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Forex Analysis

Peoples Bank of China Cut Rates

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

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

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

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

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

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Preparing For A Tough Holiday Season

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

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

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

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

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U.K. Banks Still In Need Of Capital

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

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

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

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

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

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

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

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Paulson Expected To Announce New Strategy

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

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

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

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

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Government Announces Plan to Rescue Citi

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

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

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

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

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

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Expectations From the RBA

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

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

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

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

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

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GM and the EconomyGM and the Economy

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

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

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

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

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

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The Recessionary Group of Seven

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

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

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

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

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The Economy Is Running Out Of Credit

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

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

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

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

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

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

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Has the monetary policy reach its limits?

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

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

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

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

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

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

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

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More Funds For Banks From The Fed

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

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

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

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

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

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

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ECB Press Conference Bullet Points And Analysis

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

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


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

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

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

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

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A Look Over The Manufacturing Sector

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

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

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

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

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

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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.

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