A Forex View From Afar

A Trader's Look At A Trader's Life

Forex Analysis

Inflation is here to stay

Written by A Forex View From Afar on Monday, June 30, 2008

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The Bank for International Settlements – the central bank of central banks – has released the annual report regarding their global economic outlook.

The BIS reconfirmed what the market already knew, that central banks have to choose between inflation fighting and assuring growth, and they also they pointed out some of the causes that led to the excessive credit build up.

Perhaps the principal conclusion to be drawn from today’s policy challenges is that it
would have been better to avoid the build-up of credit excesses in the first place. […]Recognising that cycles can be attenuated but not eliminated, a number of preparatory steps are also suggested that would allow periods of financial turmoil or crisis to be more effectively managed.

Remember the 1% rate on Fed Funds for over 1 year? Does that spark a thought of where we are right now? It was only 6 years ago. This is why expectations play a very important role in macroeconomics. It takes a lot of time to steer the economy through a central bank’s leverages, and they are: the interest rate, their reserve requirements, and the discount window that they service with cheap loans. The median times can be anywhere from 6 months to 18 months to get an economy back on course.

The slow response of the economy means that a central bank must act in a proactive fashion, something that central banks were not able to do recently, due to the tight credit conditions (= credit crises). Hesitation will now play its role in the coming months in the form of inflation.

I won’t accuse anybody here, since monetary authorities had a good reason to keep rates on hold or even cut, but when we have a central bank that cuts for the market’s sake, this means that problems are lying ahead, we now have the pay-back from emergency rate cuts, and that is in the form of inflation and soring commodity inflation because of a low U.S. $

Well, the BIS somehow supports my view by saying:

In the aftermath of a long credit-driven boom, it would not be surprising to see turmoil in financial markets, slowing real growth and temporarily rising inflation.[…] At the same time, inflationary forces, particularly in emerging market economies, could also prove unexpectedly strong and persistent. A major factor in inflation prospects everywhere is likely to be the behaviour of wages, but in some countries the effect of a depreciating exchange rate on domestic prices could also play an unwelcome role.

Hmm, depreciating exchange rate? Is the Fed or the Treasury hearing this???

inflation is very high while global growth will slowdown

My personal conclusion is that inflation is here to stay and is definitely more then a bump in the CPI charts, and at the same time global growth is very likely to slowdown. If the dollar is set to fall it means that the oil is set to rise, global growth slow-downs are not going to impact the oil demand it seems, not all of the time that China and India are stock-piling, and definitely not when Iran is at the center of a political storm. There is no easy answer, except maybe that the 4 hour chart channels may be are new best friend over the summer, the alerts posted on TheLFB cover what to look for. Ready? Up, down, up, down, up, down.......

Oil's effects

Written by A Forex View From Afar on Monday, June 30, 2008

oil's effects over spending.

See what high oil prices had done! Beer is now cheaper than gas

Watch out for the aussie

Written by A Forex View From Afar on Friday, June 27, 2008

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The aud/usd has been advancing for more than two weeks, but things may change as we had into the 0.9650 resistance.

The last time the pair reached this area it spent days (weeks actually) trying to break higher, but just couldn’t pull off the move. The 0.9650 level showed a wall of short orders hitting the market, all at the same time.

Thinking that the pair pays a huge swap interest rate, theoretically more then the gbp/yen does, the pair should have been used for the carry trade and have broken higher without any problems. Well, it did not do that and by the magnitude of the short orders in the 0.9650 area, something tells me that a major player was selling. The RBA maybe?

The pair is once again approaching the same level, and again volatility can be expected as traders ask canit break and bounce higher? For me, the short side seems to be more likely.

aud/usd forex analysis

As seen in the above chart, the 0.9650 level is the get-together point for two pretty important resistances. In that area, the aussie will meet the 0.9650 resistance together with the upper line of the channel in which the pair traded recently. If we keep our eyes on the recent history, the pair needs very strong momentum to move higher, and withput a major player hitting the market with short orders, it is unlikely that it will find the required strength to advance any further.

On Tuesday night, the RBA is scheduled to release their interest rate decision. The market expects the central bank to hold, but at the same time a dovish tone is expected since the recent economic releases point out that the last rate hikes have already sterted to impact the real economy. If we add the recent trend spotted when a major CB release their interest rate decision, buy the rumor sell the news, we obtain one more proof that a turn around may be on the cards.

One further argument comes to mind. This week, especially the last trading days, were clearly awful for any dollar bull, and an observation is that usually trends end with the week-end break, the time when traders cash their chips and enjoy some days off (right). This leads to to believe that short aussie, after a failed upside test from these levels is what we will be seeing.

The above is my personal breakdown for the week ahead, my little aussie analysis. The only thing left is the market to prove me right, again!

The credit crisis may not be over, but it’s doubled by inflation

Written by A Forex View From Afar on Thursday, June 26, 2008

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Just a while ago the investment world thought they had got rid of the credit crisis and everything was running smoothly, however, it seems as though the crisis just does not want to give up so easily, and now the sub-prime fiasco is now backed by inflation.

It looks now as though it is an unstoppable duo, credit and Inflation, for the world economies, but most for all for the U.S. one. The credit crisis keeps consumer away from loans, while at the same time inflation strains their pockets. I have already laid bare my thoughts on oil and commodities, and it seems that more and more analyst share the same opinion: there is still room to run. Having crude oil trading at $140 per barrel, despite the numerous verbal interventions, can be a good reason to say the commodity market may not have ran out of bulls yet.

Banks and financial company’s credit ratings have been downgraded, sending down the major market indexes. The S&P is heading towards the low of this year, while the Dow Jones is touching the lowest point since September 2006. European shares saw an imposing sell-off, closing the session more then 2% off, while Asian shares barely closed on the green, after 6 days of continued selling.

The problem is now that the tight credit conditions and expensive commodities, translated in $4 gas, are reaching consumer’s pockets. In a recent survey, 7 out of 10 consumers replied that higher gas prices caused them "financial hardship". This is the last thing the US economy needs, consumers that stop spending. Consumers less willing to spend will be immediately be felt in the GDP and growth numbers, dragging down the potential economic development.

This a pessimistic scenario. I’m still remaining optimistic on the US economy, especially on US shoppers unique ability to spend. I’m still bearish over the long term on commodities, but probably my dollar view will need some little tweaking to adjust to the new FOMC statement, and on the other various factors. The weekend is near, the time when thoughts are consolidated and trends are broken. Who knows what will hit next week, outside of the ECB and Aussie rate decisions?

The future of Crude Oil

Written by A Forex View From Afar on Tuesday, June 24, 2008

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Everyone is talking about the oil prices, with questions like; how long can prices remain so high, and, what is the next move a trader should do? Here is my view on the energy market. I like simple things, going back to basic stuff like supply and demand and future expectations. The spot price for the oil market can be a good estimate for the current supply and demand, as it is for any other market, but when it comes to future expectations, my thoughts are not too positive for crude oil.

Crude oil had an awesome year, gaining more then 100% from last May. Here are some factors that contributed to this appreciation;

1. Supply and demand: even if US consumption slows, emerging countries will keep their demand high;

The demand side in emerging countries was generally put on the Chinese shoulders. Well, Chinese officials are trying to curb their strong demand that has recently forced energy and raw materials prices to go up, probably having a quick affect on China’s fuel burning. Add to the above today’s US Consumer Confidence report, which had the lowest read in the last 15 years, while consumer expectations just recorded the lowest read since 1967. This wraps as gloomy an outlook for oil demand as we have seen for a while, especially in the U.S. which seems to have been affected by the $4 per gallon gas price.

2. Weak dollar: as the dollar traded lower against the euro (mostly), crude oil gained, as it has a reverse correlation with oil prices;

The weak dollar won’t be here too long. It’s pretty clear the dollar index formed a solid base at the 71.00 area, and not looking able to break lower. The Fed will probably raise a couple of times this year, thus empowering the dollar. A stronger dollar is something the Euro-area officials want to see. A stronger dollar would automatically lead to oil trading lower.

3. Blame it on the Nigerians or Chinese: every time crude oil starts to trend lower, something happens in Nigeria. The Chinese have been Olympic stock-piling

On the Nigerian problems my only though is, how long can the rebels keep attacking the same pipelines in the same regions every time without something being done? What happens once the world spotlight comes off China once the Games are finished?

4. Speculative interest: we just can’t have a market without the spectulators, however over-bearing they get sometimes

Any idea of what is the weakest link in the oil market? Speculators. There is just not anything else in the world that could completely change their judgment, and in just a few seconds, as the fear of loss getting closer and closer as each upwards move just about holds on. An adjustment in perception in any of the first three factors noted above could easily send a speculator into a frenzied sell off. Unchartered price points in commodities tend not to last too long before support gets tested.

From what I see in the mainstream media no one from the energy industry expects oil prices to remain high. From refinery CEO's, to investors and politician’s, they all expect oil to trade lower over the coming period. To wrap up in just a few lines, I’m not seeing a complete sell-off that will be uncontrolled, but I am seeing a slow return to more normal levels, somewhere around $90-100 per barrel in the following quarter. Whilst this happens, keep an eye on the commodity currencies, like the Usd/Cad, which may get heavily bought, or Aud/Usd that may get a haircut from gold pulling back, inline with oil and the dollar re-aligning.

European CPI

Written by A Forex View From Afar on Monday, June 23, 2008

European CPI

In the European CPI chart there is something way off. Can you spot it?

Some would notice that the red line that rose in the last months was almost vertical. Doesn’t that look like a bubble? An inflation bubble is something unheard off...until now.

Stagflation is next

Written by A Forex View From Afar on Monday, June 23, 2008

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When a country does not have growth is called slowdown or slump, when a country has rising prices its called inflation, but when a country shares them both its called stagflation.

Some voices have started to indicate that the next thing to come is stagflation, inflation linked with no growth. All all the cycles that a country goes into, stagflation is the worst, and the answer is very simple: to fight inflation properly high interest rates are needed, but high interest rates kill growth in the economy, that is the point of it. To fight a slowdown, monetary policy can be used to cut the interest rates, but then inflation will increase at a very fast pace. So basically, the Central Bank is between the hammer and the anvil, not being able to move easily in any direction.

Inflation expectations are very high on both sides of the Atlantic and at the same time the whole world is sharing this view. The other common thing shared on both sides of the pond is a visible slowdown.

We could very easy say, and this may surprise many, that at this time the Euro-area, UK, Japan and US are all in a stagflation period or very close to going into one. If future inflation and growth estimates come true, stagflation will be here. Morgan Stanley reveal charts showing each major economy, and in what cycles is currently in. Guess what, all of the major economies are heading to stagflation and the only improvements from a 70s like period are the developments in the monetary policy arena and the financial markets, to keep us far enough away from a prolonged period like that. At least Japan seems to be making a big step forward from deflation to inflation. Good job BoJ, you only needed 18 years for that to happen.

World Stagflation is next 

From my point of view, if the above scenario comes true, it will be a battle between the central bank’s monetary objectives. On one side there will be the “inflation-fighters” while on the other the “assuring growth and stable prices” central bank. Well, the ECB and the Fed can’t move too much, although on the longer term (2-3 years) something tells me the ECB will raise more then the Fed does. Stagflation is not something an equity trader would want to see, so probably the yen will strengthen to some extant. Next week, TheLFB Analysis Team will release the outlook for the second half of 2008, so stay tuned.

My last thought for today’s analysis: the Fed will keep the Fed Funds on hold for the next meetings, but at the same time hawkish comments will come from the Fed members (sounding like the ECB a couple of months ago). These comments will lead to a stronger dollar in my view, something the Euro-area will certainly like to see.

It’s clear…The power of the strong euro is here

Written by A Forex View From Afar on Sunday, June 22, 2008

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The Euro: the single currency of 15 states that had dominated the financial landscape lately, leading the pack of dollar sellers, and appreciating in value by nearly 17% from one year ago.

Well, despite destroying the entire export industry, a strong currency has some advantages too. One of them could be cheaper vacations, meaning more Europeans in NY with superior buying power. We are now starting to see the buying power of the strong euro, and I’m not referring to French and German tourist buying more souvenirs. I’m mostly referring to buying a whole factory; our case Anheuser-Busch by the Belgian’s from InBev.

Budweiser, an American institution, got a $46 billion bid from InBev, a Belgian-Brazilian company. This is pretty big news, corporate shopping at a time when it’s said consumer demand will slow down.

It seems the beer-drinking community isn’t too happy about a US icon falling into foreigner’s hand. The sentimental patriotism is as strong, and pressure will rise if the merger is approved by the board. For the record, it doesn’t seem to matter that U.S. companies have ramifications all around the world, especially in Europe. All it matters is that U.S. iconic companies remain the U.S. The opposite side of the coin is sometimes a little tarnished.

Adolphus A. Busch IV, in a letter to the company’s board seems to agree with the takeover, as long the following conditions are accepted:

* Budweiser will be the global flagship brand

* The company will be named to reflect the Anheuser-Busch heritage

* St. Louis will be the North American headquarters

* Ongoing commitment to our wholesalers, consumers and the communities in which we operate

Full text can be found here

To me, it’s pretty clear that the deal is almost done, but will the consumers be able to look past their preconceived ideas? The beer will remain the same, but its owner will have changed. It’s not that hard, but it may change the flavor.

If you really want to see someone who has too much time and too few neurons to comprehend capitalism see this:


The Central Bank’s point of view over the sub-prime causes

Written by A Forex View From Afar on Thursday, June 19, 2008

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The following text is taken from the Swiss National Bank Financial Stability Report. It comprehends the actual causes that led to the sub-prime crisis from a Central Bank point of view. Practically, this report opens a door for every retail trader and investor on how a crisis is seen from the top. This article includes only the causes that led to the sub-prime. Soon, an article regarding the possible solutions will appear. Stay tuned.

The current financial turmoil is probably the most severe of the past few decades. Lessons need to be drawn from this crisis, in order to enhance the resilience of the Swiss banking sector as a whole. This also applies to the Swiss National Bank (SNB), since it has a legal mandate to contribute to the stability of the financial system. In this text, the SNB first summarises the causes and catalysts of the current crisis, and then describes the most important lessons from its perspective.

The causes: high risk appetite and misjudgments

The crisis was rooted in an increasingly high risk appetite on the part of market participants. The current financial turmoil was preceded by a long period of stable macroeconomic conditions and high liquidity. Against such a favorable background, many investors took on ever greater risks, as evidenced by the low level of risk premia observed in many markets. Another indication of the greater appetite for risk was the unusually high rates of growth in trading and lending activities. With hindsight, certain risks were clearly underestimated. This led to developments in individual markets which have now been revealed as excesses– inter alia on the US real estate market.

Three catalysts of the crisis

The disruptions on the US real estate market that led to such severe international market turbulence were a result of three key factors.

First, the high leverage of large international banks proved to be a source of vulnerability. As a rule, these banks hold relatively low levels of capital compared to their total assets. This applies in particular to the Swiss big banks: over the last few years, they have steadily expanded their business activities without making a concomitant increase in their capital. Thus in this crisis, for some large international banks, losses that were small in comparison to their balance sheets depleted a significant portion of their capital. As a consequence, they had to resort to recapitalisation measures. 

Second, the limitations of risk management have become clear. In particular, in the current crisis, it has become evident that banks have failed to give sufficient consideration to the risks of extreme events. In the area of market risk, events occurred which, in the models being used, should not have been possible (or at least would have been considered extremely unlikely). Likewise, with regard to liquidity risk, many market participants have not taken a sufficiently conservative approach when setting the size
of their liquidity cushions. 

Third, the lack of transparency turned out to be a handicap. For outsiders, the business conducted by large international banks represents, in many ways, a black box. Generally speaking, banks do not disclose enough information about their risk positions and have difficulty providing comprehensible assessments of their risks. Consequently, market participants had problems gauging the creditworthiness of their counterparties quickly and with sufficient accuracy during the turmoil. The lack of transparency combined with the high leverage proved to be a dangerous mix.
It was a cocktail that, from the market’s perspective, cast doubt on the solvency of a number of banks. It resulted in a sustained crisis of confidence on the interbank market such as had never been experienced before.

Is the worst over yet?

Written by A Forex View From Afar on Wednesday, June 18, 2008

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Is the worst over yet? The answer probably depends on what type of persons are you asking, optimist or pessimist, and more than ever it depends on what positions they have in the market.

For RBS strategist it seems the answer to this question is a big 'no'. Inflation will cripple the capital markets in the following months, especially the credit market, they say;

"The significant bearish repricing I expect to see during August/September/October will be driven by massive negative revisions to growth and stubbornly high inflation, leading to earnings deterioration, massive negative revisions to earning expectations for H2 ‘08 and deep into 2009, weaker and weaker credit metrics, higher and higher defaults and ongoing problems/de-leveraging in the financial sector.

Bob Janjuah, the RBS credit strategist"

It seems that other analysts share this view, including Morgan Stanley’s team, although RBS estimates are much darker story than most of the other banks. In this doom and gloom situation the S&P rating agency looks more then ever ready to give a helping hand by downgrading large portions of assets;

"330 US CDOs put on credit watch negative
80 second lien RMBS cut to ‘D’
65 Alt-A RMBS ratings cut
28 European synthetic CDOs on credit watch negative"

We should add to the above list $200bn of CDOs that just hit default. Hey, was it not the S&P who rated them initially as AAA quality?

The main condition for the RBS scenario is inflation getting out of central bank’s control. I am not sure at this time how long inflation can last, since all major central banks look ready to tackle higher prices. The ECB is ready to raise rates and probably will, the Fed have already changed their view (at least in their jawboning statements), the Bank of Canada did not cut (a move that was as good as a raise, because it was against expectations), the same for Bank of England, even with the UK’s economic landscape being in a continued downturn. At least we have found out that central banks are aware of inflation, and therefore have to accept currency appreciation if they do raise rates.

How much can CBs actually increase rates in their inflation fight? A quick look at the Fed says not too much. Just a couple of months ago they were slashing interest rates in inter-meetings, and now they are preparing to rise? Something does not sound right. The rate cuts still haven’t reached the economy and the Fed is already reversing them, strange moves, not a lot of credibility, and not really a consistent environment to put money into U.S. Treasuries.

Then we have the ECB which missed the inflation target by a massive 1.7%, from 2% to 3.7%, which is almost 80% off the target. How much can they actually raise, when large parts of the old continent is reeling from the strong euro, and has a population that is very reluctant to spend or borrow. Not to much I’d say.

The I word, inflation, is all that we will hear for a while now, and since inflation and inflation expectations play a major role in currency valuation, not to speak about the jawboning from the press conferences (see ECB), that is what the markets will be trading. Next week the FOMC members will be sending the dollar on a roller coaster ride as the expectancy of higher rates sometime this year builds, and as we all know the markets prefer to buy the rumor than they do buy the news. So Fed, the dollar valuations are all yours, you have blown it up higher with hot air, are you going to follow through, or watch your 'Strong Dollar' policy deflate like an old balloon?

FT: Structured credit watch
FT: CDS report: “The very nasty period is soon to be upon us — be prepared”

What to do when oil hits $140? Advertise!

Written by A Forex View From Afar on Tuesday, June 17, 2008

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While crude oil made a new high yesterday and keeps moving to new ground almost weekly, oil companies invest more and more money in advertising to keep their image safe.

Oil companies invested over $52.5 million in the first quarter, up 18% from last year. The number is expected to grow, as corporates from the energy sector further intensify their effort to keep the image in the right place as gas reaches $4 a gallon.

It seems that they may have a hill to climb here. In 2006 a public survey showed Oil companies are seen as even worse than tobacco companies, and two years on they are ranking even lower. From my point of view, ranking under a company sells cancer inducing sticks is pretty dismal.

But than again, nobody is forced to smoke, whereas even an ubber-ecologist is forced in some way or another to use oil or any of its components on a daily basis. Add the fact that revenues of the most important oil companies reach hundreds of billions last year and it is now wonder that an image consultant is required.

I really wonder if all that money used for ads would not had a better result investing in alternative energy research. Patenting a new green technology that could actually work in the real world would send the company, as its shares, to a whole new level, not to speak about the free publicity that comes from newspapers and blogs.

Well, the conclusion could be there is no point in trying to paint the wolf as a sheep, oil companies will always remain oil companies: hunted by Congress when oil spikes, sold by every minded trader when oil goes down. While crude oil keeps inflating, we will stick to our currencies and try to benefit from them. Currencies are a safe place to be, no corporate policy around and especially no bubbles, only fair value.

WSJ: Oil Giants Try to Deflect Gas-Price Fury

Fed Funds Futures: A rate increase may be in the books

Written by A Forex View From Afar on Saturday, June 14, 2008

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Fed Funds Futures point to the markets starting to price in a rate increase from the Fed by August. The main component that added to the view of an increase were the U.S. CPI numbers that came in inflationary, bumping the chances of the August meeting outcome for a rate increase to 60%, up from 9% one month ago.

Fed Funds Futures June outcome

At this point in time the markets are seeing a rate increase of 50 basis points as having the same possibility as a 25 basis points rate increase. This is a big shift in policy for the Fed, thinking that just a back in March the Fed cut 75 basis points.

Fed Funds futures august outcome: a rate increase may be here

The markets have certainly adjusted to the new inflation fighting outlook, having s strong surge of dollar buying after Mr Bernanke adjusted the FOMC stance, and adding that last month's economics signaled to him that the worst of the economic pull-back is behind us. Bonds were immediately sold, dragging the yield on the 10 year treasury bond up to 4.25%, from 3.92% last month. The yield on the two years note, which is the most sensitive to changes in monetary policy, rose 65 basis points in the week, the most since 1982.

With treasury yields going up the dollar posted the biggest weekly gain in the last 3 years against the euro and in 4 years against the yen. The euro lost more then 350 pips in the week while the yen posted a similar gain, but in order for the dollar to appreciate further it first has to break the 1.53 area on the euro and the 108 area on the yen. Volatility is expected when the dollar tries to take out these levels.

As long as the Fed keeps an eye on inflation the dollar will get bought against most of the major pairs. What is needed now is the CPI to catch up reality and actually reflect the higher prices we are dealing every day. Who knows, maybe the greenback days are here, we will have a signal to get long the dollar for more than just a day trade when oil heads towards $120 a barrel and we see GDP growth numbers.

The trade team reported two weeks ago that they felt a base was in place on the dollar index at 71.50, the next area topside to break and hold will be 74.00, and once that has been traded around for a few sessions we will be looking for a test of 75.00. All-in-all it looks as though the oversold greenback is attracting trade desk interest, but they will do all they can to keep from signaling the fact that they are buying the Usd. we are seeing a swing point it seems.

Rebate cash or just consumer spending?

Written by A Forex View From Afar on Thursday, June 12, 2008

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The retail sales are here, and much better than expected. The numbers were released at 1%, and the previous number also revised up to 0.4% from -0.2. Overall is pretty impressive if we judge that the economy is facing credit strains and consumers are struggling with falling house prices and even more expensive gas.

Only one type of business reported a decline from last month, miscellaneous stores retailers, while all others reported gains. The biggest gains were in gas sales and building materials.

If higher gas sales aren’t a surprise, since the retail sales release is not adjusted for inflation, the increase in building material sales are a big surprise. Some could call it huge surprise, since most metropolitan US areas reported double digit drops in prices from last year. Building materials are up 2.6% from last month, but overall are still under the last year sales.

A good explanation for this phenomenon could be house owners are trying to improve their houses, maybe to recover some of the missing value. It can be seen as a way to hedge the real estate losses.

Compared with last year the biggest drop in sales was recorded in the car sales industry. Sales are down over 6%, in a time when high-end luxury cars, like Mercedes, BMW and Porsche recorded a 15% drop from last year, suggesting more and more customers are chosing a Ford rather then a high end car. This can be called a downsize in sales, I think.

It’s not clear whether retail sales were helped by the stimulus check-rebates, or by consumers that just like to spend, but it’s clear that retail sales posted an unexpected number. US Equities rose at the time of the news release, while treasuries sold, showing markets are eager for any kind of confirmation that things will get better.

Having a consumer that is ready to open their wallet whenever needed means that the US GDP number has every chance of picking up momentum once again, and thus the Fed may have more running to do to tackle the inflation issue, thereby empowering the greenback further.

Any dollar appreciation will come with many still looking at the size of the negative trade balance, and as such we are likely to see plenty of pushing and shoving as the markets battle over dollar fair value. The dollar has won this week's battle, only another 30 to go to get to where we were before the sub-prime downgrades hit.

US Trade Balance: Where is the weak dollar hiding?

Written by A Forex View From Afar on Tuesday, June 10, 2008

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Numbers released today show that the US Trade Balance continues to deteriorate at a stepper pace each month, as the weak dollar is not offsetting the higher import price.

The Trade Balance reached a $60.9B deficit in April, up more then 7% from the March revised number of $56.5B. The goods deficit kept widening, while the service balance, the only thing dragging up the number, had another positive month.

The goods deficit reached $4.5B, reflecting a $9.1B gain in imports and $4.5B increase in exports, while the service surplus widened by $0.1B in April from one month earlier.

US Trade Balance

Simply put, the Trade Balance with the biggest U.S. trading partners widened. The deficit with China reached $20.2B, not helped by the yuan, that is constantly strengthening against the dollar. The European Union trade balance reached 8.5$, while the strong euro was supposed to wipe out EU export industry, and the trade balance with Canada reached $7.6B, having a currency that just recently reached parity with the dollar.

So, where is the weak dollar helping the U.S. trade balance? Not here it seems. It’s pretty clear that exports have a strong presence in the PMI and ISM releases, but where the math is actually done, in the Trade Balance release, the dollar is playing a game of hide and seek. Maybe having now seen that the dollar being weak is not really helping exports when the reality of oil prices is taken into account, Mr Bernanke and the gang are talking of inflation as being the new buzz-word. Good for the dollar valuations, no doubt that trade desks will now be looking to build Long Dollar positions, but the impact on the Trade Balance will most likely be a further increase in the negative read.

If an increasing TB number is not covered by overseas investment into the U.S., as seen in the TIC data, the Fed will have another problem; how to balance the current account deficit. The current account is the trade Balance plus the Service side of the economy, and as seen above the service sector is doing well. So maybe this is a turning point, maybe a base is getting formed it, may instigate more dollar bulls coming out of hibernation. Maybe, just maybe a stronger dollar will increase investment into the U.S. and as such sustain the current account with internal consumption.

The fairy tale sounds good, it is based on fact, but the wicked witch that could ruin it, is the financial sector. If loans are not made, and credit is not freed up, the consumer will hold fire, and in doing so will slow down the recovery time. If it were not for it being an election year that would probably be the best thing that could happen; take the bitter pill, adjust to a lifestyle that contains an element of saving outside of the retirement plan, and clear off some debt. In reality that is not going to happen so we'll accept another 5 years of growth before we have 24 months of recession , that gets us to 2013 . Maybe by then we'll have had time to put something by for a rainy day. Whatever happens, the dollar bull is awake, and 71.50 on the Index may not be seen again for a while. Breaking 74.00 will be hard, but if we see oil under $100, gold under $750 and GDP growth later in the year, we could look back at this time as very pivotal.

Retail Trader and Institutional Trader

Written by A Forex View From Afar on Monday, June 09, 2008

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The forex market is split between two types of traders, the retail traders, also known as the kitchen-sink traders, and the institutional traders

Most of the retail traders dream to reach an institutional level, praising and admiring those who already have done so. Well, my point of view differs a little, and I think that institutional traders should have a high regard for retailers too, especially for the full-time Kitchen-Sinkers.

Institutional traders are taken from the university’s desks, sometimes even before they graduate. They are trained to do damage in the market, to hunt the market for any flaw and profit from it. Do I also need to say that they get huge salaries for this? Whether they make money or not is irrelevant, the wages get paid.

Joe, our forex retailer, doesn’t usually have access to any Wall Street mentor, access to $2000 a month data feeds, nor access to people with more than just a few years of experience in the forex market. A vast number of retail traders were introduced to foreign exchange at a time when they have a family to support and kids to send to school. It’s hard to learn something completely new at this stage in life, especially to be investing into a completely new market, without expecting instant rewards.

One thing that needs to be accepted is that money does not equal reward, time and effort are the only things that equal reward. For those with no time to invest it is not that hard to loose some money in the first months as a retail trader. Those that have the money to invest but not the time initiate their forex trading life with a baptism of fire. That is not the way to do it, leverage and money management really hurt when they are abused. Most new traders ignore the 2% maximum risk at any one time, and most soon see that abusing leverage is a way to quickly compound what would otherwise have been losing trade into a trade that blows up an account. Time investment is not the same as Money investment, take care with that thought, it is priceless.

What is worse, in the case of a prolonged loss for a new retail trader, as they work their way past the trading demons each day, is they will have a negative account balance and nothing more to show for their effort. They become insulated and dread the cheery welcome as they drag themselves out of their trading cave; "Hello dear, you look tired. How did your trading go today?".

In that same time, in that same market, the institutional trader will still have his (outrageous) wages and nothing more than some comments from his bosses at the quarterly review. If the losses persist, the institutional trader may get fired, but only if he is doing worse than the others who are losing money, it is easy to hide on a trade desk.

Is not my mission to say trading at an institutional level is easy; all I’m trying to say is institutional traders should pay respect to retailers too. A large percentage of hedge funds reported losses this year, whilst the more experienced Kitchen Sinker's had no problem keeping themselves in profit.

So, the greatest respect needs to be paid the the retail trader, the faith that they have in their own ability to succeed is admirable, and worthy of more than a cursory glance from the Wall Street Wonders. Here's to you my Kitchen-Sinkers, you should be very, very proud of yourselves. Remember to Keep It Tight, And Never Give Up. KITANGU.

A look over the NFP release

Written by A Forex View From Afar on Saturday, June 07, 2008

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The NFP release sent markets into selling frenzy. US Equities fell more then 3%, with the Dow Jones shredding 394 points, and S&P 43 points lower. The mighty dollar lost 200 pips against the euro, whereas the dollar index lost 0.70 points. Most important maybe was that Oil reached $139.12 a barrel, making a new historical high, and breaking the record of the biggest gain in one trading session, of $10.

To appreciate the magnitude, ten years ago Oil was trading at $10 a barrel, while today Oil gained that much in only one trading session.

Back to the NFP, the employment sector marked the fifth consecutive month of declines, while the unemployment number jumped to 5.5%, the biggest increase in 22 years.

Non Farm Payroll release came at -49k

The Non Farm Payroll was released at -49K, better then market expectations of -57k. Taking out the jobs added by the infamous Death/Birth (D/B) model, the NFP release number would have printed at -266k. There were 217k jobs added by D/B, from which
• 42k were added in the construction sector, the same sector which in the last 2 months broke every record, but in a negative way;
• 9k for the financial sector, were everyone is announcing huge lay-offs;
• 77k new jobs for the Leisure and Hospitality sector, were most parts of the industry are having hard times finding any tourist, offering deep discounts.

Unemployment release came at 5.5%

The biggest gained to the unemployment number came from the teenagers, which jumped 3.3% from one month earlier, while adult male unemployment rose 0.3%, with women 0.5%.

I don’t think the negative number was big surprise for anyone, nor that the big jump in unemployment was something unexpected, not to say that it was caused by teenagers taking the summer break earlier. What caused the reductions in most terms were the dollar depreciation and some geo-political comments.

The NFP release practically tore apart the possibility of a rate increase in the following FOMC meeting, but at the same time on the other side of the pond the ECB were announcing their intentions to hike. If we add that Shaul Mofaz , Israel's transportation minister and a contender for the post of prime minister, said Israel will have to attack Iran, the commodity market had all the required ingredients to skyrocket Oil prices. Oil at $138, the settlement price, made equity trader's knees shake under the table, and sent the major US Indexes lower.

ECB Press Conference Bullet Points

Written by A Forex View From Afar on Thursday, June 05, 2008

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ECB Press Conference Bullet Points:

• It’s possible, but not certain for a small rate increase in the next meeting
• Risks to price stability over the medium term have increased further
• Inflation rates have risen significantly
• HICP inflation is now expected to remain high for a more protracted period
• upside risks to price stability are confirmed by the continuing very vigorous money and credit growth and the absence of significant constraints on bank loan supply up to now
• economic fundamentals of the euro area are sound
• strong determination to secure a firm anchoring of medium and long-term inflation expectations in line with price stability.

• Q1 GDP growth of 0.8% was well above expectations, due to temporary factors
• The high growth rate in the first quarter might be partly offset in the second.
• domestic and foreign demand are expected to support ongoing real GDP growth
• robust growth in emerging economies should support euro area external demand
• Euro area does not suffer from major imbalances
• employment and labor force participation have increased significantly, and unemployment rates have fallen
• Euro-system staff macroeconomic projections: 1.5% and 2.1% in 2008 and between 1.0% and 2.0% in 2009.
• uncertainty surrounding this outlook for economic growth remains high
• risks continue to relate to the potential for the financial market turbulence to have a more negative impact on the real economy
• The annual HICP inflation rate is likely to remain above 3% for some time to come
• Euro-system staff projections foresee average annual HICP inflation at between 3.2% and 3.6% in 2008 and between 1.8% and 3.0% in 2009. Higher from the previous estimations
• the outlook for prices remain clearly on the upside and have increased further
• Inflation risk comes from market segments with low competition, such as parts of the services sector
• M3 growth remained very vigorous
• annual M1 growth has continued to moderate in recent months
• monetary analysis points to upside risks to price stability at longer horizons
• availability of bank credit to households and non-financial corporations has not been significantly affected by the turmoil.

Above all, the most important thing said is the case of hiking rates next meeting, by a small percent. Mr. Trichet said a rate hike is possible, but not certain, and referred to a small percent as inline with what we had before, meaning 25 basis points.

This obviously is a first, practically going against the recent trend of cutting rates. Doing this, the ECB wants to reconfirm its goal of maintaining price stability over the medium term (18 to 24 months).

It should be noted that the rate hike story comes a month after Mr. Trichet said that rates were in the right place. But at that time, the euro wasn’t in the right place, breaking above the 1.600 resistance.

Since Mr. Trichet spoke about the possibility of a rate hike, the eur/usd gained more then 150 pips. It seems the euro may regain the upside momentum once again, but if the HICP release comes in weaker then expected we may see some profit taking.

Asked about the commodities prices, Mr. Trichet said at first they were demand driven, but now they are certainly speculative.

Another thing that should be noted is that Mr. Trichet made a subtle reference to“Inflation risk comes from market segments with low competition, such as parts of the services sector”. Mr. Trichet has said this line for some time, but there was something new here by saying “parts of the services sector”. Usually references to the financial sector point out to the financials. I wonder if the ECB and EU are cooking something for themselves here.

The clarity is a refreshing thing, the timing is strange, but out of it all we, as forex traders, know that the market's fair value on the Eur/Usd is around 1.5600. Traders may now want to plot their paths from that pivotal point. Whether you see it as Long or Short, overbought or oversold, it makes no difference, there will be trades both sides of it, but just keep that number in mind and monitor how far away from it the speculative interest can take this.

Inflation in Europe

Written by A Forex View From Afar on Wednesday, June 04, 2008

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Inflation in Europe is building up, at an increased pace. This is not only seen in the HICP release, the European equivalent for the CPI, but in the PPI read too.

The Flash estimate for May is up 3.6%, from one year ago, much higher then the ECB’s target of 2% over the medium term. The release is up from 3.3% one month earlier.
The flash estimate can be considered a good proxy for the CPI read; it has anticipated exactly the inflation rate 15 times, with another 9 times differing by 0.1%, over the last two years.

What is worse, this inflation is not only in statistics, because of the energy component, but it is felt in the food department and ultimately in the European consumer’s pocket. Food prices increased 7.1% from last year, over the same period in which the HICP read got to 3.6%. March and April marked the highest food inflation rate since 1996, when the series were created.

Statistically speaking the HICP and food inflation moved “hand-in-hand”. Inflation rose 27% since 1999, while food inflation reached 31% over the same period of time.
The biggest gains from the food department were recorded by milk, cheese and eggs, gaining 15% in a year, followed close by oil, fats, fruits, bread and cereals.

Food Inflation in Europe

Producers are not doing much better, the PPI release shows. The Index rose 6.1% from April last year. The trend had accelerated since September 2007, from a somewhat flat trend to a more temperate one.

All this points out there is inflation in the Euro area, despite whatever policy members are saying. Inflation in Europe accelerated while the interest rates remained constant. Simple logic will tell us that leaving rates steady won’t bring down inflation. For me, the story that the global slowdown will bring inflation down doesn’t seem appropriate, we already had this situation in the 70s and it was called stagflation. Plus, a global slowdown requires lower interest rates, which leads to inflation. A Lose/Lose situation.

My view is that the ECB wants to raise rates, but they say that they can’t right now, but watch for signals that they may have to act. The ECB looks caught between the hammer and the anvil, and will need some time to get out to a safer place. In other words, a “hold” is on the books, but we need to be ready with some Long numbers ahead of the ECB decision, the euro really has a lot of room to run topside if the Dollar Index cannot break 74.00 in the near-term. The euro valuations are already where Mr Bernanke yearns for the dollar to be.

Another Central Bank Intervention

Written by A Forex View From Afar on Tuesday, June 03, 2008

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Another Central Bank intervention, or simpler Jawboning, is cooking at the Fed–ECB doors.

Mr. Bernanke said in a video-conference at the International Monetary Conference in Barcelona, Spain, that he is "attentive" to the implications of the currency's decline, that the FOMC will "carefully monitor developments in foreign exchange markets" and are aware of the effect of the dollar's decline on inflation and price expectations. At least they acknowledge the dollar decline has an influence over inflation that affects not only the U.S., but mostly the whole world.

This attempt to influence currency markets through jawboning is the second in less then two moths, after Mr. Trichet intervened in the market when the euro broke the 1.60 barrier. The euro fell 700 pips as a consequence of Mr. Trichet saying he and John Pierre Roth at the Swiss National Bank, support the strong dollar, and another ECB Council member saying rates need to be cut(yeah, with inflation at 3.6%?).

Now we have got the second part of the intervention, having Mr. Bernanke saying the US Dollar's value is now being closely watched. I have no doubt about it; everyone is looking at the dollar and especially how much value it lost in the last three years. The printing presses are working hard, one might assume, pumping out Notes and Treasuries.

It will be interesting to see how the currency will react now, given that in the next few days the ECB interest rate decision will hit the wires. I’m pretty sure inflation will be the main event, followed by "growth still in the potential output", "uncertainty in the financial markets had been diminished", "strong money supply growth". All of the familiar stuff. The thing is that overall the ECB press conference usually sounds somehow bullish on the Euro economy, and this was seen today in the strong GDP release. A stronger business cycle leads to a stronger currency, and it seems markets know this pretty well.

Back to the charts, the 1.5300 area, where the 100-day moving average sits, could act as a strong support, given the fact that the euro had already retraced in that area, and bounce higher. Furthermore, always keep an eye on the euro in that it is the biggest of all the major pairs that make up the Dollar Index. The fair value number on the Eur/Usd is at 1.5500, by 09:00 EDT Thursday that may have changed, and if the ECB are still fighting inflation the dollar may need more than jawboning to get it through 74.00 on the Dollar Index, and under 1.5300 against the Euro. It may come, but maybe once oil and gold have dropped 20%, and housing has found a bottom. The trend on the euro is still Long, we'll respect that.

AIG falsified the financial statement

Written by A Forex View From Afar on Monday, June 02, 2008

Get your money back from AIG

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If you purchased American International Group, Inc., (“AIG”) common stock or certain AIG or AIG-affiliated fixed-income securities between February 8, 2001 and March 31, 2005, you may be eligible for compensation.

The Background;

“The United States Securities and Commission (the “Commission”) filed a complaint in this action on February 9, 2006, alleging that from at least 2000 until 2005, AIG materially falsified its financial statements through a variety of sham transactions and entities and that AIG reported materially false and misleading information about its financial condition. On February 17, 2006, the United States District Court for the Southern District of New York (the “Court”) entered a Final Judgment against AIG, to which AIG consented without admitting or denying the allegations of the Complaint. Pursuant to the Final Judgment on March 3, 2006, AIG paid a total of $800 million ($700 million in disgorgement and a civil penalty of $100 million) to the Clerk of the Court. The funds were thereafter deposited in an interest-bearing account with the Court Registry Investment System (“CRIS”). In an order of June 14, 2007, the Court authorized the Commission to establish a Fair Fund in accordance with Section 308(a) of the Sarbanes-Oxley Act. The Fair Fund includes all of the funds in the CRIS account established in this action and any other amounts subsequently paid into that account. The Court’s order also appointed Kenneth R. Feinberg as Distribution Agent to prepare and propose to the Court a plan of distribution for the Fair Fund. The Court approved the Distribution Plan on April 14, 2008”.

This is funny, a financial company that changed its financial statement. Probably all financial companies should be sued for this. Some time ago, there was a minor indignity where Hedge Funds reported leverage data to appear bigger. No serious actions were taken at that time, so what did the AIG do to actually get a fine? AIG only had to deliberately release a bigger balance book to get this fine, bigger with $2.7 billion or a 3.3%. This is quite interesting for me. I wonder if the SEC will take any measures against the sub-prime originator.

At least AIG acted outside the law’s short arm, but Merrill Lynch & Co., Citigroup Inc. and four other U.S. financial companies dodged balance sheet rules with laws introduced last year, to increase the book value of $12 billion of revenues from bonds who’s price had declined; it is legal too if anyone asks.

Basically, the financial companies issued bonds, let say, for example, worth $1000. After the sub-prime saga began, their bonds started to get sold, because investors saw them as over-valuated (actually as a worthless paper). As the bond prices went down the financial companies said they owed less money, and so, if the bond’s value dropped to $600, they would still book a profit of $400.

In this fantasy world they would still owe $1000, but $600 is the current market value of their debt. Nice pull guys, I really like your creativity and ingenuity since you were the ones to lobby last year for the law that makes all this possible.

SEC/AIG Fair Fund
Bloomberg: Wall Street Says -2 + -2 = 4 as Liabilities Get New Bond Math

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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