A Forex View From Afar

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Forex Analysis

When loosing Grip

Written by A Forex View From Afar on Monday, March 31, 2008

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Since the beginning of the financial markets turmoil, Central Banks look to be struggling maybe to fulfill their attributes, either fighting inflation, assuring growth or maximum employment. One step further on and some may start to see the concept of the free market falling apart.

Firstly, we have the ECB, struggling to achieve it’s 2% CPI goal, which is currently running at 3.5% year over year. So, the ECB is not in such good a position right now, they missed the target by 1.5%, they are without too many opportunities for a rate increase any time soon.

The Bank of England is dealing with the same problems of rising inflation, but the BOE has a greater problem now; financial stability. Just a couple of months ago, the 3rd biggest lending bank in UK, Northern Rock, failed. To make the problem much worse, HBOS took a major hit after rumors spread about a similar path to Bern Sterns. Until now they remain rumors.

The cases of the European Central Banks and Bank of England, are starting to show that maybe Central Banks are starting to lose their capacity of anchoring inflation, and inflation expectations, which is a very bad thing.

Fighting inflation is their main objective. Losing this battle, even in the medium term, will affect investor’s credibility of, and trust in, the banks and maybe worse, will could influence the Central Bank’s credibility in the face of each region’s residents.

Speaking about anchoring inflation, The Fed is another example of a Central Bank that is very close to the point where inflation could get out of control; fortunately just not in the Great Depression Style;

The Fed is now starting to feel a little twist of fate it would seem from “the market is always right” point of view, and “the market will regulate itself”. They are starting to see the need to tighten regulations and maybe the need of interventions in the market. This is what basically Mr. Paulson is promoting, a regulated market. They only needed two severe bubbles to burst to realize regulation is not such a bad thing after all.

The famous Paul Krugman, said about regulations; they are just a measure for the markets to see that something is happening, nothing more, and nothing less.

The need to remain optimistic is crucial, as Mr Bernanke said to Congress recently; We would ask that the public still trust in the Fed.
With the backing of the consumer the US economy, and therefore the US$, will climb higher over 2008/9, without the consumer things look less rosy, and the Euro could continue its climb northwards.


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Housing Bubbles: Not only in the US

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

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The drop in the construction area is not only felt in the US, but Spain also suffers of it. The beautiful country, which acts as a magnet for tourists around the world, now starts to experience the downturn of a housing bubble


Completed house sales for January dropped 27% year-on-year, according to the National Statistics Institute (INE), while total lending to home-buyers fell almost 28% to €13.4bn ($21bn, £10.5bn). The value of the average mortgage was down 3%, to €142,794, despite higher financing costs.

Even if prices didn’t drop too much (measured in mortgage cost), the sale of houses dropped at a very fast pace.

It should be said that, from 1997 to 2005, prices grew at an impressive rate, totaling 247%, while 20% of the available houses were unoccupied. This clearly shows speculative interest was at the highest peak possible, creating a bubble.

The problem is where was the government all this time? Oh, I forgot, these kinds of bubbles are “good” (short-term speaking) for the economy, creating a welfare state for the population. Probably the government prolonged this bubble, after the elections, let others handle it…Does all this ring a bell? It’s the current case of US and Japan of the 90s, which until now haven’t recovered
The interesting point is at the same time, US and Spain had reached its housing peak in 2005. Now let’s see who gets things rolling first.

Probably the strong Euro won’t attract too many foreign investors very soon. Or maybe, the Spanish Housing Market is in a reverse correlation with the Euro. A strong Euro, a weak housing market.


Source:
FT: Spain’s property market headed for a fall

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Housing Bubbles: Not only in the US

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

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The drop in the construction area of the economy is not only being felt in the US; Spain also suffers from the ill right now. The beautiful country, which acts as a magnet for tourists around the world, is now starting to experience the downturn of a housing bubble

Completed house sales for January dropped 27 per cent year-on-year, according to the National Statistics Institute (INE), while total lending to home-buyers fell almost 28 per cent to €13.4bn ($21bn, £10.5bn). The value of the average mortgage was down 3 per cent, to €142,794, despite higher financing costs.

Even if actual prices did not drop too much (measured in mortgage cost), the sale of houses dropped at a very fast pace.

It should be said that from 1997 to 2005 prices grew at an impressive rate, over 247%, while 20% of the available houses were unoccupied. This clearly shows speculative interest was at the highest peak possible, creating a bubble.

The question is; where was the government control during this time? Oh, I forget, these kinds of bubbles are “good” (short-term speaking) for the economy, creating a welfare state for the population. Probably the government prolonged this bubble, after the election, to now let others handle it. Does all this ring a bell? It’s the current case of US, and the Japan of the 90s which until now still has not recovered.

The interesting point is that US and Spain reached their housing peaks the same time, in 2005. Now let’s see who gets the first things rolling to address the same situation.

The strong Euro probably will not attract too many foreign investors anytime soon. Or maybe the Spanish housing market is in a reverse correlation with the Euro; a strong Euro = a weak housing market.


Source:
FT: Spain’s property market headed for a fall

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Fundamental day

Written by A Forex View From Afar on Wednesday, March 26, 2008

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Today we had one of those Fundamental days, where new macroeconomic thoughts come into our minds and trading ideas depart, or even better, our trade ideas get re-enforced

On one side of the Atlantic, on the European Shores, business owners are starting to see a brighter future ahead, reflecting in the 3 months positive IFO Business Climate and Expectations. This somehow positive attitude was also seen in Mr. Trichet speech; Inflation remaining Europe’s biggest fear (at least for EcB).

The current ECB objective is to safeguard inflation at 2% over the medium term, and today Mr. Trichet made clear for the first time what medium term actually means: 18 to 24 months. It is good that it gave a clear indicator in time, but it is not a big surprise: this is the standard time accepted by academic views for monetary policies to take effect, sometimes even faster.

Mr. Trichet re-enforced our views, at this time; we clearly do not see any rate cut from the ECB on 2008. As we posted previously, if CPI remains above the target, as soon as the credit crises clears we will not be surprised to see a rate increase.

All this happened on the shores of Europe, were miraculously the storm on the other side of the Atlantic is not reflected.

After the US posted yesterday’s “good” performance in statistics, today Durable Goods and New Home Sales had the role of reminding us were we really are. Durable Gods came worse then expected, but New Home Sales beat analyst expectations.

Lucky them, but New Home Sales are at the lowest point in 13 years, so clearly even if they beat analyst expectations, this was not good at all.

Other victims of the credit crises are developing economies, like Iceland. It was a subject heavily debated today, Iceland's Central Bank (Seðlabanki Íslands) raised the interest rate with 125 Basis Point move to 15%. The Icelanding Krona, is a victim of the “safety run”, which involves selling high yielding currencies, and speculative positions from buying bonds.

The Iceland CPI chart shows a real economic drama that unfortunately is happening in other countries too.

Iceland CPI inflation
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Not so Confident?

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

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We saw three releases today and all slapped the Market around in one way or another. Both the main US economic components were hit today; the Housing market and Consumers

Consumer Confidence Index numbers hit the screens, showing consumers are starting to get less and less enthusiastic about the future. A bad picture is being created here, since 70% of GDP is based on consumer spending.

consumer confidence

The Consumer Index came at a 5 years low, while the Expectation Index component came at a 35 year low, when Watergate and Oil crises were at their peak. A recession is declared if two or more consecutive quarters with confidence levels are below 100. We are below 100 since April last year. Figure that out.


“Looking ahead, consumers' outlook for business conditions, the job market and their income prospects is quite pessimistic and suggests further weakening may be on the horizon. The Expectations Index, in fact, is now at a 35-year low (Dec. 1973, 45.2), levels not seen since the Oil Embargo and Watergate."’


In big terms, the Richmond Fed Index draws almost the same picture: future expectations continue to decline. The difference between these two, is that Richmond Fed Index shows current conditions slightly improved. This is the reason why the survey came in at 6 versus the -5 expected. Manufactures complained about higher prices; raw materials increased at the highest rate since 1993.

The S&P/Case-Shiller US National Home Price Index showed that Houses Prices dropped by most ever recorded in January.

Putting these 3 surveys together, a troubled future is seen. All 3 are considered smaller releases in their own right, but they had the power to send Equities from yesterday’s strong gains to the red territory today.

Future expectations play a big role in monetary policy, and these kind of releases, even if they are smaller, may force the Fed to forget (again) about inflation and assure growth by cutting Interest Rates (again). The question then comes as to whether the Fed ready to take the role of the Bank of Japan who are looking to get back towards the 0.25% mark by the Summer it seems.


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The Bank of England Says "No Thanks" To MBS Shopping

Written by A Forex View From Afar on Monday, March 24, 2008

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Mervyn King, Bank Of England’s Governor, announced that BoE will not buy mortgage backed securities (MBS) to release the inter-banking pressures. This statement comes after a private meeting between BoE officials and banking system representatives.

Why would someone want to buy such an asset, now? After banks had made bad bets, now they want to shovel it on tax-payers shoulders, and it would seems rightly so that the BoE says; "thanks, but no thanks". Already, the population is effected by falling home values, increasing payment rates and higher gas prices. To make consumers pay for someone else’s bad investments is by far a wrong idea. I can understand (somehow) accepting the top MBS as collateral, but to outright purchase them is another story. If banks want to rebuild public and investors confidence, then write down your bad debt and disclose all the hidden debt files, and possibly do it before regulators force your hand.

The good news is we found out that a Central Bank can withstand the pressures and lobby from private firms, and we would hope that is the way it stays for the long term…

Vacancy homes for sale

Written by A Forex View From Afar on Monday, March 24, 2008

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WSJ provides an interactive chart from 75 larger US areas with vacant homes for sale. In the last quarter of 2007 the home-owner vacancy rate climbed to 2.8%, the highest rate ever recorded, and that goes back to 1960 when tracking first begin. Not a bright light so far, but maybe it is a base to work from. The percentage may not seems a large number, just under 3%, the impact is more in the fact that whatever the number reads it has not ever been at these levels.
Also, an interview is available with 3 important analyst about the housing market.

Housing Market vacancy


In the mean time Existing Home Sales took a big and unexpected upwards rise from the January figures. Numbers are up 2.9% adjusted, while unadjusted existing home sales are up an impressive 12.2%, compared to a 0% expected by annalists. Even so, sales from last year are down an imposing 20%, and even worses compared to the top reached in 2006. Same again though, this may signal the bottom has been put in place.

At the current rate of sale, inventories will last 9.6 months, slightly higher then the average 7.5 months. The concern will be not in the fact that people may want to start buying at these levels, but that they may not easily qualify for the new lending criteria laid out after the SDub-Prime lending fall-out.


Existing house sales had a bump higher, but prices continued to go down compared to January and last year. The Median price for a house was $195,900 in February, compared to $213,500 in February 2007.


These numbers are not too encouraging, but they do show that buyers are there, they just need access to the newly discounted Interest Rates. No point in lower Rates feeding straight into the Institutional lender's balance sheets, there are buyers and sellers out there just waiting to be allowed access.

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Where are the bulls?

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

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Did anybody see the Bulls today? I can only see Bears, and it’s not good to stalk the Bulls, as long as we are in a Bear market.
What happened to yesterday’s 4% gains, that would re-launch equities to their peaks? Maybe they realized things aren’t going to change soon.

These rate cuts haven’t reached consumers yet, more especially sub-prime borrowers and new home buyers looking for a good loan deal. But those consumers all got hit by higher gas price and higher bills in general, quicker then anything the Fed or Government does.

As honest as I can be, only a little child thinks a full month of housing inventories can be sold overnight. Permits for new construction dropped to 16 years low, at a recessionary level.

About the FOMC decision, I can only agree with a 75 points reduction in the Target Rate. A bigger cut may have helped the Wall Street guys, but I don’t know how much it could have saved the economy, especially when thinking at 2009/2010. Inflation long-term costs are very high, hopefully we won’t see or feel them.

I’m taking my rifle and going to search some Bulls out. Maybe on my way I’ll find some other optimists to join me.

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Who invests, and where? Sovereign Wealth Funds

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

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DB provides a list of Sovereign Wealth Funds native countries and where their money goes to. I’m a little impress by how powerful the Asian countries are as far as cash exports are concerned.

 Sovereign Wealth Funds Investments

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Via
WSJ IMF: Moving Ahead on Sovereign Wealth Funds

Fed Funds Futures

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

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Fed Funds Futures from March 17, 2008, for today's meeting outcome. Markets are pricing in a 1% cut. Look how suddenly the 150 points cut probability has increased.

FOMC meeting March outcome, Fed Funds Futures


Markets are already seeing almost a 90% chances of a 50 points rate in April's meeting. If they price such a rate cut now, more then one month earlier, and one more FOMC meeting ahead, how much will they price in before the actual meeting?

FOMC meeting April outcome, Fed Funds Futures

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Zero interest rate policy?

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

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A few weeks back I wrote that a 75 points rate cut is just too much, but Friday's events made me change my view. These markets showed that they are in deep turmoil and are unable to stop the bleeding themselves. Now I see 75 points as the lowest possible cut, close to nothing for markets. If the FOMC members only cut 75 points or less, they will probably make the Markets test 10 years lows. Will the Fed want to carry such a weight? I doubt it very much.

The Markets are now pricing a 100 points rate cut, taking the Federal Funds Rate to 2%, and even with such a cut, they still have no idea how soon investors will start buying again, they look a little frightened. Add to this that a 2% interest rate coupled with over 4% annualized CPI, does not look to good for investors either. But I'm probably one of the few who has inflation on their minds right now, unfortunately.

I wonder how bad the situation can really be, if the Fed needed to cut the Discount Window Rate 24 hours earlier then they should normally, in an emergency meeting and extend the maturity to 90 days. Since The Fed couldn't wait a couple more hours for that move it is likely that they will give the markets what they want; a 1% cut. The sub-prime issues should be seen as an ill, coming back from time to time, requesting more and more drugs to temporarily heal it. At first, in August, it just needed a 25 points cut in the discount rate, reaching 1 full point in the Fed Funds now, in March.

The big problem is that the Fed does not have unlimited ammunition to fire at this. If the FOMC cuts 100 points, to 2%, how much can they cut at the next meeting; 2% is already very low. Are markets asking the Fed to have a Zero Interest Rate Policy? We can only hope not, because Japan still has not recovered from the '90's assets bubbles.

In the last two decades we never had a 1% cut, not had an Emergency Cut on a weekend in 3 decades, and never had an Emergency Overnight cut of 0.75%. Is it a worrying precedent, or a breath of air for the Wall Street Bulls and Bears?

Time will tell, and the reaction the Dollar will be really interesting to watch; 2% Rates and a rallying Equity Market will push Trade Desks out of Bonds, increase Risk Tolerance, instigate buying of Higher Yielder's (Pound, Aussie, Kiwi), send Swissy to 0.9500 and the Dollar Index towards 70.00. The Dollar may however make ground on the Yen, to the delight of the Japanese Finance Ministry.

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A Central bank intervention? Now?

Written by A Forex View From Afar on Friday, March 14, 2008

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The Trade Screens were flooded this morning with messages from the news-wires of a Unified Central Bank intervention over the Dollar value in foreign exchange markets. At this time, where the markets are right now, it would need a Divine Intervention, not a CB! We cannot totally dismiss a CB intervention, but do question its timing. Why would CB's intervene now?

• We just had the CPI release, showing inflation had flatten in the last month (strange, but this is what numbers are saying), allowing more rate cuts to come on Tuesday.
• Bern Stern required the intervention of the New York Fed and JP. Morgan, sending the sub-prime to a new level.
• According to a WSJ poll, most analyst see now the US is actually in a recession in all but name.
• The Cleveland Fed, Fed Funds Futures are pricing in, either a 50 or 75 points rate cut, sending the Rate differential even higher.
• Insurance agencies say sub-prime losses approach Hurricane Katrina losses, and will soon overtake that number.
• Most Central Banks have expressed their concerns over inflation, sending their currencies higher, in the last weeks. Such rhetoric does not show major concerns over currency valuation

The opinion is they could not have chosen a poorer time do have such an intervention. A good time maybe would have been when all the majors' pairs were caught in a range, with the Euro struggling to break 1.50, in a period when the US cut its interest rate. Most of the majors pairs are now oversold (although nobody is rushing to liquidate them in the current environment), so a pull-back, or at least a consolidation, would be something normal. It is a "healthier" move for the markets to retest previous Resistance areas, which now have become Support.

It is also something normal for central banks to protect their holdings too, the majority of all CB Reserves are held in US dollars, so a falling dollar will send Reserve values lower; something not wanted in most cases as that imbalances the local currency values as well. An alternative to try to fight the market would be to either realign Reserves to gold and other currencies, or at least try to curb the dollar fall.

Source:

WSJ: Morgan Stanley: Odds of Dollar Intervention Are “Rising”
Bloomberg: Insurer Losses From Subprime Approach Katrina Claims
FT: Emergency funding for Bear Stearns
WSJ: Most Economists in Survey Say Recession Is Here

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Can we please go shopping?

Written by A Forex View From Afar on Thursday, March 13, 2008

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Retail Sales numbers came in at -0.6%, while the Core number came -0.2% month over month.
They maybe look back, showing a consumer reluctant to spend, but they are not so bad. It certainly sparks some recessionary thoughts, but the numbers don't really show recession.

My big reasons why I don't see this numbers as being so bad is because we are in a downtrend in retail sales since '05 (do I see a double top there?), and we are still up versus last years numbers. We are now 8.8% total sales (excl. motor vehicle & parts), 4.6% adjusted to inflation, and retail sales are up 6.5% from last year, 2.3% inflation adjusted.
Those number don't show any recession for me, they would be seen as weak for a healthy economy, but are dragged down now by the other markets.

Retail Sales

If we want to see something dramatic, we just need to look at the housing or financial markets.

Ps. do you know which Business had the biggest gain, year over year? Gasoline stations, with a whooping 25% growth.

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How to write a Trade Plan for Forex

Written by A Forex View From Afar on Thursday, March 13, 2008

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The "We need a strong Dollar" Story

Written by A Forex View From Afar on Thursday, March 13, 2008

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The "We need a strong Dollar" Story had reached Mr. Bush, after it was said in every possible way and surroundings by Mr. Paulson. Until now though the markets didn't believe the Treasury Secretary, and they won't probably believe Mr. Bush either.


"We have a dollar that’s adjusting, and I am for a strong dollar. One reason I am for a strong dollar is because I want, you know, people to — I think it helps deal with inflation"


If someone had cast a look recently over the Dollar Index, it sits now at 72 points, which is 28% off from '73 value, when the US gave up on the Gold Peg.

US Dollar Index Forex

What happened to "Low Dollar helps exports" promoted by Mr. Bernanke? Maybe they don't believe that one either.

In the mean time, Fed Funds Future sees a 50 or 75 points rate cut, sending the Dollar a little lower.

Soon we will have a test on the 70 area on the Dollar Index, with the Fed Funds Target at 1%. What story are we going to hear then?


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Budget Deficit on the run

Written by A Forex View From Afar on Wednesday, March 12, 2008

US Budget Deficit

Trends from fake hopes

Written by A Forex View From Afar on Wednesday, March 12, 2008

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FT's John Authers writes down a list of previous rallies that only gave fake hopes to investors. He smoothly calls them "dei ex machina" meaning "an artificial, or improbable, character, device, or event introduced suddenly in a work of fiction or drama to resolve a situation or untangle a plot (such as an angel suddenly appearing to solve problems)"-Wikipedia Courtesy. This description should give a good image over the market.


Here are some other dei ex machina, that were once supposed to winch the market out of its funk: the Fed, when it cut the discount rate last August, again when it launched the term auction facility in December, and again with its emergency rate cut in January; the US Treasury and its “super-SIV” plan; the Abu Dhabi Investment Authority and its purchase of a stake in Citigroup; and Warren Buffett with his offer to buy the healthy part of the monoline bond insurers. None of these rallies lasted long.


We wrote about all of them, and it seems the solution won't be a lone acting Fed or Investor, but a plan well-put together by the Central Banks, Financial Institutions and Investors solving the long term problems.

Source:
FT: The Short View: Drama in credit markets

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US Markets in Puppy Buying mode?

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

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Equity, Forex and Bond Traders are now acting like small puppies, reach your arms out to stroke them, and they start yelling for joy.

Our puppy-traders started the buying frenzy once with the news that The Fed, with the help of other ECB, BoC, BoE, and SNB will continue Financial Auctions together, while Swedish Riksbank and Bank of Japan have announced they won't sustain the Term Securities Lending Facility auctions.

The rumor was seen as so big that S&P 500 futures jumped from 6 points to 26 points (about 2%) in no time.

The important news is that the maturity was extended from overnight to 28 days, while the counter-parties were extended to federal agency debt, federal agency residential -mortgage backed securities and non-agency AAA/Aaa-rated private-label residential mortgage backed securities.

The good part is banks will be able to get some liquidity from mortgage backed securities making them collaterals. The mortgage backed securities market is now at a freezing point, with no transactions done this year. this could thaw them a bit.

After the good things were said, the bad part followed very closely; This will be the third attempt for "United Central Banks" Auctions. The first two, in December and January, only managed to send down the Dollar Libor rates, it achieved nothing more than giving Institutions cheap money to offset bad debt against.

Mortgages Securities are accepted as collateral under the new scheme (they are the ones that stayed at the soul of the sub-prime). My big question is how many of them still have AAA debt rating to be accepted as collateral by the FED? And from the ones who did retain AAA rating, how many of them were left so by rating agencies so Banks won't have to write them down...Is this what the Fed wants as a counterpart? There were enough questions previously in regard to how sub-prime debt was valued by the rating agency, and how the Crisis was caused by the cutting of that debt valuation in July and October.

My second thought is that all of these auctions are sterilized by the Fed so the monetary base remains constant. This means if bank A borrows $5bn, the Fed will need to sell Treasury bonds worth of $5bn. Going above the fact that the Fed will receive sub-prime debt in the place of Treasury Bonds, the US Treasury already has problems selling it's month to month debt, and with the Fed's new T-bills in the market it will make it even harder.

Not everyone can go to the Fed and place its assets, only the primary dealers can. My opinion is that the market may not get to see too much of the $200bn, it will be "safe guarded" by dealers, as it was with the rest of the auctions.

Going back to the blog's post main theme, what was all the joy-about? I really can't see the reason. Our Puppy Markets are just looking for every possible reason to buy.

In the foreign exchange market, the dollar was by far oversold and now we created the base for future dollar-shorts trades, aka buying on dips. We needed a pullback, maybe not as violent as the one we had today, but hey, a Dip is a Dip, as they say.

Hope the puppies won't get to scared went the Big Dogs are let off their leash.

Sources:
FT: Fed liquidity plan set to boost stocks
Bloomberg: Fed to Lend $200 Billion, Take on Mortgage Securities
WSJ: Fed Expands Securities Lending

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US Trade Balance

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

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Nothing spectacular came from the Trade Balance, it slowly widened, although it did beat analyst expectations. Exports have increased at almost the same pace as imports did, so where is the low dollar helping out the exports side of the story hiding? The housing market has a 20 to 30% influence on the Trade Balance, compared with 7% of the exchange rate.
So, yes we may see a better Trade Balance, but not all from the low Dollar, but from the free-falling housing market.

US Trade Balance

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How are Hedge Funds holding up?

Written by A Forex View From Afar on Monday, March 10, 2008

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Since the credit crisis began, the smile of hedge funds had been wiped out, with banks having a big contribution.

Hedge funds, the symbol of an entire industry, should make money in every possible situation, or at least to minimize the losses. These days they are simply shutting down.

The current situation is not so bad. Yes, the S&P 500 and Dow Jones are falling, but not at a breathtaking pace, plus Bond prices go up, as with commodities like gold and oil, while in our beloved Forex market, the trend is clear: sell the dollar.

So there are plenty of opportunities to make money, or in the worst case to hedge your losses, but still, Hedge Fund are starting to get margin calls or closing doors. To put it simpler, its the leverage that makes it possible, not because of reckless trading, but because of banks increasing collateral for debt.

Banks have taken a $188 billion hit until now (with more to come), while liquidity in the market is drying and default insurance is rising. These conditions made banks require additional funds for collateral, limiting banks exposure to risk.
The average increase for AAA debt is between 10 and 20 points. This is huge, since we are talking about AAA rated debt, the Highest you can get.
Banks don't just increased collateral for real estate and consumer debt, but for Treasuries too. This is very strange, since Treasuries are considered to be the "safe haven", the holy grail of uncertainty. Raising collateral for Treasuries is the equivalent of saying the U.S. will default.

The credit crisis has clearly pushed the financial markets into making weird decisions which surely will have long term negative effects. Risk aversion won't come back in a weak or two, it will take time for banks to lick their wounds and recover their losses. I'm starting the feel that the bank's problems will go beyond Q2.


Source:
Bloomberg: Hedge Funds Reel From Margin Calls Even on Treasuries

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Not just Forex Traders get margin calls!

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

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What is the difference between a Retail Forex trader and Carlyle Capital? Apparently they both can get a margin call; recently Carlyle found out.

Carlyle Capital, a mortgage hedge fund got a margin call from its lenders, which "could quickly deplete its liquidity and impair its capital"

The first shock came on Wednesday, when it announced that it can't meet the margin calls for its $21.7b portfolio. Carlyle used a high leverage ratio, of 1:32, in order to control its assets from $670m of client's investments.

In addition to the Wednesday margin call, on Friday the fund announced it will receive some further margin calls from its lenders.

How I like these transition periods, all year long we watch hedge funds and admire there ability to generate profits, and then in the first market turmoil they fail. The Kitchen Sink retail Traders are so much more adept than that, it's how you handle the bad times that defines your trading skills, and 2% of the account at risk, with 100:1 leverage is how the Kitchen sink Trader will win out. The draw-downs are far more tolerable.

Source:
WSJ: Carlyle Capital Receives Additional Default Notices

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A look over the Housing Market

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

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Housing Market

The Mortgage Bankers Association said 2%,which is around 1 mill houses, are in foreclosure and 0.83%, 300.000 houses, will start foreclosure procedures.
Delinquency had reach 5.82%, the highest since 1985, while the share of home equity dropped to 47.9%, the lowest since 1945.

Source:
WSJ: Housing, Bank Troubles Deepen

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2.0 on Euro or 2.5 on Pound?

Written by A Forex View From Afar on Thursday, March 06, 2008

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Mr. Trichet used at least a dozen times the word "strong", mostly referring to inflation, while the words "weak" or "less" were used only once, referring to global demand. This shows that inflation tensions are building up in the Euro Area, being, for now, a bigger threat then the credit crisis. Higher inflation expectations will usually lead to a stronger currency, which we can see now in every Euro chart

Mr. Trichet made 8 references to wage-inflation and its second round effects. Slowly, inflation, lead by higher wage expectations has become a bigger problem than the financial turmoil.

Speaking about wages, there is a saying: "do what the priest says, not what he does". Mr. Trichet is the exception, by raising his salary by only 2% in 2007, under the inflation benchmark, to $530,617. Compare this to Mr. Bernanke salary of $191,300 (which soon will ask to be paid in a basket of foreign currencies, or maybe he already is) or to Mr. Mervyn King $569,378.

Seems pretty strange, that most analysts see the strong euro buffering Euro Area growth, but still, the Central Bank President still makes remarks about inflation. One of the most efficient ways to chill the currency strengthening trend is verbal intervention. Seems Mr. Trichet doesn't want to use it, or maybe he isn't too worried about the euro valuations.

PS. I heard a rumor that Mr. Trichet and Mr. Mervyn King made a bet: what will be reached first 2.0 on eur/usd or 2.5 on gbp/usd?

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ECB Press Conference

Written by A Forex View From Afar on Thursday, March 06, 2008

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•Strong near-term Inflationary pressure still remain.

•The anchoring of Inflation expectations are the main priority of the ECB, maintaining a stance of monitoring second round Inflationary effects.

•The economy has moderating growth, the last Quarter over Quarter GDP growth in 2007 was 0.4%, down from the 0.7% forecast. Consumption growth will continue in the Euro region. GDP growth between 1.3-2.3%, the 2008 outlook has been lowered since December. International outlook confirms a Global slow-down.

•Looking forward, Domestic and Overseas demand supports GDP growth, lower than 2007, but the Fundamentals are sound, with no imbalances.

•Investment growth, profitability, and Employment have all stayed strong.

•Downside risks exist, but mainly from the Credit Crisis, and Commodity prices.

•The fear of Global imbalances may affect the growth numbers.

•Strong upwards pressure from Inflationary food and Energy prices, lead the ECB to continue looking for continued price stability pressure.

•Wage Inflation may impact the ECB’s outlook on second round risks to price stability.

•It is key that all Euro-Zone participants monitor wage negotiations, linking wages to CPI is to be avoided.

•The upside risks to Price stability remain strong, and Money Supply M3 growth is very strong.

•Household borrowing has pulled back in-line with ECB rate increases. Non-financial lending grew by 14.6% yearly.

•Little evidence that the August 2007 Credit Crisis has not lead to substantial shift in financial portfolios.

•Strong loan growth suggests that the supply of credit has not been impacted so far, as a consequence of the Credit Crisis.

•The Economic and Monetary analysis confirms upside risks to Inflation, with moderating GDP growth. The anchoring of long-term Inflationary pressures, and price stability are the key parts of the ECB’s work.

Source:
TheLFB: ECB Press Conference Bullet Points

How Things Are Holding Up

Written by A Forex View From Afar on Wednesday, March 05, 2008

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The credit crunch is affecting borrowers more then ever, with the spread between the e 30-year fixed mortgage rates and the 10 years Bonds, the "penalty" yield for having a mortgage security, having reached 208 points, the biggest since 1986.

The Rate cuts didn’t have any effect in helping the Credit Markets, but they had an effect on the Forex Market, with the dollar reaching its lowest value since the scrapping of the Gold Standard. Commodities get more and more expensive because of a weak US Dollar. Equities are now concern about the Credit Market, but soon they may be more concerned about higher Commodity prices wiping out dividends.

Here is the complete picture; the Credit Market is pushing Interest Rates up, the Dollar lower, and Commodities higher. The same Credit Market, together with very expensive Commodities, are sending Equities lower, thereby creating the demand for more rate cuts. If the wheels of the Credit Markets are not greased soon the whole liquidity issue may implode on itself, cutting Rates however is a bit of a vicious circle, it just seems as though the ‘one last Cut’ is never enough.


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ARM reset schedule

Written by A Forex View From Afar on Wednesday, March 05, 2008

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ARM reset schedule

Credit Suisse has provided an ARM Reset Schedule. The first month is January 2007, and so we are now 13 months later ready to face another spike of interest rates adjustments.

It's interesting that in the last 13 months, Fed Funds Rate have dropped, but the interest rate charged by banks and other financial institutions have actually increased. This has to change because there are another 48 months where ARM's will reset with higher rates.

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Dollar, Stocks and Commodities Interview

Written by A Forex View From Afar on Wednesday, March 05, 2008

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A fascinating interview with Marc Faber on Australian Television, saying loud, and very clearly, the real problems that the US is facing.

Known as Dr. Doom, he tries to show that it is not always printing more money that gets you out of the Problem, as shown in the 2001/2 Dollar Printing Contest.






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CAD on the cut

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

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Now with the slowdown in US it appears Canada's growth is slowing too, and as a consequence, the new Bank of Canada Chairman together with the voting board decided to cut interest rates with 50 basis points, to 3.5%. That is the biggest cut since 2001.

The problem for Canada now is the deteriorating Trade Balance; exports to the US are lower due to sluggish demand from US consumers. Exports to US represent 80% of Canada's Trade Balance.

But with all this, Canada has more aces under its shirt then US does, Canada's unemployment is going down, corporate profits are up, and most importantly inflation is at 2.2%, inside the BoC target rate.

Canada CPI and Employment



In case Canada is dragged into a recessionary phase, I'll blame it on the Government for putting all its eggs in one basket. Maybe they'll think a little more about diversification in the future. We have to think that it is the Loonie that will give up ground to reach parity with the Dollar and not the other way around.


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Commercial Estate equals more Write-down

Written by A Forex View From Afar on Monday, March 03, 2008

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If some had thoughts that the residential sub-prime was the end of the problem, they most certainly would have been wrong; the Markets are now reveling in the Bond Insurers problems that have appeared. If they thought that the Bond Insurer problems were the end of the road, they was wrong again; the Markets are now reveling in more write-downs and problems to come from Commercial real-estate loans and Commercial mortgage-backed securities, so says Goldman Sachs.

Analysts from Goldman see a 21% to 26% fall in value of Commercial estates over the next 2 years, due to higher credit conditions. These losses in value will trigger more write-downs. Until now, residential estate values have fallen somewhere around 20%.

commercial loans will trigger more write-downs

With the freezing of the residential-mortgage-backed market, it seems the commercial-mortgage-baked (CMB) market is getting into trouble, it is almost at a stand-still too. January marked the first month in which no CMB deriveratives were sold in the last decade.

An even bigger problem is the firms' own holdings of leftover, unsold commercial-mortgage-backed securities. The market for these bonds virtually shutting down has made it hard to determine what they are worth, Wall Street firms are being forced to rely on the CMBX index, which tracks the performance of commercial-real-estate bonds with different credit ratings.

Portions of the index have more than tripled this year, indicating soaring perceptions of risk to come.


Risk is starting to be a real problem in US Markets, and Risk Aversion makes only for a one thing, a Bear Trap that makes money harder to get and reduces liquidity in the real estate sector. If the Goldman Sachs analysis is correct, the commercial loans problems will have an important impact to the GDP numbers over the next few Quarters, and that will therefore impact the valuations of the USD.

Source
WSJ: Wall Street Gears for Its New Pain


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Fed Funds Futures

Written by A Forex View From Afar on Monday, March 03, 2008

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Fed Funds Futures

Traders are starting to perceive a bigger Interest Rate cut for the March FOMC Meeting it seems. Some markets are already pricing in a 75 basis point cut as a result of Mr. Bernanke's Testimony in front of the US House of Representatives Committee on Financial Services and Senate Committee on Banking, Housing, and Urban Affairs.

Even if the possibility of a 75 basis point rate cut is low at this moment, currently reading at about 30%, I'm getting the impression that Fed Fund Traders are pushing this too far; a 75 basis point cut would imply a 300 Basis Point cut in a couple of months, at the same time that Inflation is knocking on the back door.

If another wave of bad economic figures appear before the March 21 Fed meeting, then the probability and expectation of a 75 basis Point cut will only grow; but will the Fed be able to provide it and still control the Inflation Dragon? It seems that the recent decreases in lending still have not filtered through to the Lenders, and by the time that the standard 6-9 months has passed that it normally takes to see Rate moves impact, the U.S. could already be coming out of its Contraction phase, and the Fed will be looking to raise in quick time. This has 2004/5 written all over it, and that then likely means that in 2010 we start the moves lower again.

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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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