A Forex View From Afar

"The glass remains half empty"

Written by A Forex View From Afar on Tuesday, April 29, 2008

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Two important news items were released recently that should have given markets a cold shower...things are still uncertain. We should ask how deep and prolong the slowdown period will be.

First, it was the Case-Shiller Index to remind us that the housing sector is still in a downturn. The Index recorded the lowest read in the last 20 years, a 12.7 fall year over year. From 20 major areas measured, only one didn't record a fall in prices in the last year, Charlotte, with a 1.5% gain. From the rest of 19 major areas, the most affected were Las Vegas, Miami and Phoenix with an average of 20% drop from last year.

February, the month for which the Index was released, marked the 6th consecutive month with declining prices. The Chairman of the Index Committee concluded there is no sign of bottom in this numbers.

The other news release that should open some eyes was the Consumer Confidence, measured by the Conference Board. The released numbers, 62.3, matched analyst expectations, 62.0. A revision was also available for last month's release, but truly, nothing big. To sum up the Consumer Confidence Release:

"This month's decline in Consumer Confidence was the result of yet another sharp decline in the Present Situation Index. This continued weakening suggests that not only has the feeble level of growth in the first quarter spilled over into the second quarter, but that economic conditions may have slowed even further. And, not only are lackluster business and job conditions eroding confidence, but rising gasoline prices are undoubtedly heightening concerns. Consumers' inflation expectations continue to rise and this measure now matches the all-time high reached in the aftermath of Hurricane Katrina. The percentage of respondents intending to take a vacation over the next six months has fallen to a 30-year low, another sign of consumers turning more cost conscious. Looking ahead, consumers' outlook for the economy, the job market and their income prospects remains quite pessimistic and little changed from last month. Or, in other words, the glass remains half empty."
Says Lynn Franco, Director of The Conference Board Consumer Research Center

Around these parts there is a saying: you don't get drunk with cold water. Maybe the Fed stopped its cutting cycle, but those lower rates still haven't reached consumers...We may find out if the cycle has reach its bottom, with the FOMC meeting. Even if the bottom was reached in Fed Funds recently, it doesn't mean the Fed will start raising rates at the next meeting.

This week the Rebate Tax will hit the "markets" and just in time the mighty Wal-Mart has announce it will cash the checks for free. What an offer...hurry up, it may be limited

Sources:
CNN: Wal-Mart To Cash Economic Stimulus Checks At No Charge

Recession is the Word

Written by A Forex View From Afar on Monday, April 28, 2008

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Last week I said that a consumer recession is pushed and shoved by the big and powerful media. Now I will show two proofs: they are called Yahoo! and CNBC, but I call them the "the recession email-server" and "First in calling recession worldwide"

The stunning email service has a featured article box on the home-page. There isn't a day that I log in my yahoo email, without seeing an article related to recession. From "how to find a job during a recession" to "what to cook during a recession"...every possible subject can be linked in any way to recession.
In the last year, 2746 articles featured the word "recession", meaning 7.5 articles per day. But wait, in the last month, 721 articles appeared including the world recession, having 20 articles per day. That is almost one article per hour...
Yahoo link

The Business television, CNBC has a lower rate of recession-featured articles, "only" 1120 in the News and Analysis section, and 390 videos in the last year. This is translated in 3 reports that inspires fear, on a daily basis, and one reporter asking everyone and everywhere about recession.
CNBC link

Recession is in the media's blood, and they can't live without boom and bust cycles. It's a pity because scaring consumers will only make matters worse and not resolve anything.

Hunter Gatherers; The Global Central Bank Dilema

Written by A Forex View From Afar on Saturday, April 26, 2008

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This week saw the release of the Bank of England April’s 10 and 11 minutes, the interest rate decision from Bank of Canada, and as has become the norm we saw ECB members speaking about inflation worries.

The Bank of Englandminutes showed that the UK must prepare for hard times to come, with some further slowdowns both in housing and in consumer spending. These slowdowns are mainly due to tighter credit conditions and leverage reductions from financial institutions. In the same note, the Bank of England MPC members expect a lower UK Inflation read during 2008. The overall tone was somehow pessimistic, with Members deciding to act preemptively; if macroeconomic conditions deteriorate further more rate-cuts will be needed.

At the same time the Bank of Canada cut their interest rate by 50 basis points, making it the second consecutive cut of 50 points since the new Governor, Mark Carney, took control. The Big difference between the Bank of England and the Bank of Canada is that the BOC expects the CPI Inflationary pressure to increase further this year, up from the current 1.5% to around 2%. It is a mixed signal that a full 100 basis point cut comes at the same time as a warning that inflation is about to increase by 30% on its current level; low Interest rates and high Inflation = disaster for the value of the base currency. Traders can take from that, it would seem, that the BOC will be increasing rates at the first sign of growth, and at the first signs that Inflation has nudged above 1.5%.

The recent ECB comments, may suggest the same thing as the Bank of Canada; Inflationary pressures are growing; that is not such a big surprise with commodity prices in a strong bull run, and with oil standing at $120 a barrel.

Furthermore, the Bank of Canada said in their interest rate statement that the US recovery is not expected until somewhere around 2009; and that would put paid to the optimistic Bernanke view initially put forward that the US will show GDP growth going into Q4 this year. This is what the BOC had to say about that;

* "The Bank is now projecting a deeper and more protracted slowdown in the U.S. economy"
* "The Bank projects that the Canadian economy will grow by 1.4 per cent this year, 2.4 per cent in 2009, and 3.3 per cent in 2010."
* "However, a gradual recovery in the U.S. economy, a return to more normal credit conditions, and accommodative monetary policy should generate above-potential growth and bring the economy back into balance around mid-2010."

We now have two Central Banks acting preemptively by cutting rates; the Fed and the BoC.
We have one CB that is tackling inflation head-on; the ECB (at least this is what they are saying).
We have two CB’s that see inflation pressures in the near-term as a problem; the BoC and ECB.
We have one CB that can’t decide on Inflation over Growth; The Fed.
We have one CB who sees Growth ahead of Inflation, but is very undecided, and is cutting; the BoE.

The big conclusion is that Central Banks are divided into 2 groups; the Hunters, and the Gatherers.

The Hunters are all chasing the same Inflation Dragon, but have regional differences as to how to actually contain it.



The Gather is busy collating the information and the DNA as to the make-up of the beast, and are debating as to how to be politically correct in profiling the Dragon. Once profiled the case will be sent to the Treasury for analysis, the reports will be digested, a trip to Capital Hill will be undertaken, rhetoric will flow, Ummm’s and Ahhhh’s will abound, and finger pointing will happen. At that stage, possibly sometime later in the year Interest Rates will be increased in an effort to contain the animal, and the Dragon will finally be put on a leash. The Rape and Pillage reaped on the US consumer will have tired the beast, and it will then be easy to control. The taxpayer then goes on to pay for the cost of incarcerating the despicable Inflationary problem. Phew! That was easy for the Fed. See, this Central Banking job is not as hard as it looks.

Those that wait to properly profile the problem may be missing the point that Inflation is stripping away the value of the Dollar, and in some cases the Pound, and in doing so is also gradually stripping away the Global confidence placed in the USD. The FOMC Members may need to take a long hard look at this problem, because if they put a leash on it right now by not cutting rates, the US consumer, although in a world of hurt right now possibly, may not have to go through the ravages of sustained devaluing of the Dollar in their pocket. Swallow the bitter pill and get it done. At that moment the USD would bounce, the equity markets would likely rally, the inter-bank would know that they have had their fill of discounted cash, and the Credit Pipes will start to thaw. Leave the rate cutting in place and the misery of doubt and uncertainty continues.

Tough call, but we now need a dose of Tough Love.

It will be a long time until we see this much of a defined split in the way that Central Banks approach the same problems, and that is a very good thing; hopefully after the Credit Crisis had abated we can get back to trading in a Global market that is a little more in sync. That way we can look forward to trends being formed, Inflation being tamed, and extremes in Volatility, that allow the Quantum Trading black boxes to form the market patterns, subsiding just a little, well at least for a year or two.

The lowest Confidence in a Quarter Century

Written by A Forex View From Afar on Friday, April 25, 2008

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The University of Michigan-Reuters survey, reporting on Consumer Confidence, had the lowest read in 25 years. Respondents complained about higher prices, mainly food and gas, declining income, and falling home values.

Three out of ten people said that they plan to spend their Economic Stimulus Package rebate check, with the other 70% intending to either to pay debt, or to save it (this is new; US consumers trying to actually save money).

Michigan's analysts affirm that inflation coupled with uncertainty is very likely to hold back consumer spending in the current year, as it is likely to do in 2009. Most respondents replied that they expect the unemployment rate to grow, something that is known to heavily affect consumers' mood, and therefore their spending habits.

The worst part could be that consumers, due to media intoxication, think that the US Economy is at a recession at this point in time, and as such the GDP, Retail Sales and Housing numbers have little chance of picking up anytime soon. Recession really is a state of mind, because by the time the economics reveal that the R Word is here, the damage has already been done to Confidence. At that time the upwards swing tends to already be in place.

Nearly nine-in-ten consumers thought the economy was already in recession, and three-in-four anticipated that bad times financially would persist for at least another year. This was the worst assessment of overall economic since the early 1980's. “More consumers reported hearing news reports of unfavorable economic developments in April than any other time in the fifty years history of the survey, with job losses, rising prices, and the fallout from the housing and credit crisis dominating the reports.

It is a slowdown, most analysts don't estimate negative GDP so no Recession is officially in place. Consumers listening to the television and news would have a differing view of things it would seem. Even if a recession does officially hit, it's not the end of the world as we know it, but the USD will struggle to move higher until the dark mood lifts a little.


The US inflation rate at 4% is not something abnormal, the lowest (and the best) inflation level in an emerging country is around 10-15%, and these are the best cases.

The US 5.5% unemployment rate is by every possible standard very good. Again, it's not the end of the world.

Ford Unexpected Profits

Written by A Forex View From Afar on Thursday, April 24, 2008

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Since Ford’s unexpected $100 Million profit is the headline of most news sources, here is how really profitable Ford is:

What did the Chevy say to the Ford?
Would you like a tow home?

Buy a Ford and you buy the best.
Drive the first mile and walk the rest.

Why did the chicken cross the road?
To push his F-150 back into the shop

Over the past 10 years about 90% of Ford trucks are still on the road, the other 10% made it home.

Ford Escort Me To A Chevrolet Dealer.

This is your brain
"CHEVY",
This is your brain on drugs
"FORD"

I bet those bigger incomes were made on spare parts, towing and repairing. Want to hear some more jokes about Microsoft?

Inflation, a healing hand?

Written by A Forex View From Afar on Thursday, April 24, 2008

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It is pretty clear what is wrong with the US Economy at this point: a falling housing market and tighter credit conditions, developed by the housing market's negative performance.

A housing market that worked -stable prices and a hand-full of buyers- would certainly heal some parts of the economy; At least it will make the stock market perform like in the good old days, and make Banks rub their hands in anticipation of the borrowers.

If we take out the main ideas from the above paragraph, we can conclude that we need:
1. stable prices - at least to stop them from free falling
2. cheap credit - cheap money and available credit are some of the most important conditions for a working housing market
3. buyers - someone has to actually buy the house

To put it simply, cheap credit means low interest rates. Cheap credit will make homes more accessible for a larger degree of persons.

There are two ways to achieve stable prices: the fist solution is to work on the supply/demand side of things. Either increasing the numbers of buyers (the Fed can achieve that by lower interest rates; our case now) or reduce the number of sellers (the Fed doesn't have a big influence over this part).
The second solution is to create a general increase in prices, which in time will affect the housing markets too - this is called inflation, and it's achieved by low interest rates; what we have now

After all the times that the Fed has been critized for letting inflation appear and affect the economy, now comes am A-ha momemt that it isn't so bad, after all;
The low interest rate creates liquidity in the markets, helping banks to consolidate their balance sheets after all of those write downs, it helps to create inflation, which in time will lead to an increase in CPI prices, followed by an increase in housing prices. In the short to medium term it will create the impression of welfare, just what is needed to make consumers spend.

The problems will come when inflation gets out control, even getting some help from lose fiscal policies, which won't be hard to find since we are in a year with elections.

Believable?

What is worse, inflation, a weak dollar or the credit crunch?

Written by A Forex View From Afar on Tuesday, April 22, 2008

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It was very apparent some time ago that equities would need to go head-to-head and deal with higher commodity prices before they could break topside and easily hold, and it appears that they have reached that time with oil at $120, and the major equity markets in the Red because of it.

Oil could not have reached today’s high without the weak US$, commodities are priced internationally in Dollars; one cannot go up too far without the other going down. The Euro just reached 1.600, the Pound is at two Dollars, the Swissy is at parity, as is the Cad, and it looks as though the Aussie is going that way as well. All this helps keep the Dollar Index scraping along the bottom of the 71 area. It may be noted that the Index stood at 100 in 2002; we are off by 30% in 6 years, and a lot of that is helped by the rise of the Euro that makes up 60% of the value.

Equities have plodded along through the Dollar demise, but now things may have to come to a head because a weak Dollar and higher commodities are stopping the Equity markets from moving onwards and upwards.

The markets only needed to be given a good reason to sell the Dollar lower, and push it through the 80 mark on the Dollar Index, the sentiment had been building negatively since 2003. They got it in the form of sub-prime in July of 2007, and a 300 points rate cut in less then 6 months.

The big problem that the Fed, and therefore the equity market too, is facing now is either to solve the Credit Crunch and housing problems, or fight Inflation and save the Dollar. In fighting Inflation with a stronger Dollar they would help to reduce Global Inflation by automatically reducing commodity prices. Two tasks, that require totally different, and extremely opposite actions: to either cut, or raise, Interest Rates.

Another added problem for the Fed is that the world demand for commodities has not slowed, especially in the past years when the US was entering a slowdown and contraction in its Business Cycle. Bad timing for the Fed; the US catches a cold, and the World now writes the prescription, with of course, Chinese made drugs it would seem.

It was reported recently that for the first time in the last decade, the demand for energy and commodities from emerging countries has overtaken US demand. This is an important aspect for the energy markets, and will probably make the Fed and other central banks revise their CPI expectation higher, inline with the need to now be dealing with basic commodity prices that are working purely on supply and demand, but with the demand outside of the historical norm.

A higher CPI is not good for the US economy at this point, the politicians and administration will not like the idea of delaying the housing recovery this year, and the government especially will not want higher interest rates, neither this year nor next due to the huge Current Account and Trade deficit. These deficits are easier to reduce with a weak Dollar, yet even so the numbers are not reducing in-line with a Dollar that is at historical lows. If rates increased the dollar gets stronger and the Trade Imbalances soar. The government pays a fortune in interest charges for servicing the debt, and higher interest rate will only make the Twin Deficit Balances that much worse.

Back to today’s main problem, which will probably last some time; high energy prices are a dangerous problem for the US Economy. They affect consumer spending, which makes up 70% of GDP, business expansion and of course confidence. All three are essential to Company profits, and in turn are affecting the equity market performance.

Mr Bernanke is piloting a heavy ship right now, and the storm clouds may not have cleared just yet, but until commodity prices come down the equity markets may be stuck spinning their wheels for a little while. They are holding higher ground, but moving forward can only be done once the Fed decides where they are taking the economy.

Fed Funds Futures

Written by A Forex View From Afar on Monday, April 21, 2008

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Fed Funds Futures, the market's view of the future FOMC interest rate decision, are starting to price a smaller rate cut (compared with the last meetings) of 25 points, to 2%



It is interesting that some traders are starting to see the chance of no rate-cut for the next FOMC meeting, which will be held next week. At this point in time a 'no rate-cut' has the same possibility as a '50 points cut'; of 10%. There is an 80% possibility of seeing a 25 points rate cut.

Going forward the same traders are a little confused when referring to the June meeting outcome it would seem. First pricing in a 60% chances of a drop to 1.75% rate on Feds Funds, and then reversing that with a 2.00% rate expectation on the same Fed Funds. Now the possibilities are almost equal for 1.75, 2.00 and 2.25 for the June meeting. In other words; no idea.

On a technical note, June expectations are following April's expectations. It's safer to wait for next week rate decision than to build a position based on June expectations it would seem. Those that are steering the Fed Fund Futures ship are lost in a fog.



Even if the Fed's recent story sounds a little strange; starting with a 50 point cut, then 25, then 50 and 75 points rate cuts in unscheduled meetings , what the market sees is a small 25 point cut, if anything at all.

All this could be translated into bigger (and more often) Dollar bounces days, against the weaker pairs, like Cad and the Pound (which we can see at this point in time).

It seems pretty certain that there will be a sniff around up above 1.60000 on the Euro. The markets really look to want to have a test, and probably a break of, that resistance; but with traders pricing in a Fed that wants to beat inflation all of a sudden, there are some question marks. Reality however soon hits home; A Fed that wants to choke inflation? Well, how can they do that with an imploding Housing market, a lose labor market, and consumer confidence hitting low levels? The Fed held rates for a long time in an effort to fight wage inflation, so they stated, how can rates now be raised in an effort to tackle inflation when the economy is still absorbing the savage cuts that really still have 6 months to filter into the markets.

It is remarkable that as financial markets start to speak more about the Fed worrying about inflation, the more we see the ECB members jawboning about their "no rate cut perspective", "rate hike expectations" ,"inflation fear", and "growth is safe, inflation is our biggest worry". Surely the ECB Members know what drives the FX pairs; Business Cycles (currency appreciation), and Spread/Swap Interest payments. Neither of which leads many Trade Desks to want to be Long Eur/Usd for anything other than a Dollar Bounce Day.

LIBOR and the Discount Window: Do bankers hide the truth?

Written by A Forex View From Afar on Thursday, April 17, 2008

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The LIBOR(London Inter Bank Offered Rate), one of the most important financial indicators, may be starting to lose its appeal it seems. It all started with some eye-browns raised- how could LIBOR rates be so low when banks are hungry for every possible penny?

The LIBOR is one of the most important indicators when looking at the financial market. Everyone in the world that has a loan is affected by the LIBOR rate. In its most simple form LIBOR is the interest rate banks have to pay for a loan. When a person or an institution accesses credit, it’s usually set at the LIBOR rate plus a premium.




With the recent low LIBOR rates, most analyst say banks don’t want to report the real rates that they access credit at, because they don’t want to send a message to the market saying they have a shortage of money.

Exactly the same thing happened at the Fed's Discount Window. Even if it is a great tool for accessing liquidity, banks see it as a ‘last resort” way of getting money, so using it means you are close to default.

The conclusion is that banks waste a very good way to get Discount Window liquidity, because of the way they view it. Now they are starting have the same perceptions about LIBOR.

The question may be how exactly banks want to deal with a liquidity crises, when most of the ways of getting money are seen as a last resort. Furthermore, The Fed has the open market operations above the LIBOR rate, and banks still have a rush on the Fed’s money. Strange that banks decide to take money from a more expensive source.

Later Edit: The LIBOR had risen today the most since August, after British Bankers' Association threatened to ban members that try to influence market rates.

Source:
WSJ: Bankers Cast Doubt On Key Rate Amid Crisis

Foreclosure and Bankruptcy rises, again

Written by A Forex View From Afar on Tuesday, April 15, 2008

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According to RealtyTrac Inc, Foreclosure had risen 57% more than a year ago for March, while banks repossessions were up 129% percent year over year, making March the second consecutive month when repossessions jumped over 100%.



The bank repossession are even more dramatic when looked at by State; 619% in Arizona; 597% in New York; 557% in California; and 464% in Florida. These numbers are out of the orbit. Even worse, real estate analyst have come to the conclusion that many homeowners just given up to their house, adding more supply to a weak market.

As home-owners default on their loan, private companies are declaring bankruptcy.
The most bankruptcies filers seem to be from the retail industry. While some small to mid companies start to file for insolvency protection other have started to close stores to avoid such measures.

It is said that Linens ‘n Things will file this weak for bankruptcy protection, affecting 500 stores. Other companies will close stores, in order to optimize costs: Foot Locker said it would close 140 stores, Ann Taylor will start to shutter 117, and the jeweler Zales will close 100.

Charming Shops, which own the women’s clothing retailers Lane Bryant and Fashion Bug, are closing at least 150 stores. Wilsons the Leather Experts will close 158. And Pacific Sunwear is shutting a 153-store chain called Demo.

This all means that around 1300 stores will, or already have, closed this year. Assuming these were low-range shops, with an average of 10 employees per shop, it adds up to 13,000 people lost their jobs this year.

There are more chain stores closing, The International Council of Shopping Centers estimates 5700 shops will close their doors this year alone, 25% more then last year.

Now more problems are arising since a retail store can't work on its own. It needs shipping companies, furniture manufacturers, mall owners and advertising agencies to properly work. It looks like it could easily develop into a spiral.

Source:
NY Times: Retailing Chains Caught in a Wave of Bankruptcies
RealtyTrac Inc: Bank-Repossession Beat Continues in March

Retail Sales and future Statistics

Written by A Forex View From Afar on Monday, April 14, 2008

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Retail sales for the last month came in better then expected at 0.2% vs. 0%, while the last release was slightly revised from -0.6% to -0.4%. This data doesn’t look too good, but it’s in far better shape then other releases. The big thing is these numbers aren’t inflation-adjusted, and it’s likely the CPI numbers will be bigger than the 0.2%. So when adjusted, the Retail Sales are somewhat negative.

To add some more weight to the Retail Sales numbers, from my point of view, consumers still haven’t seen all the crisis consequences, and I hope neither the markets nor the consumers will actually get to see them.

Some time ago I said that the only way for the Fed to reduce inflation is to change (again) the way that CPI is calculated. I wasn’t speaking seriously back then, but probably someone took my words:

“Just when reliable and timely indicators are needed most, resources devoted to their production at our federal statistical agencies have been cut, requiring the termination of data series or a reduction in sample sizes used to produce the data.”

“The Bureau of Labor Statistics (BLS) has been forced to terminate all hours and earnings data reported for local areas as well as payroll employment for 65 small metro areas. The BLS International Price Program has also eliminated a number of series including prices of transportation services such as passenger air fares, air freight, and crude oil tanker freight. The Census Bureau will discontinue its Survey of Alterations and Repairs in May. The Bureau of Economic Analysis will reduce the level of industry detail in its county data and will eliminate the benchmark capital flow tables that provide baseline data on industry-by-industry investment by type of investment. This may only be the beginning.”

Maurine Haver President of Haver Analytics

Does the “resource” reduction sound familiar? It also happened with the M3, money supply numbers, and now the Fed is the only major bank that doesn’t publish them. Someone could say it is outrageous.

Since the CPI is one of the most important economic gauges, we will all have to suffer because of “resource” reduction. Due to the same reduction the Non-Farm Payroll data will be modified too!!!

Have you ever wondered where the Government gets money to run two wars and give $150bn in the form of tax rebates, when the Government is running such a large deficit? I’ll tell you, from cutting the budget at Statistics agencies.
This way, in a couple of years the only economical-statistical release will be the interest rate, if they don’t decide to cut it off due to huge costs.

Analysts and their opinions; take care

Written by A Forex View From Afar on Friday, April 11, 2008

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Today’s Rumors Mill looks at what the economists surveyed by the WSJ have to say about the current economic state, and how useful their information really is;

The most important economical indicator, the ‘08 GDP, was forecast 1.1% annual growth, down from 2% in January, with big gains in Q3, probably from the 600$-tax rebate. Even if a recession probability is not too high in 2008, 40% of the economists see a 70% probability of recession in 2009. Again, 76% of the economist think that we are in a recession right now, and 73% do not see that the bottom has yet been hit.

The same economists see the unemployment rate going up to 5.6%. The Fed Fund’s average for 2008 is at 1.80%, down from 3.65%, the January estimate.

The housing market prices were revised for the 8th time, downwards, with a 5% loss in ‘08 and continuing through ‘09.

These economists have contrarian opinions. They think now we are in a recession, but the probability of ‘08 recession is 40%, while 70% of them see a recession in ‘09, but at the same time, they see growth picking up in Q3 and Q4 of 2008.

Most importantly, many of their estimates were lowered in the last few months, and probably they’ll do the same when things are getting better; by raise their estimates. Their views are not too useful over the long term it would seem, but they are important now, because many of these economist form an important piece of an Institution’s Trade Desks, and at the most important financial firms in the world they have the ability to move markets.

More problems ahead?

Written by A Forex View From Afar on Thursday, April 10, 2008

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Two big problems are lying in front of every Central Bank member now: who will date Britney Spears, and what is Paris Hilton doing lately?

Seriously, the problems are inflation, lead by commodities and higher food prices, and the current uncertainty in the market.

We have also got the world divided in two at this point: The Fed, Bank of England, Bank of Canada and soon Bank of Japan will join (the market says) the group that now battles recession fears; On the other side of the fence there is the RBA, and the ECB plus the regional banks that are under ECB's "hand", and China that battle inflation.

I think the charts speaks for themself, the commodity index had raise to unseen numbers, with grains having a 12.4% gain, industrial metals 22.2% and crude oil 14.8% gain this year alone, and only a quarter in to the year.

What is worse, since everybody is seeing a global slowdown, these prices should go down due to lower demand, But they are not and their motives some say are speculative interest, others say due to emerging markets demand. I say they are both, plus a weakening dollar

The other big fear nowadays is the market-uncertainty. The biggest bet these days is to guess if any bank will default (again) and which one it will be. Of course, this fear is seen in the markets, not only in Forex or Stocks, but in money markets too.
The spread between the Three Months T-Bills, which are considered risk-free, and the 3 Months Libor rate, the rate at which banks loans between them, is at a high level, and worse, it's starting to rise again.

At this point in time, I can't tell who's doing a better job, the inflation-fighters or the credit crunch wrestlers, but all I know they are moving in different directions at this point in time, and this doesn't help either of them too much.

But If I had the ability to influence something I know what I would do; send regulators to banks to write downs all toxic assets (or at least to know how big they are) and force banks to start lending to each other. One more thought, as a simple citizen, inflation isn't doing too good for my state of health, my budget, not my savings either.

Please add your Comments

Rushing for the Asian Session

Written by A Forex View From Afar on Thursday, April 10, 2008

Although this isn't related to Forex, it's very funny and just needed to be posted. Don't know how a foreigner will feel in that subway. Laughing probably :)
Anyway, I still want to visit Tokyo or Japan to see all oriental masterpieces and culture.

Konnichiha

TheYens; Aussie Ready To Rumble?

Written by A Forex View From Afar on Wednesday, April 09, 2008

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Both major US Equities markets are at important resistance areas. The S&P 500 since January has traded under the 1,400 resistance area, and has failed to break that area on three occasions, it is also an price point that has acted as strong support previously that went on to break. Old Support turns into new Resistance, and this is a Wall o’ Worry to have to climb.

The Dow Jones has had the same problem since January in trying to break the 12,700 resistance area. It also failed three times to break, and this area was also a previous important Support point that failed; the Dow also has a Wall o’ Worry.

The bad part of the story for equities, and something that may now hinder those moves higher, is that yesterday’s FOMC Minutes somehow managed to build a much gloomier picture over the medium term for US economy than most had expected them to do, with recession a possibility and inflation above the comfort zone.

Fundamentally this is not a good setup for equities to break such an important technical resistance area.

The equity market’s close followers, the Yen cross pairs, have shown in the last couple of days that they want to move higher. Instead of the normal sell once with the major stock markets go lower they seem to want to close in the green.

It is important to note that most Yen pairs, like the S&P and the Dow, are now at resistance levels.

The Eur/Jpy is now trying to break the 161.50, the 200 day SMA area; the last time it tried this the attempts were the instigator of a new down-trend. The Euro will maybe need the ECB to help in this final push through.

The Gbp/Jpy has been in a clear down-trend for more than 6 months and trading way under the 200 day SMA. It also just failed at a bearish trend-line, an area that the pair has been unable to break since November 2007. The Markets are now expecting a rate cut from the BoE, and it is unlikely that the Gbp/Jpy will break much higher, without better fundamentals backing it.

Under The Radar
A Yen cross pair that does look capable of breaking the near-tern resistance is the Aud/Jpy. It still has room to run to the upside once it clears the first resistance at the 96 area, which is the 100 day SMA area. From there the 200 Day SMA is 150 pips away.

It is very important to note that Aud/Jpy has closed out the last eight days in the green, with big candles and small Wicks. It will be very interesting to see if the Aud/Jpy can move any further as the equity markets struggle. Keep in mind that it does have a lot of strength from the rate differential of being the highest yielding major versus the lowest yielding. Trade Desks will be looking for Interest appreciation the moment that the Risk Averse signs are taken off the Wall Street sidewalks.

Keep an eye on the Aussie, all it will need is the S&P to move higher; it is ready to rumble, it would seem, but….
‘positive equity markets’ and ‘breaking major resistance’ are not two things that we have seen for at least 6 months in the same sentence. Maybe just put in on the radar, and look for a close above 96.00.

Usd/Chf. The Link To The Fed

Written by A Forex View From Afar on Wednesday, April 09, 2008

It is a possibility...

Due to the tight credit conditions in the inter-bank market the Fed had announced new forms of Lending for Financial institutions.

Currently, there are 8 ways of getting money from the Fed, 5 of which were masterminded only after the credit squeeze had begun. We could take this as a sign, showing how strong the financial markets really were affected.

Here are the current main ways for borrowing:


1. Open Market Operations
2. Discount Window
3. Securities Lending
4. (New) August 17, 2007 Term Discount Window Program
5. (New) December 12, 2007 Term Auction Facility
6. (New) March 7, 2008 Single-Tranche OMO Program
7. (New) March 11, 2008 Term Securities Lending Facility
8. (New) March 16, 2008 Primary Dealer Credit Facility


It is well known that Mortgage Backed Securities, or MBS, are the cause of the credit crises, pushing losses in the form of write-downs higher, actually, way up. To counter these the Fed had opened its doors to accept MBS through 7 of its Lending Facilities, as long as they are rated AAA. The only one making an exception is the Securities Lending which accepts only US Treasuries.

One step further, the Term Securities Lending Facility accepts MBS rated as AAA and Residential Mortgage-Backed Security, while the others do not. With this decision the Fed is going one step further in an effort to free up the bank's balance sheets, especially when they are accepting AAA MBS paper with a "hair cut" of only 98%.
This is the same "hair cut" T-bills get and we have to think that the MBS market at this point is completely frozen. This is the best deal you can find out there.

At this point in time us forex traders should start to see an interesting position. The bank switches MBS papers, that they can't sell anyway, for Treasury Bills, which are highly liquid papers. Banks don't just take T-Bills to keep them on the balance sheet, they have their MBS for that; Banks takes T-Bills to sell them, and increase their liquidity. Win/Win for the bank, Lose/Lose for the taxpayer who's money the Fed is playing around with in an effort to stimulate the economy.

By selling T-Bill they are actually sending Bond prices down and Bond yields up (from the bonds price/yield inverted relationship). Sending up the short term interest rate, through selling T-Bills, generally increases the yield on longer term bonds, like the 5 and 10 years bonds. This is how the Fed, as any other central bank does, controls interest rates, by controlling short-term yields.

Obviously, the most effected currency pair by the raise in Bond's yields, especially 10 years Bonds, is the Swissy, Usd/Chf. If this all holds true it would mean we should see some stronger Dollar bounces versus the Swiss Franc.

It is interesting that since the Lending Facility was announced, we have seen a certain increase in T-Bills yields. Unfortunately, the TSLF is still new, with only 2 operations until now. We still need some more time to determine if this theory will work over time, but it's attractive to watch the operations being done, and to monitor its effect on currencies.

Fed Reserves

Written by A Forex View From Afar on Wednesday, April 09, 2008

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Wall Street Journal provides a chart showing how the Fed Reserves had evolved over the last quarters, more exactly since the sub-prime had begun.

1. Lent banks $10.3 billion through the discount window.
2. Lent banks $100 billion in term auction credit.
3. Lent securities dealers $76 billion through standard repurchase agreements.
4. Lent securities dealers $34.4 billion through the discount window.
5. Lent securities dealers $75 billion of its Treasuries in return for other collateral through its new Term Securities Lending Facility.
6. Lent up to $36 billion to the European and Swiss central banks.

We're getting close to the bottom of the sack, aren't we?

I really recommend to study the source for this article, it's a really good read and plus it offers some nice solutions too

Source:
WSJ: What Could the Fed Do?

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A look at the mortgage market

Written by A Forex View From Afar on Tuesday, April 08, 2008

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According to the data collected by Freddie Mac, the Primary Mortgage Market in the US, the place where the mortgage big guys (Mortgage Brokers, Mortgage Banks, and Depositories) settle the mortgage conditions is in good shape right now. (At least that what interest rates are saying).



The 30 years fixed-rate loans, the usual loans used for houses, are just starting to feel the benefits from the recent rate cuts. At this point in time, the interest rate charged is around the same value as it was back in 2001-2002, when the rates were at 2%. A loan taken now, over 30 years with a fixed rate is at 5.88% for the primary market.



Unfortunately, a simple calculus shows that the spread between the Fed Funds and the 30 years mortgage grows exponentially when the Fed is in a rate cutting cycle. From a spread of 1% it reaches a top slightly above 5%, a huge gap from the 5.88%.

This shows that the big winners from the rate cut are mortgage bankers in first place, and a long way lower, probably at the end of the line, is the Average Joe. Sadly, this is what charts are showing.

The same things can be observed from studying the 1 year adjustable mortgage (ARM).
Now it bears the same interest rate as it did during the 2001 rate cut, but the big difference comes when the Fed is cutting rates. The same pattern can be observed as in 30 years mortgages; when Fed Funds are targeting lower the spread increases a lot, showing again that the big winners are mortgage banks.






Maybe what the mortgage brokers are doing is a little out-of-line; Why can't they pass on the lower Fed Fund to the rates that Average Joe has to pay? Those rates cut were made for him, not for the big wallet of the mortgage industry.

By keeping the rates higher on mortgages during rate a rate cutting cycle they are just making the Fed's job much harder in trying to re-launch the housing market. Ironically, a better housing market will mean more contracts sold, which will be reflected in their balance sheets. It seems mortgage banks are not ready to accept that, and things may stay that way until they clear out the write-downs on their balance sheets.

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Who knows what they want?

Written by A Forex View From Afar on Monday, April 07, 2008

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Scenario 1; The Chairman of a Central Bank, and his Finance Ministers, complain that the volatility in the foreign exchange market supports a strong currency (their counter-party currency, that is), say that the Central Bank will closely watch the exchange rates, and also add that currency appreciation should reflect fundamentals. What opinion should we make, as Forex traders to this?

Obviously they are not supporting the current exchange rate and its trend. All this is called verbal intervention, or jawboning.

Scenario 2; The Chairman of a Central Bank says that the growth perspectives are fine, the financial markets are in a good shape saying we have outstanding credit growth, says inflation is strong in every 3rd sentence, says the IMF is to pessimistic about future growth perspective, will not even speak about the idea of a rate-cut, and says they (the Central Bank) will not support interventions over a counter-party currency.

They are sending signs that growth is good, and with so much talk about inflation they are leaving room for currency appreciation, it would seem.

Imagine all of this was said by the same people, well actually you do not have to imagine it, because it was actually all said by the same people; Mr. Trichet and his staff.

Strange, isn't it? To me it appears they are sending totally different messages. It's like they have forgotten about currency fundamentals. On one side they say: "Hey, we are doing fine here, not like others (note to the Fed). Growth perspectives are inline, the only problems we have are with inflation" and on the other side "Woooow, what have you done with the eur/usd parity??? We are in the middle of a crisis and you send the Euro up to the sky?? Bad traders, bad!!!"

What do they expect? To speak only about inflation and dismiss from the start the idea of a rate-cut at the same time that the Fed cut 300 points, and they don't expect currency appreciation and excess volatility??? The next step will be to say; switch all available Dollars for Euros, but at the same time complain about why traders are doing that.

I think they are starting to loose the ability to anchor future expectations, and by not sending a clear signal that may easily get exaggerated. At least I'll admit it; they have lost me with all of this double talk.

I can't wait for Tuesday when Mr. Trichet will speak again; about inflation. Now how will he get around this one. C'mon Claude, you were always so elegant in your delivery, please do not go down the Greenspan/Riddler path.

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Japanese Asset Bubble

Written by A Forex View From Afar on Thursday, April 03, 2008

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Via the WSJ's Economic Blog, Societe Generale strategist Albert Edwards writes that the U.S. could see an asset bubble similar to the on from Japan, during the 90s, or even worse.

Mr. Edwards has been making Japan comparisons ever since the dot-com bubble burst. Many people disagreed with such assessments, pointing out that U.S. banks and real estate were in far better shape. That’s not the case anymore, says Mr. Edwards, who also notes that Japan didn’t experience a real credit crunch until years after the bubble burst in 1990. And while there’s a view that Japanese banks were glacial when it came to writing off bad loans, part of the problem was that bad loans kept on turning up as the situation worsened. Sound familiar?

What could make the U.S. situation worse, he says, is that Japan’s citizens had deep reserves of saving to tap into, whereas the U.S. personal savings rate is near zero. Japanese companies were unwilling to fire people, which, while it may have made for a sclerotic economy, helped prop up spending.

Even if I agree we are now felling the Bubble Bursting, similar to the Japanese 90s style, it definitely won't be at that magnitude and scale; after 18 years Japan isn't fully recovered. From the stock market point of view, at the time of the Burst, the Nikkei was topping at 40,000 points, now it stands at 13.000, 18 years later. Who knows how much time will need to recover?

Another good counter-argument would be that US didn't have enough time to "prepare" for such a bubble. We already had a bubble burst from 2001 to 2003, which cleared some inflated parts. From 2003 to 2007 there wasn't too much time to have reached the level of Japan's bubble, but it's obvious that the ones who are to blame for the bubble, bank and money regulators through easy lending, had a real rush. Trust me, 5 years between two bubbles burst is very bad.

Interestingly part of the blame for the Japanese bubble was placed on the fiscal policy, with financial markets deregulated and loose tax policy. From 2003 to 2007, we got them both, through Bush Tax Cuts and deregulated markets. Remember the speeches about the financial advantages of deregulated markets? I do.

About national debt, I'll have to agree with Mr. Edwards. The US is an economy which has developed in the last years through credit, taking the saving rate to the negative territory.

We'll have to see now how the US economy will cope without the debt machine, because US consumers are already late on credit payments, and at the highest level in 15 years.

Sources:
WSJ: U.S. Situation Could Be Worse Than 90s Japan

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Professional Financial Risk Models

Written by A Forex View From Afar on Thursday, April 03, 2008

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Since the beginning of the sub-prime mess, that marked the current meltdown of the financial system, one of the things that carried a lot of the blame was the Financial Risk models.
In the big picture, there are two types of risk-models: The Arbitrage Pricing model and the Black-Scholes Pricing model.

The Black-Scholes model is used in options, an insurance or hedge on an underlying security/asset that is being held, normally Equity/Stock based. Currency options are not (yet) as well used by retail traders as the spot market, so we are going to focus on the Arbitrage model

Arbitrage Pricing is one of the blueprints that created risk models. It was first develop in the 70s by Stephen Ross and it soon took the financial world by storm. Arbitrage Pricing is, in its most simple form, a math formula, where external shocks (such as macroeconomic data) take the form of coefficients. Using this formula, it is possible to determine a future expected price.

At a future date, if the price of the asset is not in line with the calculated price by the arbitrage theory someone could use this opportunity to do an arbitrage trade between the risk-asset and a synthetic range of assets (an index).

A good example would be if the risk-asset is overpriced; then go short the risk-asset, and long the index, until the risk-asset's price is inline with value calculated by the Arbitrage Pricing.
In the forex market such arbitrage systems could be made between the Eur/Usd pair, and the dollar index; The Euro makes up 60% of the dollar index. As for the external shock, we could use the macro-economical and market data such as inflation, GDP, Fed Funds Futures and Consumer Sentiment. Pretty much they gauge Trade Desk expectations and they would qualify as good coefficients in the math quote. We could say almost every pair has its own possibility, and we know the Commodity link between them all as well.

It's very important to note that these types of risk models created two very important financial turn-offs, first in 1998 with the LTCM bankruptcy, and now with the current credit crises. Even if they sound risk free in theory, as proved in practice, most of the time the risk-free part turns out into risk-horror.

If someone would ask me, I'll stick for now to my "risk model", not more then 2% per trade. The best, and the only flawless risk model that we have.

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Recession is possible...Really?

Written by A Forex View From Afar on Wednesday, April 02, 2008

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We had a first today, with Mr. Bernanke saying recession is possible. Really? After cutting 300 points, bailing out a bank and making up all sorts of "lending" facilities to switch T-Bonds for empty papers (read MBS) only now it's possibly a recession?

We have been saying it for almost 6 months now, the R word that is, but we were polite in saying Contraction, or Trough. Does this mean we are way ahead of the Fed?

The first step to cure a disease is to admit you have it. Until now, the Fed had taken massive doses of antibiotics, pain relieves and a surgery, and only now the Fed sees the ills, c'mon Guys, take off the Rose Tinted glasses, we can handle it. At least we are starting to walk on the good road, which ultimately will heal.

The other big shift in today's speech was chancing the recovery date. The planned revival of the economy was delayed from Q2-Q3 this year, to 2009. What happened to the quick recovery? Did it hide somewhere?

The way to 1% in Fed Funds is getting paved these days, be patient, any time now.

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US Sub-prime Map

Written by A Forex View From Afar on Wednesday, April 02, 2008

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The Fed has done it again. In order to heal the whole nation's pain, dropping house prices, you first have to show it on a map, but on an interactive map, not a simple one, showing the actual scale instead of the colors.

Map Link Here

Good Job Guys, Keep the Standards Low High, as we got used too.

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Attack on the Crown

Written by A Forex View From Afar on Tuesday, April 01, 2008

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Attacks On The Crown, The US $ Next?

The attack isn't on the English Crown, but very close, it is on the Icelandic Krona (which actually means Crown). Quote;

"...give off an unpleasant odor of unscrupulous dealers who have decided to make a last stab at breaking down the Icelandic financial system". "They will not get away with it".

These comments, made by the Chairman of the Icelandic Central Bank, David Oddsson, confirms that Hedge Funds (described as "unscrupulous dealers") are out in force, attacking the country's financial system. Iceland is in a tough position right now, and looking vulnerable; the current account deficit is at 16% of GDP, and inflation stands at 8.7% against the central bank’s target of 2.5%.

Late Call On The Downgrades
To give a helping hand, of course for the Hedge Funds not for Iceland, the rating agency, Fitch, has just announced it has changed the country's outlook from Stable to Negative;

"Fitch Ratings has today revised the Outlooks for the Republic of Iceland’s Long-term foreign and local currency Issuer Default ratings (IDR) to Negative from Stable"

Even more staggering is the fact that Fitch has the same intentions for Iceland's biggest three banks, but only now that the Hedge Funds have had their chance to tear them apart in an effort to replace their recent loses.

"Fire, Fire"
Why do these rating agencies alway crop up and yell "Fire" after the facts are out in the open? Is the idea of rating something not meant to enable a forward valuation to protect against this? They did it with U.S. LDO and CDO (sub-prime) debt valuations last year, they were 9 months behind the curve on those.

The Fed, The Last Resort
What is very interesting is that Fitch has cut ratings on some banks, that until some days ago were fine (until the hedge funds role in to rape and pillage), but they chose to keep the AAA rating on mortgage backed papers that have a 60% default, that can be hardly called speculative bonds. What gives there?

The "good" news is those AAA bonds will soon change to Treasury Bills, if they haven't already been swapped, as the Federal reserve step in to buy debt that nobody can sell.

It could get worse; Paul Krugman and David Oddsson are hinting that Bear Stearns, which is in insolvency right now, may implicate others in their debacle. It seems that the other Hedge Funds involved are DA Capital Europe, King Street, Merril Lynch GSRG and Sandelman Partners. Maybe the rating agencies will want to join the Rogue's Gallery too, no wait, rating agencies will probably leave it until much later into a problem before downgrading themselves.

Forget Ratings
Where on earth does all this lead to in regard to trying to value debt? If ratings are only ever reactive, instead of being pro-active, is there a need to have ratings at all? It has failed average Joe dramatically recently. The Institutions deserve to make their own restitution if they could not be bothered to get second opinions on the swaths of debt that were gorged on, in a greedy frenzy whilst the US housing market exploded.

European Gains
Maybe the Treasury is looking to regulate the wrong people, maybe the rating agencies deserve to get grilled by Big Hank and Helicopter Ben, and leave the Banks to sort themselves out via the Interbank. All of the Red Tape has an unwanted sticky side too; London and Frankfurt are gaining Market share of foreign investment whilst all the whistle-blowing and finger-pointing takes place.

Door, Horse, Alan Greenspan
Closing the stable door should have been done in 2005, the Horse bolted a long time ago Hank, and was last seen being ridden into the sunset by Alan Greenspan.

US$ Valuations
The US Dollar will only appreciate with an expanding economy, the Contraction phase is done, we are in the Trough, next comes Expansion, and then eventually Growth. However, Growth cannot happen with poorly rated debt, and debt cannot be rated retroactively. So, until the debt can get properly accounted for, the US $ may not appreciate too much more than just having Bounce Days throughout 2008.


Sources:
Paul Krugman: The North Atlantic conspiracy
FT: Put-upon Iceland’s latest woes

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