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Global Demand Required: All Applicants Accepted

Written by A Forex View From Afar on Thursday, July 30, 2009

A larger number of market participants are saying that the business cycle is likely to recover in early 2010, and that it will be driven by strong demand, now that the global economy appears to have diminished the pace of contraction.

A fundamental question rises from that thought process; from where is that demand likely to come? We have two main groups to pull from here; consumers, and from industry, and both seem increasingly unlikely to assist in the expansion phase.

Consumer demand is usually driven by credit. However, credit card and loan/mortgage defaults are surging to a record high on both sides of the Atlantic, while, the velocity of money – which speaking from a theoretical point of view, measures the level of economic activity – has reached very low values for the vast majority of developed economies.

The U.S. saving rate increased exponentially, in-line with the drop of available credit, to 7% in the last few months, the highest rate seen since 1993, after being at negative rates just a little more than a year ago. This situation points to a consumer that has started saving for their financial safety, rather than building a pile of unsustainable debt as in previous decades that aided economic expansion, but ultimately proved toxic for Wall Street and Main Street.

As admirable as it is that savings have been forced on consumers, and the heady days of Main Street excess look to be fully restrained, the administration will be pushing for an increase in consumer debt to fund the expansion that pays back the stimulus packages. Strike one; the U.S. consumer will not be consuming the economy into growth anytime soon.

The glimmer of hope, is that global savings rates eclipse the rate at which Americans save, and as such the overseas savers may be able to spark a consumption rally. That however, remains nothing other than a glimmer, rather than a ray of consumption sunshine.

Industrial demand is in a comparable situation to the consumer driven demand. During the economic downturn a high percentage of factories have been temporarily closed, or have reduced output dramatically, while employees are fired. This means that when the economy picks up and factories see a stronger backlog of orders, they will simply re-open the idled machineries, instead of buying or building new.

This economic phenomenon is known as economic slack, and can be measured using the capacity utilization report and detail. Since the U.S. economic slowdown started, the capacity utilization rate has dropped at a very strong pace, and has been far stronger than in previous economic slowdowns.

Due to the economic slack, industrial demand is likely to stay at low rates, until the economy reaches once again the 2007 production levels. That is something that is not likely to happen until the consumer in the U.S. starts to consume. Strike two: the industrial sector will not be manufacturing its way to economic growth anytime soon.

All this put together shows that the recovery period will be slow, and long, and when translated into market momentum will likely transpose itself into a side-ways trend in the currency market over the medium to longer term.

Investors and analysts will try to value regional business cycles and local economic growth, and while that is unfolding divergence will be seen in regional valuations and expectancy. The same divergence was seen recently when the forex market was unable to push the dollar lower in spite of one of the longest, and strongest, equity rallies of the last few years.

The forex market might come back to life on its own, going forward, breaking some of the high correlations it had with S&P futures over the last year, as the regional debt-to-growth ratios are absorbed and valued.

The easiest way to generate growth, historically, is to cut interest rates, lower taxation, and force credit onto banks. However, as we have witnessed from 2003 to 2007, there is a harsh price to pay for the famine to feast business cycle that the U.S. is travelling, as it goes from contraction to peak, and back down again, in record time.

The troughs get deeper, whilst the cycles get shallower, and that creates a unique U.S. based conundrum that may, over time, impact negatively the Usd perception that the consumer will save the day. Just how will the consumer be able to do that? Strike three: the administration may be issuing a new, bigger, better, stimulus package, that covers the interest on the previous package, that looks to be like a drop in the ocean of what is really required.

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Inefficient Pricing Models Defy Gravity

Written by A Forex View From Afar on Monday, July 27, 2009

The recent equity market rally had a strong driver behind it; investors’ optimism, which has helped the financial market sustain one of the longest trends of the last few years.

In trade on Monday, equity markets are heading higher for the eleventh consecutive day, the longest streak of the last few years, and a similar pattern to the period when the housing and credit bubbles were being inflated. In particular, the Nikkei closed in the green for the 9th consecutive day, making the current rally the longest in a little more than 20 years.

However, the present rally seems to defy the macroeconomic picture, some are saying. The global economy is still in a contraction phase, even though the pace of decline had a noticeable slowdown, the unemployment rate is projected to surge to around 11%, although just a few months back the estimates were pointing out to a 9% rate. Add to that the fact that the consumer spending sector appears to be deep in contraction, as credit card defaults head towards record highs in U.S. and European markets. Moreover, the major central banks together with the IMF forecast a slow recovery period, which would have a strong weight on both consumer and business revenue streams and expenditure.

Despite these issues, investors have been lured by the number of companies that had better than expected reports in the Q2 earnings releases. Out of the nearly 200 major companies that reported so far, a huge majority beat analysts’ estimation, probably making Q2 appear as one of the best earnings quarters in history. Things are not so rosy after all, it would seem, since the reported earnings so far are lower by 30% than the numbers seen in the second quarter of 2008.

This confirms, via a reduction in income, that consumers have indeed cut their spending, and that is not something that is expected to pick up anytime soon. There is a huge slack in the global economy right now, something that will further delay the recovery period. The current situation has the feel of the April 2009 rally that was initiated by the Federal Reserve, but then fueled by earnings reports.

To some extent, this shows again that the stock market does not reflect the state of the economy, but rather the outlook of the public companies as weighed by investors. As long as the remaining companies continue to beat expectations, chances are that the current rally will continue. Suddenly, 1000 points on the S&P does not look so far away.

Moreover, the current rally shows once again that the free markets are rather inefficient, even though the pricing models that most investors rely upon are built on the market efficiency hypothesis. If the equity rally continues the traded market will see inflated equity values, higher commodity prices, and a lower Usd, all backed by an inefficient valuation model. The issue with that is the ease in which those values can realign themselves, especially when not backed by robust employment, access to credit, and diminishing income flows.

The divergence is also being seen in oil prices, a market where speculative interest has increased in-line with equity valuations going higher. The perfect example of automated trade that has been allowed to grow, with nothing programmed to cover the lack of foundation in the corresponding market. Global oil consumption is forecast to move lower in 2009, but to keep aligned with inflated equity valuations, the pricing models are sending out buy orders, like equities, that do not match the forward valuations. Something will soon give, in the form of price reduction, or economic expansion that gets things aligned. Right now, the economic expansion thought process looks as flawed as the inefficient pricing models that run the automated order process.

The final line in the equity play may be the question of where the XLF is trading. The financial sector historically has lead or backed each sustainable move the equity markets make, and throughout the recent rally, the XLF has been stuck trading around the $12, and held there for the last two months. The markets are not rallying financials, and as such a red flag is running up the pole

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The Free Markets Are Dead, Long Live The New Free Markets

Written by A Forex View From Afar on Thursday, July 23, 2009

CIT’s success to find someone to lend it $3bn and (temporarily) avoid the bankruptcy filing was seen as a staggering victory of the free market, a market that does not need any more help from the Fed or anyone else.

However, just a day after the new free market was crowned, the details of the transaction came to light, showing a rather painful picture: the price of survival. After being rejected by the F.D.I.C. (which until now was the financial system’s last resort) CIT managed to strike a deal with 6 of its bondholders to provide a $3bn loan.

The cost of the loan is huge, since the 6 creditors require the loan to be paid back at a 13% interest rate (14 times more than the interest rate the government pays for a similar loan), a 5% commitment fee and assets as collateral worth more than three times the size of the loan. Let’s just put this into perspective for a moment; if a person from main street goes to a bank, requests a loan, and then tomorrow he defaults, he would get better terms….

However, even these funds are not enough for the company to survive, TheLFB-Forex.com Trade Team said. In addition to the $3bn, the company will need bondholders to accept a 17.5% reduction of the $1bn debt that will expire next month. Moreover, the company’s total debt is around $60 billion right now, from which $10 billion is expected to mature over the coming months, TheLFB-Forex.com Trade Team said.

Taking a closer look, this does not look like a good deal, but rather as a desperate attempt to survive and therefore avoiding entering the bankruptcies’ hall of fame. The new free markets might be here, but they look like rough ground, on which many corporations are expected to trip over. Interestingly though, the economy is recovering, China grows by 8%, so we are told by the People’s Republic, and the banks keep failing.

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Debt Monetization: The Real Affect On An Open Market

Written by A Forex View From Afar on Tuesday, July 21, 2009

In this article we are going to see what debt monetization is all about, since, lately, there has been a lot of talk about the Fed having to monetize the Treasury’s debt.

Our example’s imaginary government needs to spend about $5000 over a year, but its income is only $4000. Thus, our imaginary government will be forced to run a $1000 deficit, which would need to be funded somehow.

At this point, the Treasury comes into play, taking the task of issuing and selling the $1000 of bonds (IOU’s) to the public, to help the government cover its expenses. Following this process, the private sector will hold $1000 in bonds, but this has the effect of reducing the money supply (less money available for consumer spending), and puts upside pressure on the interest rates.

The imaginary Central Bank (CB) does not want this to happen, so they will step in to the market, and buy $1000 worth of bonds from the private sector. The CB’s purchase increases the money supply by $1000 (excluding the multiplier effect), something that sends yields lower again, to where they were before the bond’s auction.

Everything should look normal by now, but things are not really that good on the inside. The CB increased the money supply by $1000, or considerably more if the multiplier effect is included, which is a huge sum compared to the size of the economy. This will cause inflation, because in the shorter term it shifts the AD (aggregate demand) line to the right, corresponding to higher prices, so long as the AS (aggregate supply) holds steady.

The logical justification of this would be the government uses an extra $1000 to fund spending, thus increasing the demand side of the economy. However, in the short-term, the supply side lags the cash drivers, thus a new equilibrium point is reached (E’), in the short-run, which corresponds to higher prices (P).

This is important because it is happening in the economy right now. Most governments are running deficits (from which some are huge) in order to support the demand side and kick-start the economy. However, deficits – especially the ones monetized by the CB - have a strong inflationary pressure built in, and send the local currency spinning lower. Does these sounds familiar? Think of the dollar now, and we get a very clear picture.

TeamLFB provides forex related market analysis and trade signals

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The China Story: Fact Or Fiction?

Written by A Forex View From Afar on Saturday, July 18, 2009

Should the market expect a strong bounce from the global recession, helped by China?

Not likely.

Should the market expect a slow and sluggish recovery period, with lots of “green shots” similar to the one we have now?

Most likely.

If current market valuations are driven higher by green shots, then China is at the tip of the arrowhead, being solely responsible for much of the recent rallies in global markets
From the first few months of the credit crisis, during the summer months of 2007, analysts were saying that the economy will recover relatively quickly (Q1 2008 was estimated), as China and the rest of the emerging economies would drive up demand, helping the developed economies recover.

Time passed, Northern Rock and Bear Stearns bankrupted, but still, China (or any other emerging country) failed to sustain the demand side of the global economy. This caused the recovery date to be delayed, to somewhere around the last quarter of 2008, but still China was the one which should pull the global economy out of contraction.

The global economy did not recover in fourth quarter of 2008, but Merrill Lynch, Lehman Brothers, Washington Mutual and AIG continued the flow of famous bankruptcies, which sent the global markets into a backspin.

Today, we are at the beginning of the third quarter, 2009, two years after the credit crisis began, and also two years prior to the day in which China should have saved the global economy. Despite this, the main triggers of the credit crisis (housing market, default rates, over-leverage) seem far from over.

Banks still continue to file for Chapter 11 (read CIT, which would be the fourth biggest U.S. bankruptcy), and, low and behold, China has still not saved the global economy, albeit the analysts are still forecasting this would happen in the next quarter.

On what basis are these forecasts built? On the fact that the Chinese economy grew 7.9% in Q2, much more than expected? For most countries, such a growth rate seems almost mythical, but this is still far below the growth rate the Chinese economy saw the last ten years.

In addition, in order to keep the economy running, the Chinese Government, together with the central bank, run very loose fiscal and monetary policies. That loose, that the Chinese money supply grew by a massive 30% from a year earlier, while new loans increased by almost three times in just one year.

Economics 101 says that the money supply should expand at roughly the same pace as the economy (that is 8% in China’s case), anything bigger would spark massive inflation. Moreover, having new loans expand at such a strong pace raises some questions about the creditworthiness of some of the borrowers, and the defaults rate associated with them. Does this all have a familiar 2007 kind of tone to it, or are we just imagining that we have walked the over-leveraged, consumer fueled, path before?

On top of the inflationary problem, the question is how much time the Chinese economy can be developed while relying on internal credit, and how much can this help the global economy; China expanding internally does not help the global economy. The answer to this question remains in the hands of the international consumer, and their thirst and/or ability to obtain credit to start the consumption growth engine.

That will require lower interest rates, a lower value Usd, and by default a reversal of the ‘Strong Dollar’ policy that the U.S. administration is candidly trying to put out there as the message of comfort for holders of U.S. debt.

The China growth story will not unfold until the Fed deals with 10 year Treasury note yields; until they, and by default the Usd, are reduced, the China story may be more of a Fairy Tale than a Non-fiction Bestseller.

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Trade Desk Thoughts: The Relationship Between Crude Oil And Cad

Written by A Forex View From Afar on Thursday, July 16, 2009

Historically speaking, crude oil and the Canadian dollar have had a very strong relationship, most of the time, the two assets having a high degree of correlation.

This can be explained by the fact that Canada holds the second biggest oil reserves in the world after Saudi Arabia. Moreover, a large amount of these oil reserves are pumped into the United States, making Canada the biggest energy source for the U.S. economy. Thus, investors focus on crude oil prices to gauge the Cad’s direction of trading.

The correlation between crude oil and Cad was pretty easy to exploit in time, but all this came to an end over the last few weeks as crude oil began to quickly drop while the Canadian dollar declined only a few basis points throughout the same period. Most likely, this happened because of two different fundamental drivers: oil dropped as the market was re-pricing the outlook of the global demand, while Cad traded mostly range-bound, together with the dollar index and the other major currencies, as it seems the financial market saw more dollar than it would ever need (thus the market stayed in risk-aversion mode only for a short period).

The attached chart shows how the cad and crude oil have behaved over the last 15 months (from 03.01.2008 to 07.14.2009), while the secondary chart shows the weekly correlation between the two. The green area denotes the periods when the implied correlation was between -0.5 and -1.0, which are the phases when crude oil can be used to forecasts Cad’s direction. As a note, the extended periods when Crude oil and Cad had no correlation or moved in the same direction - as the one we have right now, denoted by the fact that the correlation index swings between -0.5 and 1.00- happened only when the market reversed the prior trend.

crude oil vs usd/cad

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BoE With Pound Inflation Headache

Written by A Forex View From Afar on Tuesday, July 14, 2009

The last few months of trading showed a very weak U.K. economy, something that has been reflected directly in the pound’s value.

Currently, the U.K. economy faces one of the strongest contractions on record, while the government runs a massive deficit that is forecast to reach 12% of the economy in the next few quarters; by far the biggest among the developed economies. Even the BoE’s quantitative easing plan has not work as planned, since even if the Bank bought roughly 20% of the entire Gilt market, the current yields are still above the ones when the QE program was announced, TheLFB-Forex.com Trade Team said.

All this had put the pound in a negative light, something that was very well observed during recent risk-aversion phases, when the pound was the first pair to be sold, and usually at the strongest pace. However, things may be starting to look positive for sterling once again, since according to the latest TheLFB-Forex.com Trade Team reports, the BoE might have misjudged its inflation forecast.

In a little more than a year, the Bank of England reduced the interest rate by 500 basis points, from 5.50% in December 2007 to 0.50% in 2009. However, most of the easing came during the second part of 2008 and early 2009, as the BoE reached record low interest rates based on forecasts that inflation will “undershoot” the 2% target. Since then, months have passed, but the CPI read still holds above the 2% target.

The BoE issues a quarterly inflation report, and according to the latest three issues, May’s CPI (which was sitting at 2.2%) is in the upper range of the BoE forecasts. To make matters worse, according to the same projections, the CPI downfall should come to an end over the next few months, and then slowly move higher, which means that soon, the BoE will have a negative inflationary policy, while inflation reads will be already going the other way; higher

For comparison, while inflation reached 2.2% in the U.K., the year-over year inflation is negative in the U.S., and slightly above the 0% line in Germany, even though in the U.K. and U.S., the CPIs behaved in a fashionable way over the last few years.

The BoE problem with inflation continues in the food department it seems, TheLFB-Forex.com Trade Team said. Analyzing the CPI components, a problematic trend emerges, even from the initial view; food prices are up by a huge 8% year over year in May, in a period when the BoE worries about deflation. Again, comparing this numbers with the German or the U.S. food prices, which are both below the 2% benchmark, shows again that the BoE has been wrong in its forecasts, and inflation will become a big problem once the economy starts to recover.

For now, the pound’s outlook is mixed as the U.K. economy faces both medium and long-term problems: a huge deficit and inflation picking up strongly over the next few quarters. Both of these two problems work in different direction, since the deficit puts downside pressure on the pound as it denotes an expansionary money supply, while a high level of inflation will force the BoE to raise rates, something that should strengthen the pound. In the short term though, the market looks to want to hold the short-side of the pound, as it seems traders are now more focused on the huge deficits and on the political dead-lock.

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Trade Desk Thoughts: Oil Falls, Majors Hold

Written by A Forex View From Afar on Thursday, July 09, 2009

Oil has plunged a little more than $13 over the last seven days of trading, making it the strongest pull-back the commodity markets has seen so far this year. Much of the downside action came as clear sings emerged that the global economy is not in the shape the market believed it was.

Crude oil has a tied connection with the global business cycle, as it is used as world’s main source of energy, and business expansion is reflected in the speculative interest in crude trade. Investors gauge the world growth rate to forecast oil consumption, and based on that determine a potential price for the raw material.

On Thursday, crude oil managed to post some small gains, shortly after the IMF issued a report in which it upgraded the global growth forecast for 2010. According to the Fund, the world’s economy is going to “expand” 2.5% next year, but, as a side-note, a global growth rate smaller than 3% is seen as a contraction, TheLFB-Forex.com Trade Team notes. It also forecasts contraction to be maintained in 2009, and has the Euro-zone as the weakest major economy.

Oil’s current downturn and currency correlation has been quite interesting to observe. Most of the time, when oil retraces, it sends a strong wave throughout the forex and the equity markets, in the form of risk-aversion. However, over the last few days, a time in which crude oil has declined at a strong pace, the major currencies and equity markets, posted only limited downside action.

This may be a sign that the market is shifting its correlation/focus towards regional earnings season updates, and less towards the global growth story; time will tell. It will be interesting to observe over the next few days if the dollar will be able to move without its close oil link.

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The Implication Of The IMF Bonds And Their Aftermaths

Written by A Forex View From Afar on Tuesday, July 07, 2009

Extensive reports had been written recently period that the IMF is preparing to have its first bond issue in order to raise as much as $500 billion to help the emerging economies avoid a collapse.

The amount of money that the IMF intends to raise can be compared to the GDP of the 80 poorest countries in the world; that too reaches $500 billion. However, much of the $500 billion needed will come from credit lines from the major economies, with the remaining being funded by issuing bonds.

The Fund plans to issue the new bonds denominated in special drawing rights (SDRs), which is a synthetic currency made up by the dollar (44%), the euro (34%), the Japanese yen (11%) and the British pound (11%). However, the maturity of these bonds is still unknown, with some saying that they will be issued for a shorter period, up to 18 months, while other say it will be as long as 5 year.

The IMF’s bonds have strong implications for the financial market and in the political world. China has pledge for a long time that the world should seek an alternative reserve currency to the dollar, saying that the SDRs should be appropriate.

To some extent, China and the other emerging economies obtained a clear political victory over the developed world; up to now these were the countries to lobby the IMF to issue bonds. Consequently, it is China 2 – U.S. 0, since China will manage to diversify from the dollar (something it has talked and planned for a long period) and at the same time it will manage to impose its view in the world.

In the financial market, some argue, among them TheLFB-Forex.com Trade Team, that the IMF bonds might change the behavior of the Treasury market, mainly because central banks now have a realistic alternative to the greenback.

One of the most important aspects of the newly formed IMF bonds, is that they may raise the yield of the U.S. Treasuries, since demand for U.S. debt is likely to weaken. Foreign central banks hold an important part of the debt issued by the U.S. Treasuries, but this is likely to change when central banks have an alternative.

From now on, the U.S. Government’s debt will have to face and challenge the bonds issued by the IMF, a race that seems lost. However, it should be noted that there is no secondary market for the bonds issued by the IMF, only central banks will be able to buy and trade them. This means that the U.S. Treasury Note would still remain the market’s favorite instrument when risk-aversion comes into the financial market.

A very important note is that a central bank can simply buy IMF bonds without any prior notification from the Government, or any other national institutions. Since the new IMF bonds are seen as foreign exchange reserves, any central bank can simply sell some of the assets that they already hold (such as U.S. Treasuries) and buy instead the bonds issued by the IMF.

One way or the other, the IMF bonds start to appear as a contender to the status of the U.S. dollar as a reserve currency. Maybe, somewhere in the future, the dollar will need to move over and share the throne, because if the central bank Treasury market is being usurped there may be no end to it.

How does 660 Eur per ounce of gold sound? Or 38 Gbp per barrel of oil? Maybe we will buying a bushel of corn in Jpy before we know it.

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Global Unemployment Rates Bouy The Usd

Written by A Forex View From Afar on Tuesday, July 07, 2009

Over the last quarter a rather grim picture from the global labor market revealed
itself, as the unemployment rate rose to multi-year highs in most economies.

Probably the most important headline of the previous week was that the unemployment rate moving to 9.5% in the U.S., the highest level since 1983. The same thing happened around the globe; the unemployment rate surged to record high values.

For example, in Spain where a massive real estate bubble just burst, the unemployment rate moved to a surprisingly high 18.7% in the second quarter of 2009, up by more than 8% in one year.

A rising unemployment rate has a wide list of negative effects in the real economy, TheLFB-Forex.com Trade Team said. The most evident effects are seen in the credit market, where there is a tight relationship between the unemployment rate and the default rate.

The impact will also be heavily felt in the consumer market. When consumers follow a rising stock market and see real estate income, and/or appreciation they drive up the spending rate.

global unemployment rate

However, when all this reverses, consumers cut all unnecessary spending and start saving to obtain some degree of financial stability. Consumers reducing their spending will have a negative impact on the employment situation, especially in those economies that spending makes up about 70% of the growth rate.

Moreover, macroeconomic data had shows that deflationist pressures tend to rise as the unemployment rate decreases. However, TheLFB-Forex.com Trade Team notes that, this relationship is reliable only on the short-term, and it will still cause some headaches at the Fed, and at the other major central banks over the next few quarters.

As seen in the attached chart, every major economy saw its unemployment rate rise after the third quarter of 2008, and some say this will continue even beyond 2010. In addition, the huge slowdown in the global trade had also started to affect the emerging economies, something that was reflected in the unemployment rate.

Even the infamous Chinese economy has started adding jobless numbers into the economy, something that pushed the unemployment rate up to 4.3% - a multi-year high. The same situation was seen in most emerging economies, something that yet again suggests the weakness seen in the global labor market is a longer-term problem, rather then a short-term imbalance.

It can also be seen in the equity market’s inability to move higher, and by default that same unemployment rate increase, will empower the Usd; when equities go lower, the dollar goes higher.

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ECB Press Conference Analysis

Written by A Forex View From Afar on Friday, July 03, 2009

At the ECB press conference, held after the announcement to hold the minimum bid rate at 1%, as expected, Mr. Trichet re-iterated on Thursday the same messages as in the last few press conferences. The euro-area economy is going through a contraction period, which is likely to continue for the time being, and interest rates are poised to remain at very low levels, until the expected gradual recovery starts to threaten the inflation target.

However, there were some small differences from the past press conferences, like the fact that the risk to the economic outlook is balanced, which represents a major upgrade from the comments in the past few meetings. Remaining on the same tone, the ECB gauges the outlook for inflation as balanced too, suggesting that for now, neither inflation nor deflation are major concerns.

In addition, Mr. Trichet announced that the bank will begin its asset buying program in the next few days. The ECB is set to buy up to 60 billion euros in covered bonds, something that may help re-launch the European mortgage market. Last week, the ECB ran the biggest open market operation on record, by pumping 442.2bn euros into the financial system, at a fixed 1% interest rate with a maturity of one year. TheLFB-Forex.com Trade Team calls this a real bargain, which should replenish most European banks confidence and balance sheet levels.

• The Governing Council decided to leave the key ECB interest rates unchanged
• The current rates remain appropriate taking into account all the information and analyses that have become available
• Economic activity over the remainder of this year is expected to remain weak
• Looking ahead into next year, after a phase of stabilization, a gradual recovery with positive quarterly growth rates is expected by mid-2010
• The risks to the economic outlook are balanced
• There may be stronger than anticipated effects stemming from the extensive macroeconomic stimulus being provided
• Concerns remain relating to a stronger or more protracted negative feedback loop between the real economy and the turmoil in financial markets
• Annual HICP inflation was -0.1 % in June
• Further decline in annual rates of inflation was anticipated and reflects primarily base effects resulting from past sharp swings in global commodity prices.
• Annual inflation rates are projected to remain temporarily in negative territory over the coming months, before turning positive again
• Risks to the outlook for inflation are broadly balanced
• On the downside they relate, in particular, to the outlook for economic activity, while on the upside they relate to higher than expected commodity prices
• In May, the annual growth rate of M3 declined further to 3.7%, with that of loans to the private sector falling further to 1.8%
• This concurrent deceleration supports the assessment of a slower underlying pace of monetary expansion and low inflationary pressures over the medium term
• The flow of bank loans to non-financial corporations and households has remained subdued, reflecting in part the weakening in economic activity and the continued low levels of business and consumer confidence
• In this respect, it is important to note that past reductions in key ECB rates have continued to be passed on through lending rates to both non-financial corporations and households
• Banks should take appropriate measures to strengthen further their capital bases
• As the transmission of monetary policy works with lags, our policy action should progressively feed through to the economy in full
• Hence, with all the measures taken, monetary policy will provide ongoing support for households and corporations.
• The Governing Council would like to recall that the Eurosystem provided a significant amount of liquidity to euro area banks at its recent first 12-month longer-term refinancing operation
• Once the macroeconomic environment improves, the Governing Council will ensure that the measures taken are quickly unwound and that the liquidity provided is absorbed

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Range-Bound Equity Markets? Take A Look At The Fx Market

Written by A Forex View From Afar on Wednesday, July 01, 2009

The rally started back in March was fueled mainly by the view that the world economy will recover as emerging economies and consumers would sustain the demand side of the developed economies.

However, over the recent weeks, both theories faced reality, as the eagerly awaited consumer recovery refused to happen. The emerging economies demand, mainly Chinese demand, is enough only to sustain the country’s huge production capacity, without implying any huge foreign imports. To sustain these claims, the attached chart from RBC Capital Markets shows that the decline in Japanese, or in U.S., GDP individually, is big enough to offset the gains made up by the Chinese economy, while the rest of the emerging economies barely count.



These two points would suggest that the rally that started in March is becoming unsustainable; reasons that fueled it are now disappearing into nothing but fading hopes. Further clues that point in this same direction are the poor expected earnings numbers to come over the next few quarters. Add to that the fact that both manufacturing and the service sides of the economy remain in a contraction phase, and have a rising unemployment rate, and all does not look at all sustainable at the projected growth rates.


TheLFB-Forex.com Trade Team argues that this may force the equity markets to consolidate around the current values until the global perspective improves once again, something that would require the financial markets to re-price such an event. Moreover, the continuous drop in the market’s implied volatility confirms the view that the market is going to remain in a range-bound fashion for the time being.

Ultimately, range-bound equities are likely to influence the trading activity in the currency market, something that would make the dollar index swing around the 80.00 area, as it has been doing for a few weeks now. Moreover, the currency market might come down to a regional story as long as the equity markets trade side-ways.

The aussie would have the best perspective since Australia is the only major economy that has avoided a recession so far, while the Japan would be the weakest economy fundamentally speaking. The swissy also has a relative good macroeconomic perspective, but still not too many trade desks would want to buy the Swiss franc, not as long as the SNB intervenes regularly into the fx market. The summer may have doldrums, but the order flows are revealing an interest in moving things, but at very specific times, and for very specific reasons, and that is the way things are likely to stay until a new fair value on Debt/Growth ratios is found.

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What To Look For Ahead Of The London Open

Written by A Forex View From Afar on Tuesday, June 30, 2009

In the forex market, the London open is often cited as one of the most important moments of the day, since the market liquidity is very high and most trends are built around this time of the day. The reason is to do with the fact that European markets are open through part of Asian trade, and also part of U.S. trade, and therefore pick up a large slice of global trade momentum.

As such, gauging the market’s direction at this time of the day is very important since a trader can position themselves on the right side of the trade, or an institutional trade desk can profit from the increased market volume to more easily achieve their goals unhindered. The following items are some of the things TheLFB-Forex.com Trade Team follows around the London open:

1. The direction of the S&P futures. This is probably the best indicator of market’s state towards risk: aversion or tolerance. S&P futures posting significant gains or declines overnight will certainly be reflected in the FX market.

2. The direction of the Asian markets. Together with point 1 in our list, spot equity markets can be used to determine the trading direction of the greenback. If, for example the Nikkei opens in the green, but throughout the trading session posts significant declines, it shows that the market may want to get away from risky assets, and buy instead the safety of the bonds, via the dollar.

3. European equity open. More often than not, the open of the European cash markets (mainly the German Dax and the U.K. FTSE) follows the direction of the overnight Asian markets. However, sometimes it happens that the European cash markets break free from the pattern of futures market trade, which is quickly reflected in the FX market.

4. The direction of the commodity market. The dollar is seen as the “counterparty” of the commodity market, since all raw materials are priced in Usd. As such, higher oil and gold will automatically open short dollar positions, while lower commodities are usually translated into a higher value of the dollar index.

5. Keep a close eye on the news calendar. Usually, in days when the market awaits an important news calendar, the major pairs fail to break any important price points and waste most of the time moving side-ways. However, on other days the market moves in a very volatile fashion, sometimes without a clear direction around the news release, especially around important reports like interest rates decisions. The best would be to adjust your trading style and risk to ant red flag calendar release days.

6. Technical analysis/pattern recognition – Most trades in the FX market are based around technical or automated analysis; things like support and resistance are not anything new. However, a number of traders (especially the ones with a lot of screen time) are able to recognize patterns that are repeated around the London open.

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The Truth Is Just Too Painful To Handle

Written by A Forex View From Afar on Friday, June 26, 2009

The recent reports issued by the U.S. Treasuries showed that, despite recent claims, foreign buyers still show their interest in U.S. debt.

Treasury auction bids are usually split in two, direct and indirect bids, mainly for statistical purposes. The difference between the two is easy to understand, direct bids come through primary dealers, while indirect bids come from foreign sources, avoiding the primary dealers.

Usually, the market uses indirect bids to gauge the foreign central banks’ interest in U.S. debt, but as TheLFB-Forex.com Trade Team notes, this view may be wrong, since indirect bidders account for a large class of foreign investors, which includes foreign financial institutions, brokers and central banks.

Over the last week, indirect bidders for treasuries surged from the long-run 25%-30% average to a whopping 60%, something that sent a real shockwave through the financial market, since it showed that foreign investors still buy dollar denominated assets. However, how most of the financial press said that the Treasury changed without any signs or explanations the way it accounts for indirect bids. This has caused foreign demand for U.S. debt appear curiously strong, even though China and other important holders of U.S. debt complain rather often about the dollar’s weakness and announced publicly that are looking to reduce their holdings.

The Treasuries actions raise some questions because it tries to inflate foreign demand at a time when most market participants question the fate of the ever-growing U.S. deficit. These actions look like someone is trying to hide the truth, a painful truth that the economy is running on huge debt that no one is looking to finance, especially at the current interest rates. The same pattern – hiding/modifying the truth – could have been observed with other key economic reports too, like the CPI or M3 during a period when the market was looking to them for guidance. Currently, the Fed is among the only central bank in the world that does not publish the M3 numbers.

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Global Recovery Doubts?

Written by A Forex View From Afar on Thursday, June 25, 2009

The financial market continues to trade mixed, as investors raise doubts about the global recovery.

One day up, the other down seems to be the latest trend in both the currency and the equity market, as investors move in and out of risk-aversion. This has made the gains observed in the equity markets come to a sudden stop, allowing the S&P futures to retrace for the first time since the trend started in March.

However, the direct consequence in the foreign exchange market was that the major pairs failed to find a direction to trade over the last few weeks. To some extent, the link between the dollar index and the S&P futures, which could have been used very easily by investors until now, seems to have weakened substantially since the beginning of June. This can be explained by the fact that the market saw more dollar strength than it (ever) needed since the beginning of the credit crisis, and now investors are beginning to back away from the old greenback as the Treasury digs deeper hole for the U.S. deficit.

The dollar is under huge pressure right now, as countries that have noticeable amounts of dollar denominated assets are looking to diversify. To make matters worse, this happens at the time when the Treasury is trying to sell even more assets in the form of debt, something that raises big questions about the future of the dollar. For now, TheLFB-Forex.com Trade Team sees only two solutions: either the U.S. Treasury hires a very good advertising/PR agency to make the dollar look like the king of the market once again, or stand behind the pledge when saying that the Treasury is aiming for a strong dollar policy.

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Fed Expected To Keep Rates On Hold, But What Is Going To Be In The Statement?

Written by A Forex View From Afar on Tuesday, June 23, 2009

On Wednesday, the market expects the Fed to maintain the Federal Funds Rate at 0.25%, but this time the two-day meeting will probably raise more questions than the previous ones.

By a huge percentage, the market expects the Fed to maintain the key interest rate at 0.25% as the global economy maintains a roughly similar pace of contraction as in the prior period. However, over the last few months, a number of key macroeconomic reports have indicated that consolidation may be near record low levels, something that has the Fed along with most market participants believing that the pace of contraction is starting to ease.

This has created a real frenzy in the market by only focusing on “green shot” signs. Even though this is what the Fed expected to happen, once the market started to price in the signs of recovery, a relative strong increase in demand and thus inflation has begun to happen, creating a real problem for the world economy.

A few things that the Fed has to face on Wednesday, when it releases the FOMC statement are Treasury yields rising at a strong pace over this last month, the dollar declining, and oil more than doubling its price from the low touched earlier this year, something that has the potential to choke the global recovery.

To some extent, the Fed is now between a rock and a hard place, since a statement that can be interpreted as positive may further send the Treasuries higher/dollar lower, while the market may have a similar reaction to a more neutral statement, leaving traders to consider that the Fed may not be affected by the recent gains in Treasury yields. At the same time, a downbeat statement compared with the one released in April may have investors thinking that the market is returning back to a global contraction phase again, sending it back into risk-aversion mode. It will certainly be interesting to see how the Fed addresses this problem, especially when it needs to provide signs of financial/economic stability, while still anchoring the longer-term yields.

However, even though the market interprets any recent report as a sign that the recession is easing, some of the major imbalances that led the global economy towards the credit crisis in the first place are still not resolved or any vital steps being taken towards resolving them. Mainly, the default rate of U.S. mortgages is still high, the U.S. household savings rate remains at very low levels and the already low Fed Funds can only be sent even lower. The U.S. fiscal deficit is still high and unfortunately is continuing to head even higher. Maybe, somewhere in the future the Fed may want to address these issues too, before another bubble begins to form.

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The Fed And The Repo Market

Written by A Forex View From Afar on Monday, June 22, 2009

The Fed is looking to change the way overnight markets works, achieving one of the most important changes in interest rate recent history. The Fed, under Bernanke’s reign, is going throughout some major changes that some say have been needed for a long period of time.

Mr. Bernanke has managed to free the Fed from the view that the market is always right, a view that had a great role in the credit crisis. Other important changes that the Fed went through include now a much more transparent central bank, able to properly anchor market’s expectations, and the Fed’s ability to pay interest on the deposits made.

The Fed is looking at ways to re-organize the repo market, also known as the overnight market, which is the Fed’s most important lever over economic business cycles. Currently, the Fed uses a number of private banks as clearing houses for the repo market, however, this system proved to be obsolete during the credit crisis, TheLFB-Forex.com Trade Team commented.

Throughout the overnight market, the Fed controls the effective federal funds rate and thus the refinancing cost. In this market, banks and other financial institutions access liquidity to meet the daily demands, which include daily customers’ activities (like transfer and withdrawals) and to meet the Fed’s minimum reserve requirements, which is another important lever of the central bank, together with the Fed Funds Rate.

In the repo market, banks that have excessive reserves available compared to their daily needs will lend to banks that require additional capital to meet their daily operations requirements. The average rate at which these operations occur is called the Fed Funds Rate, and is usually very close to the Fed’s targeted rate set by the FOMC.

In order for these operations to happen, a number of clearing banks supervise the market, and set the collateral and the payment requirements. However, this system showed its downside during the credit crisis, especially when Lehman collapsed, as a number of clearing banks (read JP Morgan) raised the collateral demanded on Lehman, further sending the bank into a downspin. Some argue that these actions were the final nails in Lehman’s coffin, and were made deliberately.

Currently, the Fed is trying to change this, by implementing a non-profit organization to handle the overnight market operations. Such a measure is already used in the Euro-area, where the European repo market helped the regional financial system weather the credit crisis.

Such a measure taken by the Fed does not have any direct implications in the forex market, but it will help the U.S. financial system achieve a more stable status, which in the long run might help to make the credit crisis an easier thing to overcome.

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Financial Sector Re-Valuation: Forex Impact

Written by A Forex View From Afar on Thursday, June 18, 2009

The financial sector might still face a difficult period ahead, TheLFB-Forex.com Trade Team notes, as the U.S. administration is trying to impose stricter rules, while a large number of banks may still have to face further sub-prime/credit-crisis write-downs.

Consequently, the rating agency S&P downgraded 18 U.S. banks (of which five were moved into the naughty corner; to default levels) after earlier this week Moody’s downgraded another 25 Spanish banks.

Moreover, both the ECB and the S&P issued a warning this week that European banks might continue to faces losses this year , and next, continuing the trend started in 2008. According to the ECB, losses in the European financial system might reach $280 billion by 2010.

The credit crisis showed that risk is spread systematically throughout the financial system (remember now, “Financial innovation is good”), and now these losses are likely to be reflected in the U.S. bank balance sheets. But for now, U.S. financials are sheltered behind the law that allows them to value illiquid assets (toxic waste) using the bank’s own valuation models.

Additionally, the new financial regulations that President Obama’s team is trying to impose will probably reduce, even more, the sectors’ profit margin and will inflict tighter regulation; something that investors will certainly not like.

As such, TheLFB-Forex.com Trade Team notes, the strong uptrend that the financial sector experienced lately might come to a halt, after the XLF index outperformed the broader S&P 500 over the last three months of trading. Moreover, it is hard to believe that the U.S. markets can advance without the financial sector in the front line, especially in the current market circumstances.

Therefore, the U.S. equity market may well spin its wheels through the summer, as the financial sector re-alignment continues to take place; something that stock market bulls had hoped was already baked into current valuations.

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The Three States Of The Financial Market: It Is All About Risk

Written by A Forex View From Afar on Wednesday, June 17, 2009

In its natural stance, the financial market has three major attitudes towards risk, which models its behavior and actions throughout each of the global trading session. The three are; risk aversion, risk tolerance and risk-neutral.

Risk-aversion is characterized by investors selling assets considered risky, and swapping them for the safety of the bond market, mainly U.S. Treasuries. Risk-aversion can be seen relatively easy; commodities decline as investors consider that consumption will slow, while the S&P futures also head lower. In the currency market, risk-aversion strengthens the dollar, as investor sell foreign denominated assets to buy U.S. Treasuries. In this period, higher yielding currencies are the one being sold the most.

The risk-tolerance phase is seen when Treasuries are sold as investors are looking for higher yields. In periods of relative calm and positive macroeconomic reports, traders abandon the safety of the bond market and invest their capital in stocks, commodities and foreign currencies, thus in this period the dollar is sold. Usually, bull markets are characterized by risk-tolerance phases and in this period S&P futures head higher, together with the euro and the rest of the pack.

In most cases, risk-neutrality happens when the financial market moves side-ways, unable to push anywhere decisively. This period is characterized by a redistribution period, as investors shift their assets between the various financial instruments to prepare for the next leg (risk aversion or tolerance). The main difference being that the shifts are not only session-by-session, they literally happen hour-by-hour. Sentiment is seen to change from one to the other, empowered by the relentless flow of automated trades that trigger as a contingency play, as each individual market accepts risk neutrality.

The sideways moving market tends to be the more volatile as the channels are traded, and fair value sought at each regional market open. June has been a risk neutral month; the equity markets are unable to attract enough volume to make a stance on risk, and therefore the currency markets spin their wheels each day as dollar values are fought over.

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Interest Rates Or Growth; What Gives?

Written by A Forex View From Afar on Tuesday, June 16, 2009

With the recent green-shots in the global economy taking root it seems, the major central banks now have to face a difficult situation; keeping the yields on long-term bonds at relative low values.

Most market participants consider that inflation will pick up strongly in the coming quarters, in-line with the major central banks currently running strong expansionary policies. Historically speaking, most times that a central bank intervenes in the debt market inflationary expectations rise at a strong pace – Japan of the 1990’s being the only exception.

As traders price in high inflation they build in to fair value the requirement of additional yields on Treasuries, especially on the longer-term maturities, to counter the effects of money printing and asset depreciation. However, this has negative effects in the real economy, not only do yields on Treasuries rises, but on every financial instrument linked to the bond market; corporate bonds, and especially consumer and housing credit, including mortgage rates.

Consumer and housing credit pose the biggest threat to any global recovery; consumers pay more on their mortgages and credit costs, and that leaves less money to spend or save. Higher interest rates are directly linked to higher default rates as well.

For now, the major central banks have two big options to use as an exit strategy. The first would be to increase the quantitative easing programs, something that does not seem likely, since almost no central bank would obtain a substantial increase in their available funds at this point in time. Even a small increase would make most market participants think the bank had its hands tied.

The other option a central bank has is to pledge that it will maintain overnight interest rates at low levels for a longer period of time than may seem prudent, something that further fuels inflation expectations, whilst trying to address the confidence requirement that consumers need to borrow, whilst at the same time creating the pool of liquidity that regional and commercial banks can dip in to at fair value rates.

However, before any central banks has to search for an exit strategy, the global economy has to show some solid signs of growth, and maybe take the lead from the emerging markets who look to be capable of drawing on the higher savings rate to get consumers confident, and to get rates contained.

The Fed looks to be the region that will have an interest rate headache for the longest period; the printing, and key to this, the subsequent re-buying, of new notes, has inflationary pressures inherently built in. Getting out of a quantative easing program is very likely to be at the expense of forward growth, and at the expense of affordable consumer interest rates.

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The Dollar’s Future As A Reserve Currency

Written by A Forex View From Afar on Monday, June 15, 2009

A lot of talk has been heard lately regarding the dollar’s outlook as a major reserve currency, much of which has been initiated by Chinese and Russian officials, who tried to impose their global status at the international level in regard to the amount of U.S. debt held.

Despite this, the recent actions make the talk look like nothing other than empty words, as the two countries try to push more hot air into a balloon flying in a very cold environment. Despite all the recent accusations coming from Chinese officials, China still kept the same buying pace of U.S. debt, while Russia showed its support for the U.S. dollar during the G8 weekend, after it announced its plans to reduce its exposure towards U.S. denominated assets, something that caused a little shock in the financial market last week.

Ignoring the recent talks coming from China and Russia, TheLFB-Forex.com Trade Team argues that diversifying from the dollar can be really challenging for the vast majority of central banks. Right now, the only feasible alternative to the dollar as a reserve currency for now is the euro. However, what exactly a central bank would do with the euro, when the business relationships including trade balance and money transfers, are relatively low within the 16-nations, and the currency channel is illiquid most of the time.

A case in point would be Canada, of which a staggering 80% of its exports reach the U.S. economy, while only 4% of its exports and 6% of its imports are toward the Euro-area. The big question is, what could the BoC with its newly found euro reserves, when the liquidity in the euro-cad is very thin. Even the Chinese central bank would not have too many things to do with the euro, since the trade balance between the Euro-zone and China is rather small, and considerably less than 10% of the total Chinese balance.

One of the most important aspects is that, in order for a central bank to calculate a cross rate, it first has to triangulate the exchange rate to the dollar. Obviously, if the central bank is planning an intervention in the currency market (which by the way are done very often, especially for minor currencies) they would have to sell or buy dollars against the national currency, rather than euros, yuans or any other currency.

TheLFB-Forex.com Trade Team believes that the recent talks of the U.S. dollar losing its status as a reserve currency are greatly exaggerated. For now, the dollar’s status is safe, even though it is expected that the greenback will lose a few percentage points as central banks try to hedge its declines. However, this is far from the dollar losing its reserve status – as some say.

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Is Mr. Inflation Coming Back To Town?

Written by A Forex View From Afar on Sunday, June 14, 2009

An increasing number of market participants are considering that inflation is going to pick up very strongly over the upcoming period.

There are a number of signs that the market is preparing for such an event, but the most important one came from the commodity and Treasury markets. First, since the beginning of March, oil has more than doubled its value, making the current bull market the second most powerful on record. At the beginning of March, oil was trading at $32 per barrel, while on Thursday the oil market briefly tested the $73 area, which means that oil rose nearly 110% in thee months. The strongest bull trend on recorded happened in the early 1990’s, when oil gained more than 150% in a three month window, TheLFB-Forex.com Trade Team notes.

Over the last few years, oil was responsible for a large portion of the increases seen in the CPI reports. This was best seen during the summer months of 2008, when inflation reached multi-year highs in the most developed countries as oil was heading towards the $150 level. As such, TheLFB-Forex.com Trade Team expects inflation to pick up again in the coming months.

Further inflation evidence comes from the Treasury market, where the spread between the medium and longer term debt instruments is trading near the highest level on record. Mainly, the spread between the 2-year and the 10-year Treasury notes reached 2.60% in the last few weeks, even though its long-term average sits somewhere around 0.60%. TheLFB-Forex.com Trade Team said that the high spread shows that investors are demanding additional protection against inflation, as they think the Fed will be one step behind.

Remaining in the Treasury market, the 5-year breakeven spread has reached 1.90%. The 5-year breakeven spread measures the difference between 5-year conventional note and the 5-year TIPS notes, which are protected against inflation. The higher the spread between the two instruments, the higher investor’s prospects are that inflation will pick up. Moreover, the 5-year breakeven spread is the central banker’s preferred way to gauge inflation expectations over the longer term.

In the forex market, the currencies that usually have a higher interest rate backing their value will be the best performing ones during a global inflation event. As such, prospects really look for currencies like the aussie, pound (even though it is not the case right now) and more specifically for the emerging currencies.

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Trading Is About Managing Risk, Not Positive Trades

Written by A Forex View From Afar on Wednesday, June 10, 2009

One of the biggest issues a trader has to learn even from the first days of trading, but usually only after multiple blown accounts, is how to manage risk

Many traders just focus on the reward, and do not concentrate enough on the risks that go hand-in-hand. One issue many traders seem to pass by is that risk and reward are directly proportional, meaning that as one increases, the other does too. Moreover, the relationship between risk and reward has more of a fat tail behavior; the link between risk and reward decreases at high levels.

A forex trader should avoid taking trades with an associated risk bigger than 2% of their trade account, it will take more than 5 years of experience to find a rare opportunity that sets once in every while that risking more has proven to be previously advantageous. From personal experience, new traders should focus on small risk-trades, ranging from 0.5%-1.0% of the available account balance.

Even though these particular trades would not produce the same financial reward, they will keep a new trader in the game for longer, and will build a solid knowledge base that a career can be built upon. With some retail brokers offering now micro and mini lots (1K and 10K trade lot size) that cost a few dollars, and sometimes pennies to put on, a new trader does not need an account stacked with thousands of dollars just to learn to trade and manage risk.

A trade has two possible outcomes – either you win or loose. As such, in a control environment, a trader has a 50% chance to lose the next trade. Chances for 2 consecutive trades with the same outcome (win or lose) are 25%, while chances for three consecutive traders with the same outcome reach 12.5%. Even though the percentage is relatively small, new traders chase the game defying logic, and defying money management in the fear of loss gamble that comes with poor money management.

A good trader should psychologically prepare for such events during the intra-day set-ups. Too much risk can kill an account very quickly, especially for new traders who tend not to control their emotions too well, if at all. If someone is looking for risk-free trades in the financial markets, he or she should better look at a savings account, but with that being said, the other extreme is taking risk that is not at all justified.

Start with the stop area, and note the pip loss potential, 40 pips for example. Each pip costs $1 of a mini lot trade when trading Usd based pairs. On a $5000 account balance a 2% risk equals $100; with a 40 pip Stop the risk is 2.5 mini lots per trade. With 2% being the absolute maximum exposure at any one time, it also means that no new trades can go on until the original position has hit profit and the Stop moved to break-even.

Overleveraged trading is thrilling to some, while the idea of a casino type Lotto win is all consuming to others. Forex however, is a business; leave the gambling to the Thursday night card school, get a Plan, and get serious about managing risk because without it the game soon ends.

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The U.S. Toxic Asset Plan – The Greatest Plan That Never Lived

Written by A Forex View From Afar on Monday, June 08, 2009

The plan that was built and designed to save the world from an imminent implosion of the famous U.S. toxic plan is starting to look just like a distant memory, since U.S. officials are planning to halt its application.

The Treasury, under Mr. Geither’s leadership, was planning to use the U.S. Toxic asset plan to help banks get rid of the toxic assets locked on bank’s balance sheets. The plan was supposed to find the best price for the toxic assets in an auction sale, were hedge funds and banks would had bid with a staggering majority of funds taken from the Federal Deposit Insurance Corporation.

However, the plan fell short because both banks and other financial institutions appeared reluctant to join the toxic asset plan because of fears that Congress would impose pay caps to the companies’ executives if funds were used. That is not the smartest decision; to threaten the pay check and eventually the position of the person in charge of making important decisions, when you are trying to reach an agreement with them is a little hard to implement.

In addition to investors’ reluctance to join the program, government officials look ready to halt the U.S. asset plan. Recently, the FDIC postponed a pilot sales program, which was supposed to benchmark the system. Moreover, Treasury officials said that banks can now raise enough capital individually, making the program look ineffective.

TheLFB-Forex.com Trade noted that, to some extent, the U.S. asset buying plan was one of the greatest plans that did not see the light of day. Even though the plan provided strong support for the equity market when it was announced, it looks like it was nothing more than hot air. For now, the Treasury can change its focus once again towards the U.S. debt mountain, adding some more hot air to that instead, with public displays of a “Strong Dollar Policy”. From what the financial market have witnessed over the course of the last decade, empty words and wild talk seems to be the way forward. And now to the bubble-mobile, we have another boom cycle to create.

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Mortgage Rates, The Fed And Treasuries

Written by A Forex View From Afar on Monday, June 08, 2009

On Thursday, U.S. mortgage rates reached the highest level in 2009, as investors are leaving the market before the Fed does.

A few months back, in March, the Fed had pledged to use up to $1.25 trillion to buy debt from the financial markets. This decision was taken to send the bond yield lower, something that will help the economy (including consumers, companies and the government itself) whether the credit crisis more easily, TheLFB-Forex.com Trade Team said.

However, the decision to intervene in the debt market with such a huge sum (about 5% of the size of the U.S. bond market) raises some concerns that the Fed will cause hyperinflation in the long run. As such, investors are demanding higher yields from the market to prepare for such an event. Additionally, as the economy recovers the Fed will have to raise the interest rate, something that again makes investors seek higher yields. That’s not the case right now, even though the market is preparing for such events (especially the hyperinflation one). The spread between the 2 year and the 10 year Treasury notes is trading near the highest level on record, suggesting again that the vast majority of investors think inflation will be very strong in the long run.

However, neither a high level of inflation nor the economy recovering are possible in the next few months, and this does have a strong effect in the real economy, because mortgage/loan rates are rising with the Treasury yields. This certainly has the potential to slow the recovery, and even more, to take away precious buyers from the housing market since mortgages are again rising. TheLFB-Forex.com Trade Team notes that the U.S. economy will never be able to recover unless the housing market at least finds a bottom.

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The ECB Press Conference: “Independence Fears”

Written by A Forex View From Afar on Thursday, June 04, 2009

At the ECB press conference, the central bank updated its forecasts for 2009 and 2010. According to the ECB’s staff projections, the economy will contract a whopping -5.1%, to -4.1% in 2009, much worse than the previous projections, released in March, which expected the economic activity to contract between -3.2% and -2.2%. The 2010 growth projections were also revised lower, from -0.7% to 0.7% in March, to the current forecast of -1.0% and 0.4%.”

“Inflation expectations were left mainly unchanged at the current ECB staff projections report. TheLFB Trade Team said. “The ECB expects CPI inflation to range between 0.1% and 0.5% in 2009, but to pick up a stronger pace in the 2010, ranging between 0.6% and 1.4%.”

“Overall, Mr. Trichet press conference was more bullish than usual, and said for the first time that the pace of contraction is easing in the global economy. However, Mr. Trichet also warned that growth is expected to pick up only in 2010 (and thus the poor 2009 GDP projections) when asked about the recent green shots in the financial markets. Except for this, the introductory statement did not provide any new information.”

“The Q&A session had two main themes: the new covered bond buying program and the recent comments made by Germany’s Chancellor Angela Merkel. Additionally, from time to time Mr. Trichet received questions about the fate of the Baltic economies, mainly Latvia.”

“The President of the ECB refused to give away too many details on most questions, mostly providing partial answers and most of the time dodging the essential of the inquiry. About the new asset buying program, Mr. Trichet said that the program’s size is 60 billion euros, and does not want to provide any additional information.”

“However, when asked about Angela Merkel’s recent comments, in which she complained about the decisions taken by the Fed, BoE and mainly by the ECB, Mr. Trichet said only that he had a conference call with Germany’s Chancellor in which she assured that the bank’s “fears independence” is not at risk in any way. In the following few questions, Mr. Trichet only reiterated this answer that the bank’s independence is not at risk.”

In the forex market, the major currencies plunged compared with the dollar after the ECB’s interest rate decision. As Mr. Trichet provided his statement, the euro retraced earlier declines, but then started to move lower once again. For now, the currency market appears to be looking for a solid anchoring point.

• The Governing Council decided to leave the key ECB interest rates unchanged at 1%
• The current key ECB interest rates are appropriate taking into account the decisions of early May, including the enhanced credit support measures, and the information and analyses which have become available since
• Economic activity weakened considerably in the first quarter of 2009. Economic activity in the euro area contracted by 2.5% quarter-on-quarter, after a decline of 1.8% in the fourth quarter of 2008
• Activity over the remainder of this year is expected to decline at much less negative rates. After a stabilization phase, positive quarterly growth rates are expected by mid-2010
• The risks to the economic outlook are balanced
• On the positive side, there may be stronger than anticipated effects stemming from the extensive macroeconomic stimulus under way and from other policy measures recently taken
• Confidence may also improve more quickly than currently expected
• On the other hand, a stronger impact on the real economy from the turmoil in financial markets, more unfavorable developments in labor markets, the intensification of protectionist pressures and, finally, adverse developments in the world economy stemming from a disorderly correction of global imbalances, may impact the outlook
• With regard to price developments, annual HICP inflation was, according to Eurostat’s flash estimate, 0.0% in May, compared with 0.6% in April
• Annual inflation rates are projected to decline further, and temporarily remain negative over the coming months, before returning to positive territory by the end of 2009. Such short-term movements are, however, not relevant from a monetary policy perspective
• Any threat to price stability over the medium to longer term can be effectively countered in a timely fashion
• As has been emphasized many times, the Governing Council will continue to ensure a firm anchoring of medium-term inflation expectations
• The latest data confirm the continued deceleration in the pace of underlying monetary expansion and thus support the assessment of moderate inflationary pressures
• In April, the annual growth rate of M3 declined further to 4.9% and that of loans to the private sector to 2.4%
• The latest developments in M3 components continue to reflect to a large extent the impact of past reductions in key ECB interest rates.
• Regarding fiscal policies, the latest projections by the European Commission point to a sharp increase in the euro area. The deficit ratio is projected to rise to 5.3% of GDP in 2009 and further to 6.5% in 2010, from 1.9% in 2008, with the debt ratio exceeding 80% of GDP in 2010

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Markets Prepare For ECB and BOE Interest Rate Decisions

Written by A Forex View From Afar on Wednesday, June 03, 2009

The European Central Bank (ECB) and the Bank of England (BOE) are expected to keep rates on hold, after reducing the monetary policy stance at a record pace over the past year. Both central banks have the policy rate at the lowest level on record, in order to help the economy recover from what seems to be the biggest downturn since the Great Depression.

The Bank of England is expected to keep rates on hold at 0.50%, the lowest rate in the bank’s three century history. Also, the central bank is seen maintaining the current asset purchase program at 125 billion pounds, after it was extended at the previous meeting by 50 billion pounds.

TheLFB-Forex.com Trade Team noted that the U.K. economy saw the first signs of recovery in May, as the price of houses unexpectedly increased, while the service side of the economy expanded for the first time in a year. This may lead to the U.K. central bank to provide a bullish statement tomorrow, since the bank has already said that the recession is easing in its latest minutes. Additionally, the most bearish member in the voting committee, Mr. David Blanchflower stepped down on 1 June, which might uplift the overall view of the committee on the economic outlook.

At the ECB, things are a little different. The European bank has just announced a new (and small, related to the size of the economy) quantitative policy, and has already received criticism about this. At the last meeting, the European Central Bank announced a plan to buy up to 60 billion euros in covered bonds, in order to help the market recover and lift the inflation expectations. However, the bank’s decision received strong criticism from Angela Merkel, Germany’s chancellor. These comments seem even stronger since the German government has been known to never comment on the central bank’s monetary decisions. Currently, Germany is the biggest economy in the Euro-area, and the ECB was built on the Bundesbank’s legacy.

As such, the ECB is expected to keep the interest rate at 1%, while chances are very small that the central bank will expand its plan to buy covered bonds. TheLFB-Forex.com Trade Team expects Mr. Trichet to put emphasis on the global recovery and on the recent developments in the commodity markets.

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Baltic Countries Continue To Struggle

Written by A Forex View From Afar on Tuesday, June 02, 2009

Even though it seems the global economy is on its way towards recovery, overall, not every country is enjoying the comeback.

In the European Union, the Baltic country of Latvia is enduring a very tough period. The economy contracted a whopping 18% in the first quarter from one year earlier (in nominal terms), while TheLFB-Forex.com Trade Team expects the GDP to shed a quarter of its value by the end of the credit crisis. The unemployment rate surged to 17.4% in April, from 6.1% one year earlier. By every standard, the Latvian economy is in terrible shape. TheLFB-Forex.com Trade Team argues that the economic contraction is even greater than the one experienced by the U.S. during the Great Depression.

However, things have not been always like this. For years, the three Baltic States (Latvia, Estonia and Lithuania) had the strongest growth rate among the developed economies, especially Latvia, which averaged double digit expansions during the 2005-2007 periods. As a consequence, the three countries came to be known as the Baltic Tiger.

However, it all came to an end during the credit crisis as the huge current account deficit, (bigger than 20% of the economy) net outflows of cash and double digit inflation choked every small attempt of economic recovery, TheLFB-Forex.com Trade Team noted.

These days, a growing number of economists, including the IMF, say that Latvia should devalue its currency. This would send the Latvian Lat much lower against the dollar and the euro as the central bank tries to inject money into the real economy.

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Commodity Markets Push Canadian Dollar Higher In May

Written by A Forex View From Afar on Monday, June 01, 2009

The financial markets saw some strong trends in May, as more and more investors became bullish on the global and equities

The most important rally observed in May, that had widespread influence over the financial markets, was the in raw materials. Crude oil, gold and metals surged as demand from China and the other emerging economies were stronger than expected. Some analysts even suggested that China is using its huge FX reserves to buy and deposit cheap commodities, instead of buying Treasury notes. However, this theory fades as recent reports showed that China still bought Treasuries in the last part of year, despite the complaints issued by top Chinese officials.

Together with oil, the cad experienced the strongest monthly decline since the 1950’s, in May. The Canadian dollar was pushed higher against the dollar as crude oil surged. The cad has a close correlation with the energy markets, since energy products are Canada’s main export products. The Canadian dollar weakened only 2 weeks out of the 13 since the rally in the equity and commodity markets started, in early March, something that suggests the pair’s strength, TheLFB-Forex.com Trade Team said.

The pound also saw some strong upward pressure during the previous month of trading. The pound gained more than 9% in May, much more than the S&P 500 index, which returned 5.30% over the same period. TheLFB-Forex.com Trade Team said that currencies outperforming equity markets happen very rarely. The pound was driven higher as evidence is mounting that the decline in the U.K. housing market is slowing, even possibly reaching a bottom, they added. Both the U.K. and the U.S. economies were hit very hard by the housing market decline, and traders are now betting that the economy will recover with the housing sector. Moreover, a number of investors are speculating that inflation will surge in the coming period in the U.K, which also empowers the pound.

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Choking Global Growth Before It Even Happens

Written by A Forex View From Afar on Friday, May 29, 2009

Most market participants agree that the global economy is recovering, but chances are that some are expecting a recovery that is too strong for the current circumstances.

As investors judge that the global economy is improving, more short positions are taken against the dollar and treasuries, while long positions are build in the commodity market. This has made commodities such as gold, oil and copper enter into a real bull market.

However, TheLFB-Forex.com Trade Desk has stated over the last period, that the strong rise in crude oil threatens to dampen the economic recovery even before it happens. Oil is known to have a strong link with the world’s GDP, since in order for the global economy to develop, it needs an energy source. Unfortunately, oil is the only viable energy source available right now, despite its large list of detriments.

Academic studies have shown that a 10% increase in crude’s price can reduce the global output by 0.5%, by its direct effect on inflation, consumption and unemployment. During the December to February period, crude oil prices averaged $45 a barrel, while in March and April, the average price rose to around $50 per barrel. The gains seen in the crude oil market over the two periods dampened the global output by around 0.5%, since crude oil’s prices rose a little more than 10%.

However, nowadays crude oil is trading at $65 per barrel, which represents a 45% gain from the December-February period, and a 30% gain from the March to April episode. Translated, it would mean that if crude oil averages $65 a barrel in the coming months, as it trades right now, the world GDP will be slowed by full percentage points over the next few quarters.

This does not look to good, since the latest forecasts of the International Monetary Funds point out that the global economy will contract 1.3% in 2009, while it slowly recovers by 2010. Strong gains in the crude oil market, or strong volatility, have the potential to further delay the recovery period, or in an extreme case, crude oil can send the global economy back to the contraction phase.

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Housing Market Still Far From Stabile

Written by A Forex View From Afar on Friday, May 29, 2009

Even though most investors are confident about the global economy recovering in the second part of the year, the equity markets cannot find the strength to break above the highs set at the beginning of May.

The major equity indexes saw strong buying orders during March and April, and some more during the beginning of May. However, the financial markets ran out of steam pretty quick, as a number of releases failed to hit the market’s expectations. Some of those releases are coming from the housing market, were the contraction seems to be going forward uninterrupted.

Today, a report showed that new home sales rose 0.3% in April, to 352,000. Even if most market participants interpreted the releases as signs that the housing market is stabilizing, things are not too rosy.

Speaking from a statistical point of view, a 0.3% increase is close to nothing. Not to mention that such a small variation can simply be ignored, because even the smallest slip would produce a bigger fluctuation. In April of this year, new home sales were just a third of what they used to be back in 2004 and 2005, at the height of the market. “This clearly denotes the magnitude of the downfall, and a gain of 0.3% month-over-month, is just a plain number. Nobody expects the housing market to return to its 2005 activity, but the whole industry cannot survive with only pieces of what it once had been,” TheLFB-Forex.com Trade Team added.

Another problem with the housing market is the huge number of inventories. The latest release points out that inventories are holding at 12 month highs, but TheLFB-Forex.com Trade Team considers that this number does not reflect the real market-situation. In such a poor housing market, one question rises, which owner would sell its house at the current prices? Not too many. A quick conclusion would be that one of the initial causes of the credit crises, the housing market is still far away from a sustainable recovery.

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Two Different Views, One Conclusion: Bye-Bye Dollar

Written by A Forex View From Afar on Wednesday, May 27, 2009

The currency market is currently running on two different views, but both are pointing to dollar weakness in the medium to longer term.

The first outlook is that the economy is starting to recover, or just initiating the expansion period. This view is fueled by the recent releases, which point out that consumers are actually holding strong.

TheLFB-Forex.com Trade Team said that, when the awful first quarter numbers were printed, the financial markets found strong support in the fact that consumer spending increased during the first three months of the year. Yesterday, a report showed that consumer confidence increased at a record pace in April and May, which are the first two months of the second quarter. This made investors optimistic once again about the global recovery theme, and furthermore made some investors bullish. According to TheLFB-Forex.com Trade Team, the U.S. economy might be on the path to recovery by the second part of 2009.

As the U.S. and global economies recover, institutional traders become more risk-tolerant, meaning that they will abandon the safety of the U.S. dollar for the yield of foreign assets. This should empower the euro and the rest of the major pairs, in the long run. If this holds true, some are saying the euro might break the 1.6000 by the end of the year.

The other important view that is influencing the currency market is that the global economy is heading towards a period of massive inflation in the next few years. This outlook is fueled by the fact that the U.S. government is running a huge deficit, by the ultra-low level on the Fed Funds and by the huge size of the Fed’s balance sheets. All three taken individually are known to spark massive inflation in the medium to long term (around two years), but now these three forces are working together.

A good way to gauge inflation expectations is to calculate the breakeven level between Treasury notes and similar maturity TIPS notes. Both the spread between 5-year and the 10-year notes increased at a record pace since March, when the equity rally first started.

In periods of high inflation, the greenback looks rather weak. This happens because investors are looking for ways to beat inflation by investing in foreign denominated assets (especially those of emerging economies), and in commodities.

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The Link Between The S&P And The Currency Market

Written by A Forex View From Afar on Tuesday, May 26, 2009

After a very light day of trading on Monday, the currency market experienced a strong overnight session this Tuesday. The dollar was the clear winner of the overnight sessions, strengthening not only against every other major currency, but against the minor currencies too.

It is interesting though, that the currency market lost its close link with the S&P futures over the last period of trading. The S&P moved only a limited number of points, while the currency market saw some huge swings. For example, last week the S&P had a 50 points range (0.55%), while the major currencies had one of the strongest weeks of 2009. The same case occurred overnight, when the S&P futures declined only 2.60 points, while the euro and the pound declined as much as 140 pips.

However, TheLFB-Forex.com Trade Team noted that, even though the correlation between the dollar index and the S&P futures has decreased lately, the currency market does not have the strength to reverse the current trend on its own. Such a move would require the cooperation of the Treasury and of the Equity markets.

TheLFB-Forex.com Trade Team argues that over the last few days of trading, the uptrend observed in the currency market needs to be retraced first, allowing a number of investors to switch to the bull camp. As soon as the currency and the equity markets hit an important swing point, the dollar may resume its decline while the S&P futures may continue to gain helped by the global recovery.

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The Dollar And The Emerging Currencies

Written by A Forex View From Afar on Monday, May 25, 2009

The dollar index saw a day of light strengthening during the Monday session as the U.S. financial markets will be closed today. The New York Stock Exchange will be closed for business, but the NYMEX will remain open providing the daily oil fix.

The current overnight session offered the dollar the possibility to retrace some of the strong declines seen in the previous week of trading. However, the light volume observed in the financial markets (including the currency market) was too small for the dollar to break any important price points, such as the 81.00 resistance area on the dollar index. So it would not be a surprise to see the dollar’s strength continue within the next few days, as it tries to retrace some more ground. As a note, TheLFB-Forex.com Trade Team notes that, some pairs may look a little overvalued in the short-term.

As the dollar declined and investors turned more bullish on the global economy over the last few weeks of trading, emerging currencies were able to post their first gains this year. This is a big relief for some emerging countries, since a significant percentage of the public and private debts are denominated in foreign currencies. According to TheLFB-Forex.com Trade Team analysis, some of these emerging currencies may offer important opportunities, due to their strong international positions and due to their huge swap (especially compared with the dollar).

The best three performing currencies of the last few months are the South African rand, Turkey’s lira and the Brazilian real. Each of these currencies pay a swap bigger than 9% against the dollar, which should attract some strong inflows of capital in the mid to long term. Additionally, a number of analysts, including TheLFB-Forex.com Trade Team, forecast that inflation will pick up later this year, something that should further increase the spread between the dollar and the emerging currencies.

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Who is next on the list?

Written by A Forex View From Afar on Thursday, May 21, 2009

The financial markets saw a short-lived shock today, when the rating agency S&P announced that it downgraded the outlook of the U.K. economy.

According to the S&P’s statement, the U.K.’s downgrade is a consequence of the huge public deficit, projected to reach a whopping 12% this year, a huge number by any standards. For example, the European Union triggers the excessive deficit procedure if it passes the 3% level, something that the U.K. deficit has broken for a while.

Over the last period, the three major rating agencies have taken a pro-active stance. A large numbers of banks are under review in Asia, while more than 30 Spanish banks will probably see their rating reduced in the following weeks. At the beginning of March, Moody’s put both Bank of America and Wells Fargo on the radar.

The big question now is who may be next on the rating agencies’ list? Because the forex market is influenced in a great way by a country’s downgrade rather than individual stocks, we shall examine the macroeconomic environment to see who may follow.

Following the template set by the U.K.’s downgrade, the first countries that appear under TheLFB-Forex.com’s radar are Italy and Greece. Of the two, Greece already saw its debt rating downgraded in January, so a second one is not likely real soon because of the short timeframe.

However, Italy may very well be the next victim for the rating agencies. Italy, along with Spain has been seen for a long period as the epicenter of the credit crisis in Europe. Spain has already had its debt downgraded (with Greece), so it would not be a surprise if Italy would be next.

To further strengthen the case, Italy is currently running a huge public deficit, reaching up to 105% of the GDP, one of the worst in the world. Currently, forecasts are that the government deficit will reach 5% this year. At the same time Italy’s trade balance, another strong indicator about the country’s finances is $52 billion, again one of the biggest in the world.

If TheLFB-Forex.com’s assumption holds true, and Italy does indeed have its debt rating downgraded, then the euro will see a strong wave of selling orders. Depending on the timing, the market could have an even stronger reaction that the one seen today.

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The S&P has downgraded the outlook on the U.K. economy

Written by A Forex View From Afar on Thursday, May 21, 2009

The U.K. financial markets came under a lot of stress this morning, after the S&P announced that it downgraded the U.K. economic outlook to negative from stable.

According to the S&P’s statement, the downgrade follows the poor state of the U.K.’s public finances. The government’s deficit is forecast to reach 100% of the GDP in the following year. To make matters worse, this year’s deficit will reach 175 billion pounds, nearly 12% of the economy. However, most analysts say that the actual number might be even bigger as the government tries to fight the aftermath of the credit crisis.

For now, the U.K. economy still retains its top-notch triple-A rating, but the S&P warns that the U.K’ high level of debt is incompatible with the current rating.

In recent weeks the rating agencies have started to act preemptively, something that has not happened over the last few years. Earlier this week Japan’s foreign-currency debt was downgraded by Moody’s, while the same rating agency put most of the Asia’s financial system on review for a possible downgrade. Furthermore, Moody’s is also preparing to downgrade 34 Spanish banks, including Santander, one of the largest banks in the world.

Most likely, more countries will see their debt rating downgraded in the coming period, as public deficits are set to increase substantially.

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TheLFB Wednesday Currency Report

Written by A Forex View From Afar on Wednesday, May 20, 2009

Oil hit another milestone, as did the cad, breaking and holding above the $61 per barrel benchmark.

Commodities, led by crude oil are gaining ground fast as investors are becoming even more bullish on the global economy. To further feed these feelings, a report showed today that crude oil inventories dropped over the last two weeks, suggesting that demand is picking up again. Most market participants believe that the economy will bottom in the current quarter, something that goes hand-in-hand with demand for crude oil (energy) picking up, as the economy is expanding.

TheLFB-Forex.com Trade Team notes that the strong gains in the crude oil market empowered the Canadian dollar during Wednesday’s trading session. The cad was able to break below the 1.1490 level, which acted as support for almost half of year.

The pound outperformed the entire market again on Thursday, something that seems to have become a trend lately. At the time this article was written, the pound had gained 220 pips, breaking above the 200-day simple moving average for the first time in almost a year. It appears as though the pound’s strength comes as institutional traders consider the pair undervalued, something that TheLFB-Forex.com Trade Team have stated in the last few weeks.

The Japanese yen again became a safe heaven, after a release showed that the Japanese economy contracted 4.0% in the first quarter, the most on record. Some argue that, Japan’s lost decade has now become decades, since real GDP has fallen back to the 2003 level, while nominal GDP has fallen to 1992 levels…

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Markets Preparing For Inflation?

Written by A Forex View From Afar on Wednesday, May 20, 2009

The financial market is going through some major changes, which are likely to influence the outcome of the economic activity over the coming periods.

Currently, most market participants expect the pace of contraction seen in the global economy to slow, while a small group of investors even anticipate a number of positive signs of growth in the upcoming quarter. With this being said, the financial markets expect demand to pick up again, led by emerging countries like China and Brazil whereas the developed world is to lag behind.

Another important change that the financial markets are experiencing these days is the fact that inflationary expectations are coming back to life, and very fast. The inflation breakeven level, or the spread between the 5-year TIPS and the similar maturity Treasury note, experienced a sudden shift in sentiment since March, when the equity rally first started.

TheLFB-Forex.com Trade Team notes that in March, the breakeven rate was standing at -0.20%, meaning that investors expected a rather prolonged period of disinflation and/or deflation. However, things have suddenly changed with the equity rally. Right now, the same breakeven spread sits at 0.60%, a sharp change in just a little more than two months.

The market’s inflation expectation is fueled by the strong expansionary policies ran by the Fed and the other central banks, and by the gains seen in the commodity markets. TheLFB-Forex.com Trade Team commented that oil rose nearly 80% from the low reached earlier this year, something that will soon be reflected in the monthly CPI numbers. Moreover, the quantitative easing policies, to expand the monetary base by intervening in the bond market, will also add to inflationary pressures.

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Monday’s Currency Report: The Euro and The GDP

Written by A Forex View From Afar on Monday, May 18, 2009

In a day in which the major currencies posted strong gains against the dollar, the euro barely moved.

The main drag on the euro seems to be the very poor GDP reports seen last week, which pointed out that the economy contracted much more than expected. To make matters worse, the German economy, which is seen as the regional benchmark in Europe, contracted the most on record, at 3.8%.

At the time this article was written, the pound, aussie and the cad each gained 150 pips, while the euro advanced only 50 pips. The dollar’s decline started during the European session and was extended during the U.S. trading hours, as the S&P futures recovered from the declines seen in the early part of the overnight session.

TheLFB-Forex.com Trade Team notes that the dollar index declined only 30 basis points reaching the 82.68 area. Even though the dollar lost ground against every possible currency, except for the Japanese yen, the index’ decline was tempered by the small gains posted by euro. The dollar index has a big exposure to the euro, and tracks every move made by the euro, be it small or big.

However, as long the global economic recovery story seems to continue, the outlook of the majors’ currencies remains to the upside. As investors become increasingly eager to take risk on their balance sheets, they will abandon the safety of the greenback for higher yields. TheLFB-Forex.com Trade Team argues that in the coming quarters, inflation will again be seen in the CPI numbers because of the present expansionary policies and this will further accelerate the dollar’s decline.

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The Euro And The Recent Green Shoots

Written by A Forex View From Afar on Wednesday, May 13, 2009

The tide may have turned for the euro, as the recent green shoots prompted currency traders to shed the dollar’s safety for the yield of more risky assets.

After more than six months of heavy selling, the single currency managed to retrace almost 38.2% of the strong downtrend that started with the credit crisis, in July 2008. TheLFB-Forex.com Trade Team notes that most of the upward pressure came during the last nine weeks of trading, mirroring the rally seen in the equity markets, as institutional traders tried to diversify their holdings to other classes of assets including denominations in foreign currencies.

However, these days, the euro might see even more support coming, as a number of traders build dollar-short portfolios, as the global economy recovers from what appears to be the worst recession since the 1930’s. A number of prominent financial ‘guru’s’ have come out in favor of the euro against the dollar.

These claims are in-line with what TheLFB-Forex.com Trade Team have said over the last few weeks. The dollar’s outlook is starting to appear grim once again, and once the global economy recovers, the major central banks will have to tackle inflation once again. To some this may appear as distant, but the market is already pricing in such a scenario.

Most likely, inflationist pressure will come from the crude oil market, where oil may surge once the global economy is on its way to recovery. This in turn will be reflected in the CPI, but unlike the summer of 2008, central banks are now targeting an expansionary policy, which should add some further points to the CPI data. One must think that right now some central banks are way off from their inflation forecasts made earlier this year. If this holds true, the euro may continue its rally as the ECB returns to its inflation targeting rhetoric.

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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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