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Forex Analysis

IMF Is Preparing For A Bad Period Ahead

Written by A Forex View From Afar on Friday, January 30, 2009

The International Monetary Fund, the organization that monitors the global financial markets, is planning to borrow $100 billion from Japan and another $150 billion through its first bond sale.

The IMF has played a key role in the latest financial crisis, some even saying than was necessary. During the Asian currency crisis, in 1997, the IMF was seen by many as being guilty for the magnitude of the crisis. The Asian Financial Crisis also remains in historical terms as the IMF Crisis.
However, it was the IMF that provided the funds needed for the Asian economies to recover. The same thing happened in the past year, when Iceland, together with other eastern European states, knocked at the fund’s gate for additional cash reserves.

Now that things appear to be going from bad to worse, the IMF tries to raise more cash, as it seems more countries might need to access money from the IMF. In the last few months, there were some intense speculations that Romania would need to borrow up to $6 billion to cover some of their current expenses. However, it looks like the Romanian government is going to take the needed money from the European Union, from a recently created fund to help the emerging economies. Adjusting from the Asian Crisis experience, the IMF imposes some strict fiscal and monetary rules that might not be approved (or accepted) by all governments.

The IMF hunt for cash and liquidity means that the fund is preparing for another wave of countries nearing bankruptcy. From time to time, a look over the emerging currencies might not be so bad, because they tend to drop very fast. In the last half year, the Hungarian forint, Romanian RON and the Polish Zloty lost at least 40%.

From Banking to Auto's

Written by A Forex View From Afar on Tuesday, January 27, 2009

After nationalizing most of the banking sector, the U.K. government has shifted its attention to the auto industry. The lifeline would be offered for producers developing low-emission vehicles and training programs for some workers.

However, almost none of the major U.K. car manufacturers target such a market, yet. U.K. cars are usually stylish cars, with big petrol engines like the Bentleys, Range Rovers and Jaguars, all of which burn lots of petrol, some more than others, such as the Bentley.

This decision shows the strong determination of the U.K. government to save the country for a prolonged recession. Estimates are now running as low as -2% for the 2009 GDP and this number will probably be revised lower, if the situation from the financial sector and the labor market continues to weaken.

The British authorities have already committed to shore up most of the financial sector, buying the three biggest U.K. banks. Just last week, the Royal Bank of Scotland had gave up a 70% stake to the U.K. government. In the long run, the recent actions taken might help the U.K. economy recover faster than expected, or at least show some signs of vigor ahead of the other major economies, which would be reflected in the pound’s strength. However, at this point these are just speculations…

The Bubble Years And The Bubble Economy

Written by A Forex View From Afar on Tuesday, January 27, 2009

Mr. Bernanke suggested in the last period, that the Fed might start buying longer-term debt. Tomorrow, the Fed may discuss this option, and possibly implement it. This means the Fed will further enlarge its role in the market, something that may not be a good thing.

In normal markets, the Fed acts in the short-term debt market with a maturity up to a year (also called Treasury bills). This happens because the Fed needs to be in control of the overnight lending rate, or the rate at which the primary banks trade funds. By buying and selling T-bills, the Fed has control of the rate most of the time, controlling the whole economy and the business cycle throughout.

However, in these unusual days, the Fed has reached the limits of conventional monetary policy. The short-term interest rates are as low as they can get, leaving the Fed with no room to move. In this environment, the Fed is expected to start buying longer-term debt, up to 10-years.

The immediate implications of this move will be that the yields on the longer-term bonds will move lower, as the price is driven up. This should steadily promote markets taking more risk, as the yields drop considerably. The search for revenue/profit will overtake most of the fear in the market, but this will happen slowly. In addition, some say the Treasuries already show bubble-like behavior.

As the economy recovers, the Fed will eventually have to lift rates again. If treasuries are really on a bubble, as some suggest, a possible rate hike from the Fed would be catastrophic for the economy, sending the yields higher in a snowball effect, obstructing the financial system once again. If the Fed will really go into the market and buy longer-term bonds, then it should develop an astonishing exit strategy from the ultra-low rates, to avoid another bubble.

One should think that the world economy has reached its current condition by facing two strong bubbles in just a few years. First, it was the tech-bubble and then it was the housing bubble. Now, we could be heading towards a Treasury-bubble.

BoJ Interest Rate Analysis

Written by A Forex View From Afar on Thursday, January 22, 2009

In the early hours of Thursday, the BoJ released its 2009 and 2010 updated forecast in the monetary policy statement that followed the interest rate decision.

The members of the policy board estimated that the economy will contract by 2.0% in 2009, even though the initial forecast, dating back to October of last year indicated a 0.6% expansion. The 2010 forecast was also revised lower, from 0.1% in October to -1.8% now. However, the policy board expects the GDP to pick up again in 2010, having the economy expand by 1.5%.

The bank has also shifted lower its inflationary view. The bank estimates the CPI read will show deflation in 2009. The bank expects the CPI to come down to -1.1% in 2009, from the estimated number of 0% in October. In addition, the bank also expects the CPI to remain under the 0% benchmark in 2010.

The BoJ issued a very downbeat forecast, which shows that the Japanese economy will again face deflation, something that the bank has tried to fight for years and never succeeded. In all probability, the central bank will try again to implement a quantitative easing approach, buying a wide array of debt instruments to bring yields down.

Most likely, the BoJ will focus on corporate debt to bring yields down, making it easy for the corporate environment to borrow and access liquidity. At the same time, these measures will drastically expand the monetary base, adding inflationary pressures (even though this has never succeeded in practice by the bank).

Furthermore, in order to shift to the upside the inflationary expectations, the bank will be temped to intervene in the currency market, as it has done before. In the past few weeks, top Japanese officials complained about the yen’s strength, and said an intervention is very likely. This is no surprise, since yesterday the yen reached a 13-year low against the dollar, choking exports.

Usually, central banks disappoint very rarely, and are committed to what they say and preach. In the medium to long term, expect strong yen rallies on positive U.S. future numbers, and some unusual resilience to break lower, on negative equity markets.

BOE Meeting Minutes

Written by A Forex View From Afar on Wednesday, January 21, 2009

Today, the minutes from the BoE meeting held on 7-8 January were released. The report showed that the vote was not unanimous, with eight votes for a 50 basis point rate cut, and one for a larger, 100 basis point rate cut.

Apart from this, the January meeting brought something new. It was the first time in the current easing cycle that the bank discussed to leave the interest rate unchanged.

Until now, the bank’s assessment was that the inflation read is in big danger of “undershooting” the bank’s target, now it seems some parts of this risk have vanished, helped by the on-going rate cuts and a huge depreciation in the pound’s value. The central bank’s view is now that the risk is somewhat balanced.

In the last few lines of the minutes, the bank inserted a vital clue that helps anchor future expectations. The minutes show that the bank has acted preemptively until now and, in case the economic outlook does not shift any further to the downside, it would be wrong to view any rate cuts forthcoming.

However, the Committee voted for a 50 basis points rate cut, in order not to damage the market’s confidence in the financial system and in the real economy. A detached vote came from Mr. Blanchflower who called for a 100 basis point rate cut. As a note, most market participants are used to Mr. Blanchflower’s bearish view, so this vote can be easily ignored.

The meeting’s minutes came at a good moment for the pound. The pair shed 1/3 of its value in the last year, falling more than during the “Black Wednesday” event, when the U.K. was forced to abandon the European Exchange Rate Mechanism.

An additional look on the daily chart shows that since the pound has traded freely, after the 1992 occurrence, it never went any lower than the 1.40 area. This suggests that the pound may see, in the short-term at least, some upward pressure, bouncing off a very strong support area, also sustained by a fundamental shift.

European Commission Updated Projections

Written by A Forex View From Afar on Monday, January 19, 2009

The European Commission, the institute responsible for the European legislation and its implementation, today cut the Euro-area’s growth forecast to -1.9% for 2009.

The European Commission’s forecast is the grimmest report from a public institution. The previous forecast from the same institute, issued just two months ago, in November, said the economy would expand by 0.1% in 2009. The current estimates released by the ECB, known as the staff projections, points to a 0.5% contraction in the Euro-area in 2009. However, as Mr. Trichet said during last week’s press conference the staff projections are going to be drastically lowered in March.

The European Commission also said that the Q4 GDP growth is expected to be as low as -1.5%. Even though this is a very negative and worrying number, it looks like it is surprisingly close to the other three major economies’ forecasts. The Q4 GDP numbers for Japan, U.S. and U.K. are expected to range from -1.5% to -2.0%, the worst in the last few decades in some cases.

Furthermore, the ECB’s Governing Council member George Provopoulos, said in a interview that it is off the mark to expect the bank to cut interest rates to 1%, or below. In the last few weeks, the ECB members have repeatedly said that the central bank would try, at all costs, to avoid reducing the overnight rate too much, something that would create a liquidity trap. However, George Provopoulos, who is also the Chairman of the Bank of Greece, did not exclude further rate cuts in the future, and neither did Mr. Trichet in his interest rate speech, last week. It should also be noted that the ECB was focusing on inflation in July, and only a few weeks later the bank conducted its first rate cut.

Lower Debt Ratings Seen In Europe

Written by A Forex View From Afar on Sunday, January 18, 2009

The economic situation in many developed countries is starting to become tougher and tougher, requiring the government to raise cash from private investors to funds its expenses. However, raising debt together with today’s uncertainty, regarding the economic future and prospects, makes some ratings companies cut the debt rating lower.

Greece had its sovereign debt (government bond) rate cut down by S&P today, one grade lower, to A-, but with a stable outlook. Currently, Greece holds the lowest rating from the Euro-area according to the S&P’s rating system. Using the Fitch’s rating system, Greece holds an A investment grade, also with a stable outlook. According to the Fitch’s grades, only Cyprus has a lower debt rating than Greece.

The debt ratting system is very useful for investors, helping them gauge the default risk of a bond issuer. As such, a lower yield means that Greece would have to pay more for its debt. Among other things, the immediate implication of this decision is that the yield spread between the members countries of the Euro-area will further increase. Some say, this may create tensions in the Euro-area, as some countries would have easier and cheaper access to debt than others.

Also in Europe, Spain and Portugal face a similar situation. Both countries are threatened with downgrades from the main rating agencies. Spain faces a severe crisis currently, generated by a large housing bubble. In the last few months, the unemployment rate rose from 9% to 13% in Spain, currently the highest rate from the Euro-area.

Usually, a lower debt rating should affect the euro, since this means investors will be less tempted to send money into the Euro-area. Nevertheless, it also should be noted that, the same agencies initially rate the U.S. mortgage debt with AAA, the highest a bond can get. That AAA debt is now sitting at the heart of the credit crunch, much of it being seen as toxic debt.

Euro-area debt rating

Industrial Production Awaiting A Synchronized Bottom

Written by A Forex View From Afar on Sunday, January 18, 2009

According to the latest reports coming out of the major economies, industrial production took a deep plunge recently. As observed in the attached chart, Japan seems to be the most affected until now, while the U.K. production seems to be in the worst shape.

The slump seen in the industrial production has multiple effects in the economy. Firstly, and mostly, it denotes that businesses have cut back on spending, something not good for the economy, especially at this time. Secondly, many producers will start to cut costs as much as they can. More often than not, the work labor represents the biggest fixed expenditure for most businesses because it does not matter if the employees work or not, but they would still need to get a (minimal) wage.

The strong declines in production output were very well seen in the PMI releases, which currently are at record low levels for the four economies. To some extent the downtrend observed in exports and imports also point to declining production since it denotes the demand side is shrinking.

Since 2002 U.K. had the weakest growth as a result from not being able to add any new value to the economy, while Japan had the strongest growth in industrial production, approximately 25%. Japan also had the biggest contraction in the industrial output during the 2001 recession and during the current one. Only in the last year, Japanese industrial production dropped 15%. Industrial production in the Euro-area and in the U.S. managed to grow side by side since 2002, both recording an approximate 15% expansion in output.

Industrial Production Awaiting A Synchronized Bottom

In addition, the industrial production chart shows one very important feature. During the 2001 recession, industrial production bottomed at the same time, in three out of the four economies: in Euro-area, U.S. and Japan. This is very important to pay attention to because it likely indicates that it will most happen again whenever industrial activity finds a bottom again.

ECB Press Conference Bullet Points

Written by A Forex View From Afar on Friday, January 16, 2009

• The Governing Council decided to reduce the interest rate on the main refinancing operations of the Euro system by a further 50 basis points
• Since September 2008 the financial market turmoil has intensified and broadened
• Tensions have increasingly spilled over from the financial sector into the real economy
• Foreign demand for euro area exports has declined, and euro area domestic activity has contracted in the face of weaker demand prospects and tighter financing conditions
• The survey data and monthly indicators for November and December clearly point to a further weakening of economic activity around the turn of the year
• The Governing Council continues to see global economic weakness and very sluggish domestic demand persisting in the coming quarters as the impact of the financial tensions on activity continues
• Outlook for the economy remains surrounded by an exceptionally high degree of uncertainty
• Overall, risks to economic growth remain clearly on the downside
• Annual HICP inflation has declined substantially since the middle of 2008
• The significant decline in headline inflation in the second half of 2008 reflects mainly the sharp falls in global commodity prices over the past few months.
• Lower commodity prices and weakening demand confirm that inflationary pressures in the euro area are diminishing
• Headline annual inflation rates are projected to decline further in the coming months, possibly reaching very low levels at mid-year. Inflation rates are expected to increase again in the second half of the year
• Risks to price stability over the medium term are broadly balanced
• Unexpected further declines in commodity prices or a stronger than expected slowdown in the economy could put downward pressure on inflation
• The latest evidence confirms a moderating rate of monetary expansion in the euro area. Monetary trends therefore support the view that inflationary pressures and risks are diminishing.
• The broad aggregate M3 and, in particular, the components of M3 that are most closely related to the ongoing financial tensions, are stable
• The tightening of financing conditions resulting from the intensification of the financial tensions has contributed to a slowdown in the flow of monetary financial institution loans to the non-financial private sector in recent months
• The Governing Council recalls its operational decision, taken on 18 December 2008, to widen again the corridor formed by the rates on the Euro-system’s standing facilities as of 21 January 2009
• Looking forward, there is an expectation that inflation rates in the euro area will be in line with price stability
• Governing Council welcomes the European Council’s reconfirmation of its full commitment to sustainable public finances

Today’s conference press was probably the most bearish one in the ECB’s short-history. Mr. Trichet acknowledged that inflation pressures had further diminished in the last few moths, and now the Governing Council expects some very low CPI rates in the first part of the year. However, according to the bank’s assessment, this trend should reverse by the middle of 2009. In the Question and Answers session, Mr. Trichet said the Euro-area would not experience deflation, but only very low inflation rates.

The outlook for the economic activity clearly lies on the downside now. Both foreign and internal demands are very weak, affecting the Euro-area’s export market, and thus its trade balance. This trend is seen worldwide, and not only in Europe.
The most important key-points were in the Q&A session, and both were reflected in the market’s reaction. First, Mr. Trichet put a lot of empathy on the March ECB’s meeting, saying that the one in February is not so important, because of the short-time span of only 3 weeks. Shortly after, the euro started to move higher, until later, when Mr. Trichet said that the current rate of 2.00% is definitely not the limit, even though it is a very low rate. The euro started to tumble after this remark.

Also during the Q&A session, the ECB Chairman said that the transmission mechanism between the bank’s decision and the real economy throughout the 3M Libor rate, declined significantly in the near-term. In addition, Mr. Trichet has said that the ECB staff projections are going to be lowered at the March meeting, adapting to the current economic conditions.

Preparing for the ECB

Written by A Forex View From Afar on Wednesday, January 14, 2009

On Thursday, the financial markets await the ECB’s reply to the credit crunch. Currently, most estimates run for a 50 basis points rate cut, down to 2.00%.

Earlier this month, the financial markets speculated that, the ECB would vote for a hold decision. This happened after Mr. Trichet said in a public speech that the recent rate cuts would still need time to be felt in the real economy. Usually, monetary policy needs between 6-18 months until they are fully passed on to the real economy.

However, some members of the Governing Council hinted that the bank would cut in January, but it is essentially to take actions in sectors other than monetary policy, where there is more room for maneuvers, especially fiscal policy. The comments of the Governing Council over the last few months indicate that the bank is reluctant to reduce the overnight rates too low, because of the broad implications in the financial markets, particularly in the inter-banking system. This was also underlined by Mr. Trichet by saying that the Fed and the ECB face different shocks, which require different solutions.

Mr. Trichet might hint during the press conference that the ECB will wait for additional data before taking a decision. If so, the euro will certainly rise. However, if there are no clear indications what the ECB might do next, and the Governing Council puts empathy on the risk to downside, the euro will take another strong hit. Using the Bundesbank model, the ECB is committed to prepare the market for its future actions (anchor expectations), and thus it might give important hints about future monetary policy actions..

This tactic was used a number of times during Mr. Trichet press conferences. This can be seen in the strong reactions the euro had to some conferences, while at others the euro simply traded in a tight channel, as in the attached chart. This was mostly seen in the last few months, when Mr. Trichet downgraded its assessment for the Euro-area economy.

ECB Interest Rate and the currency reaction

A bleeding Q4

Written by A Forex View From Afar on Monday, January 12, 2009

The latest estimates for the three major economies, U.S., European and U.K. points to strong contractions in the fourth quarter of 2008.

Estimates are a 1.5% contraction in each of the three economies, in nominal terms, or 0.6% annualized. This would be the strongest contraction seen in the last few decades. In addition, both Q1 and Q2 of 2009 are seen negative next year, making this recession much longer than previous ones.

The very poor GDP forecasts should not be any surprise, since almost every release is at a record low, or very near. Manufacturing and industrial production, the two big components of the real economy contracted at the fastest speed on record in the last months, according to the PMI release.

The labor markets are also in a horrible state. The unemployment rate in the U.S. is now 7.2%, but forecasts go as high as 8.5%, even with President Elect Obama’s stimulus plan. The U.K.’s labor market trails very closely, having the rate rise by almost 1% since the summer of 2008. In Europe, the jobless rate rose steadily by 0.6% in the last year, reversing a downward trend that lasted more than 2 years.

With such poor forecasts ahead, it is wise to expect risk-aversion coming back into the market from time to time. The latest case was the NFP release, when the dollar strengthened more than 300 pips against the euro, after a very poor release. However, this is good news for currency traders, because we can enjoy strong (and profitable) trends. Risk-aversion can be a very good thing, as long as you are on the right side of the trade.

Another Bank Has Failed

Written by A Forex View From Afar on Friday, January 09, 2009

Commerzbank is the latest bank that required government intervention to shore up its balance sheets.

The German government injected 18 billion euros, in two trenches, to save the bank, gaining 25 percent ownership plus shares. This means that under the German law, the bank has been nationalized. Commerzbank required 10 billion euros this week, after two months earlier the bank received another 8.2 billion euro.

Another bank failure should not be a surprise, however, because of the timing, it raises some eyebrows. From every point of view, financial markets have stabilized in the last few months, and even started to show some signs of improvements. Therefore how can the bank explain the sudden need for another 10 billion euros, when the bank’s capitalization is roughly 4 billion euros? Furthermore, central banks from around the world accept every possible asset the bank could produce at every hour of the day. The second question that the “bankruptcy” raises is how come the bank did not use any of the lending programs made special for such cases?

Maybe this was only one particular case, but since a number of banks said write-downs might resume in the first quarter, chances are we are going to see some other banks failing too. In such a case, it will be interesting to see the market’s reaction, since bonds, the usual safe-assets, are already at ultra-low levels.

How much can the CPI fall?

Written by A Forex View From Afar on Thursday, January 08, 2009

The Euro-area CPI data has taken a deep plunge recently. During the summer of 2008, the CPI reached record highs, but has decline at a very fast pace during the past few months.

The Euro-area CPI dropped from a record 4.0% in June and July, to December’s unconfirmed number of 1.6%. This is a huge drop, but the question now is ‘how low can it actually drop from now on?

Theoretically, there is no limit to how much the CPI can fall, since it can go all the way below the zero benchmark. However, there is a practical limit to how low the inflationary read can drop.

In the last period, the CPI was dragged lower by huge declines in the crude oil market. At the same time, crude oil was to blame for the huge increases seen in the CPI during the early part of 2008.

Up to now, the month of January has brought something new in the crude oil market. The commodity managed to find a bottom, and actually posted some small gains. This means though, the CPI read might have found a bottom too, and the huge declines might stop, at least if oil does not move any lower.

As seen in the attached chart, crude oil (priced in euros) and the Euro-area CPI read moved hand in hand over the last five years. The correlation between the two, oil and Euro-area CPI, over this period is very high, slightly above 80%. Because the way the CPI is built, to absorb asset shocks over a longer period, it has the tendency to follow the oil market with a small lag.


Assuming that the oil market has hit the bottom, as most say it has, we can deduce the CPI read will not go any lower in Europe or in the other major economies. However, because of the CPI’s lag, we might see it coming down for a while, but soon the read will hit a bottom too, hopefully skipping any negative read.

If this holds true, central banks will not have the same initiative to cut interest rates, as they have up to this point. In Europe, the CPI read was the main reason why the central banks have cut so much, being in danger of “undershooting” the target. Maybe, no other bank will join the Fed and the BoJ in their quantitative easing path.

The German Stimulus Plan

Written by A Forex View From Afar on Monday, January 05, 2009

The German government, led by Angela Merkel, is trying to propose a new stimulus plan in Germany meant to help the economy weather the financial crisis.

The new stimulus plan is projected to reach 50 billion Euros, or nearly $70 billion, over a two year time-span. Previously, the German government proposed a 12 billion euro, $17 billion, stimulus plan, over the same two year period, but was halted due to its small size. Even though there is not a clear destination for the money available throughout the plan, analysts estimate the biggest part of the funds would be used on public spending. In addition, some say the government might also reduce the tax level for low level incomes, to help internal demand pick up faster. It should be noted that, until now, Germany has opposed a common Euro-zone plan to fight the credit crunch.

From the available information, the German stimulus plan is significantly smaller than the one the U.S. government is planning to implement. The direct ratio is about 1:10 in favor for the U.S., since sources point out that Mr. Obama's proposed plan might reach as much as $700 billion. As a percentage of GDP, the U.S. plan is about 5%, while the German government’s plan represents nearly 2.1%.

Currently, the stimulus plan has had no direct implication on the currency market. However, as time goes by, this measure, correctly implemented, would help the German economy recover faster from the credit crunch. As such, it could have a direct influence over the euro's valuation, pulling it higher.

TheLFB Team & The View From Afar Blog

© 2008 A Forex View From a far Trading Blog

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Fundies and Trading
There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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