A Forex View From Afar: 10/01/2008 - 11/01/2008

Libor Starts To Move Lower. The freeze thaws.

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

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

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

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

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

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

| Posted in » bonds, economic preview, forex

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

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

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

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

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

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

| Posted in » economic preview, forex

Foreseeing A Currency Crisis

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

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

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

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

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

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

| Posted in » economic preview, forex

Looking to Central Banks for Intervention

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

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

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

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

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

| Posted in » forex

Consequences of the Lehman Bankruptcy

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

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

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

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

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

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

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

| Posted in » Fed, forex

Nikkei: The Road To 1982 And Back

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

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

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

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

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

| Posted in » economic preview, stocks

Hedge Funds and Random Walks

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

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

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

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

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

| Posted in » economic preview, forex

Wrong Time to Catch Up for Emerging Economies

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

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

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

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

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

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

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

| Posted in » economic preview, forex

It May Get Rough, But not for the Jpy bulls

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

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

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

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

| Posted in » economic preview, forex

Second Stimulus On Its Way

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

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

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

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

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

| Posted in » economic preview, Fed, forex, stocks

Bring Back The Specialist, Hank

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

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

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

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

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

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

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

| Posted in » forex

Government Private banks

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

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

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

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

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

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

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

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

| Posted in » economic preview

First signs of relief are here

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

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

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

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

| Posted in » bonds, forex, stocks

Another Step Into the Market for the Fed

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

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

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

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

| Posted in » Fed, forex

State Owned RBS and HBOS

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

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

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

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

| Posted in » Bank Of Englad

Not All of Them Cut

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

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

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

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

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

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

| Posted in » forex, SNB

Government Banking

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

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

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

| Posted in » Fed, forex

Confidence Crisis, Still no relief

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

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

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

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

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

| Posted in » Bank of Canada, Bank Of Englad, ECB, economic preview, Fed, forex, SNB

Attack on the Crown, version 2.0

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

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

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

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

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

| Posted in » economic preview, forex

Sell the Rumor for the aussie?

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

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

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

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

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

| Posted in » economic preview, forex, retail forex

ECB press conference

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

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

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

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

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

| Posted in » ECB, economic preview, forex

A European Bailout?

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

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

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

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

| Posted in » ECB, economic preview, forex

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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.