than currently foreseen
• annual HICP inflation has remained considerably above the level consistent with price stability
• wage growth has been picking up rather strongly in recent quarters, in spite of a weaker growth momentum and at a time when labour productivity growth has decelerated
• annual HICP inflation rates are likely to remain well above levels consistent with price stability for some time, moderating gradually during the course of 2009
• upside risks to price stability have diminished somewhat, but they have not disappeared
• strong concern that the emergence of broad-based second-round effects in price and wage-setting behaviour could add significantly to inflationary pressures
• imperative to ensure that medium to longer-term inflation expectations remain firmly anchored at levels in line with price stability
• previous episodes suggest that financial market tensions can have a relatively limited impact on monetary developments, but they have also been associated with large portfolio shifts and thus have exerted significant influence on monetary data.
• the availability of bank credit has, as yet, not been significantly affected by the ongoing financial tensions
• gradual moderation of growth in loans continued
• the growth of loans to households continues to follow the downward trend
• The Governing Council discussed extensively the recent intensification of the financial market turmoil and its possible impact on economic activity and inflation

The Governing Council discussed for the first time in the last few years the possibility of a rate-cut, along with the option of keeping rates on hold at the current 4.25%. Mr. Trichet put emphasis on price stability, although the risk of inflation has diminished, dragged down by a rather large slowdown in demand.

The effects of the financial turbulence over the real economy are still unknown, since the statistical releases available for the conference were available only up to the month of August; even so, there is an “Exceptional high level of uncertainty“. During the question and answer session, Mr. Trichet underlined that every future action will be decided taking into account price stability.

The financial markets see the ECB cutting at the following meetings. Since the press conference began, the euro tumbled 100 pips against the euro, totaling more than 200 pips today.

A European Bailout?

Written by A Forex View From Afar on Wednesday, October 01, 2008

Mainstream media has reported that France, which now holds the presidency of the European Union, plans to organize a meeting this weekend with the major Euro-area leaders to analyze the consequences of the credit crisis on the European economy.

This comes after more European based banks are in need of government bailouts and some Euro-area indicators for member countries saw deep plunges, including Spain, Ireland and to some extend France. Sources have said the plan would reach 300 billion-euro ($422 billion), but details are so far limited.

On the charts, it will probably not have an immediate effect on the euro’s valuation. However, if France’s plan is approved and adopted in the coming weeks, it is possible that surging dollar will slow down. The greenback advanced during the last few trading sessions as speculation that once the bailout plan is approved, the U.S. economy will resume its path of growth increases. It now seems the Euro-area will resume this path as well, in theory at least.

The need for a bailout

Written by A Forex View From Afar on Tuesday, September 30, 2008

The House of Representatives might have vetoed the Treasury’s plan to bailout financial institutions, but the market still sees a very strong need for a rescue package.

The market’s response as the news of the vote unwrapped, confirms that investor’s confidence is close to zero. Global equity markets tumbled the most in 21 years, while the major U.S. indexes posted some record declines.
If someone wants to look for any further evidence that the financial system needs a serious bailout plan, then just look at the number of banks recently bankrupted or were forced to “sell themselves” on both sides of the pond. Lehman, Merrill, AIG, Washington Mutual, Wachovia in the U.S and Fortis, Dexia and Hypo Real Estate in Europe are just the latest banks that can be added to the of credit crunch casualty list.

A new bailout plan with explanation and serious clarification on what the Treasury will do with the cash it receives might give it the potential it needs to pass the vote. However, till then, who can vote for a blank check with $700 billion on it that not too many know its clear purpose or effects?

Reports are just starting to appear with the effects of the credit-crunch over the real economy. Tougher access to liquidity and credit, weak consumption and small owners complaining about the business environment are just to name a few. If banks will not start to do what they are intended to do, lend, then this will be just the beginning as the whole economy is torn apart.

An alternative to the bailout plan would be for the Treasury to bankrupt every possible bank, until only one stands. Since Mr. Paulson has strong relationships with Goldman Sachs, it will not be hard to imagine which would be the last one standing. Moreover, since now they receive deposits, who really needs more than one bank??? Oh, let’s not forget that the U.S. still needs Bank of China to support its debt, but that would be another story.

To finish this article, who knows what a Wall Street bank is now? The answer is simple: a bank is nothing more than a future government entity.

Wall Street Bailout and the Real Economy

Written by A Forex View From Afar on Monday, September 29, 2008

Wall Street Bailout and the Real Economy

Trading the Canadian Dollar

Written by A Forex View From Afar on Monday, September 29, 2008

The Cad has a unique trading style, moving only one third of the trading day, during the U.S. session. For the rest of the time, the pair tends to hover around a price level, be it the neutral pivot point, a moving average or a support/resistance level. Lately, however, the Cad has started to move during the overnight sessions as well, but the volume continues to be low and insignificant.

The daily chart shows little signs of dollar strength, even though the dollar has posted strong gains against its European counter-parts. This suggests the pair may not have too much room to run on the upside. The 1.0500 area may be a key resistance level in the future, as it has in the past, and long orders should come after this level is broken.

Regarding future short positions, the cad will first have to break below the 1.0300 level, which is an important swing point. At this level, the resistance area (which has now become support) held for over 9 months in which the cad was unable to close above. Having crude oil, the commodity that back’s the cad valuation, holding around the $100 level, we may see some additional tests below the 1.0300 level. The intra-day pattern of trading shows that it is better to avoid any short-term trades around the U.S. session open, when we often see a wave of orders hit the market.

This week, the only important news release coming out of Canada will be the GDP read for the third quarter. The market is expecting a 0.2% read, while the second quarter GDP was released at 0.1%. A read that deviates from market expectations will certainly move the market and test the closest support or resistance, depending on the news release.

Wall of Shame The Bailout Plan

Written by A Forex View From Afar on Thursday, September 25, 2008

The bailout plan is the hottest topic around, let us examine some of the plan’s unique characteristics:

• The plan will require a blank check with $700 billion on it, minimum
• Although the plan is just steps away from being voted, no one can say for sure what it does or how it will be implemented
• The agency in charge of supervising the plan is still unknown.
• The plan presumes the toxic debt will be taken from banks’ balance sheets. It’s still not sure how it will be priced
• Toxic debt = packages of mortgage loans which are in a default phase. Most securities had been downgraded from investment grade to junk. This looks more like investors trying to scrap them, rather than the liquidity crisis that the Treasury claims.
• If the bad debt gets overpriced U.S. taxpayers will support the losses.
• If the bad debt is under-priced or priced at the current market value, it will not help the institutions who may as well offset it at fair value now. Banks can simply write down the bed debt and the same effect will emerge.
• The main reason behind the sub-prime crisis was the high default rates among homeowners and falling house prices. Injecting huge amount of cash into the financial system will not reduce mortgage rates, nor help interbank liquidity that impacts the taxpayer who is back-stopping the package. This looks like trying to cure the symptoms rather than the disease.
• Mr. Paulson is asking for full immunity when implementing the bailouts. To some, this says a lot, and to most it says it all. This smells.
• The plan has alternative names too: “The Swedish Solution”, “The Hanky Dumpty sat on the Wall (Street)”, “Bail-me-out Mae”
• The plan has no provision for financial officers of the failing business models to re-pay into the $700B any of the bonus checks issued since June 2007 downgrades of toxic debt, that is something maybe to consider. Check issued to “The U.S. Taxpayer” will start to cover things by all of those courageous enough to do the right thing and balance the investor’s book a little. The taxpayer foots the damage bill, as well as having their own investments stripped bare. The market’s job is to take the maximum amount of money from the maximum amount of people in the minimum amount of time. Well done on getting that done, but this really is turning into a Hall of Shame.

Looking at the inter-banking liquidity

Written by A Forex View From Afar on Thursday, September 25, 2008

Usually, when a bank wants to make a loan for liquidity needs it has two options: either borrow money from the central-bank, through the open market operations, or call another bank to lend money at the LIBOR rate. The London Inter-bank Offered Rate or LIBOR is the reference rate at which banks lend money each other.

A major distinction between those two would be that banks need collateral in order to access money from the central bank, while there is no such need when accessing funds from a fellow bank. This would imply that money accessed through the LIBOR rate, would be more expensive (a higher interest rate) because the loans are not secured.

In order to measure the liquidity from the inter-banking environment, investors use the Libor-OIS spread. The index measures the spread between the costs of accessing money throughout the LIBOR rate on a three month loan and the overnight rate at which banks would access funds from the central bank. Usually, the spread is just a few basis points, less than 10 (or 0.1%), however, today the spread reached a massive 166 basis points (or 1.66%). This is the highest spread recorded since 2001, showing that there is a massive lack of liquidity.

The other alternative for a bank would be to access money from the local central bank. The recent open market operations held by the SNB and ECB showed that this is mainly what banks do. The ECB auctioned $25 billion yesterday with a maturity of one month, and received bids valued at $110. The average rate at which banks accessed the $25 billion was 3.75%, while the LIBOR rate with one-month maturity reached 3.20%. This shows that banks decided to have a rush at the central bank’s offer, despite funds from private banks being much cheaper. In normal market conditions (which these are not), the LIBOR would be bigger than the open market’s interest rate, since a LIBOR loan implies additional risk, requiring a bigger premium.

This does not have a direct effect over the currency charts, but it shows that banks are not lending to each other, fearing that bankruptcies may continue. Put head to head, it shows the financial system is a long way from recovering. As such, trade desksmay not be willing to take risk onto their balance sheets, meaning the high yielders (the plural from yielder) and the yen will just hover around the support/resistance levels on the charts. Assuming, of course, that no news hits the wires that cause a different reaction.

Quoting from an old London high street joke, the LIBOR is the rate at which bank’s do not lend to each other.

Learning from the past

Written by A Forex View From Afar on Tuesday, September 23, 2008

The Treasury proposal of a huge infusion of capital into the financial system and bank’s balance sheets had already been used by other countries, although the outcome was not always so bright. The plan proposed by Mr. Paulson is similar to the one used in Sweden the 1990’s, as we reported this week, in helping banks deal with the bad debt. However, the Swedish had a different approach to this solution; in exchange for the capital infusion Sweden asked for equity. However, Mr. Paulson’s plan only asks for the bad assets and nothing more in return.

The problem is how exactly these toxic papers will be valued. If they are overpriced, the taxpayers will suffer a huge loss, since the Treasury will pay for valueless paper, with little chance of forward redemption. If they are underpriced, or the Treasury pays the same price as their current real value, it won’t solve anything since banks can achieve a similar outcome just by writing-down the bad debt. From here, this appears that the U.S. proposal is loss-loss situation to the taxpayer, and maybe therefore to the Usd.

Even with the “Swedish solution” applied to the U.S. problem, the real economy may still have a hard time ahead. The Swedish economy recovered some 4 years later, in a period when unemployment rose from 2.1% to an incredible 19.9%. In Norway, a neighboring country that faced the same problem, unemployment also rose at a strong pace in the following years, but not as much as in Sweden.

Japan also had to deal with a huge asset bubble in the early 1990’s. The Japanese authorities had chosen a similar solution, injecting huge amounts of capital into the economy. The strategy was called “quantitative easing” and had no real effect over the economy. Actually, the only effect (counter-effect more likely) is that the Japanese economy has never fully recovered from the asset bubble, not even to this day. The Nikkei topped out around 40,000, dropped to around 7,000, and today trades at 12,000. Cash infusions do not always work, and in some cases just prolong the crippling effects of what would otherwise have been a painful but warranted natural reduction of those unable to perform in a changing financial arena.

The mountain of U.S. debt needs servicing, and this may be the cost of reckless borrowing. The U.S. economic outlook may not as bad as that of Sweden or Japan, just yet, but things are delicately balanced between imparting a reasoned argument to mortgage the future and the huge financial liability to the U.S. taxpayer of this creating another debt mountain that will never get repaid. The U.S. struggles with current debt payments as it is, managing to make the minimum payment when servicing its overseas commitment of repaying existing debt. A rise in unemployment and a drop in output are still expected over the next quarters, and that is not the environment that will make the dollar bulls feel warm and fuzzy, nor overseas wealth funds swoon at that thought of U.S. based assets dominating their books.

The U.S. is the economy that pulls the levers on the global scale, but we have asked our-self time and again recently whether 'The Global Player' may not become just another one of the 'Group of Global Players' in quick time. The BRIC (Brazil, Russia, India and China) group is watching the outcome closely. The BRIC’s are seen to be more than capable of forming an economic bloc, similar to the European Union, and have been studied to such a degree that the BRIC’s by 2050 could have a wealth and global dominance that eclipses the current Global Players.

The King of Currency has some suitors, and the World’s currency may now have to see some backing from the U.S. economic infrastructure being re-built on firmer foundations than the last re-balance, if the Usd is not to come under some valuation pressure.

Usd supports new debt at a cost

Written by A Forex View From Afar on Monday, September 22, 2008

The plan announced by Treasury Secretary Mr. Paulson, to buy $700 billion of bad assets (said to be illiquid) and another $400 billion to guarantee money-market mutual funds raises some question marks as to whether the dollar current valuation will be able to support such debt. In order to get the required funding to make the plan work, about $1 trillion, the Government will have to issue a new wave of debt. Such a massive sale will certainly add additional pressure to the Treasury yields, especially on the short-terms. Yields, in a very straightforward form are the cost of owning money. A lower yield equals a cheap currency; a higher yield denotes a strong currency.

U.S. yields are the second lowest in the industrialized world, only the Japanese yields being lower. Thus, a foreigner holding a dollar denominated bond would mean having to pay negative swap because of the high yield differential. Furthermore, the highly inflationary policy used now by the Fed adds even more downward pressure on the U.S. yields. The spread between the Fed Funds and the inflation rate, measured by the CPI, is now 3.4% the lowest since the 1980’s.

All this put together raises some questions as to whether the dollar does not need a re-valuation, again. On the daily charts, the dollar had already topped against the major currencies on very strong volume, suggesting the greenback will need a lot more momentum to break anywhere higher through the 80.00 dollar index resistance levels. Moreover, the major pairs bottomed when lower yields where not even in sight.

There may however be some light at the end of the dollar tunnel, it seems. As the global slowdown progress, reverse flux from emerging countries will soon start to appear, selling risky “emerging-assets” and heading towards the safety of the U.S. treasuries, (the very ones that pay a negative rate at the end of the month).

To draw a quick conclusion, the outlook for the dollar in the short to medium term lies to the downside, particularly until the Senate comes with a clear and concise text over the bail-out plan. Do not exclude a test of the 74-75 area on the dollar index over the coming period, until the market signals that they are buying into the noise coming from the ticker-tape parade. This took many years of relentless feeding on leveraged debt, there really is no easy, nor instant fix.

Forex Correlation table

Written by A Forex View From Afar on Sunday, September 21, 2008

Forex currency corellation table

Wall Street on Credit Crisis Street

Written by A Forex View From Afar on Saturday, September 20, 2008

wall street credit crisis

Northen Rock
Bear Stearns
Countrywide Financial
American International Group
Lehman Brothers
First Integrity Bank
IndyMac Bank
First Heritage Bank
Fannie Mae
Freddie Mac

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TheLFB Team & The View From Afar Blog

© 2008 A Forex View From a far Trading Blog

Trade Desk View

Fundies and Trading
There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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