A Forex View From Afar

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Forex Analysis

The Story Of The First Quarter GDP

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

The GDP report revealed a story of two tales, one in which consumers are the main character and has a happy ending and another where businesses came to the spotlight, but does not have the same happy ending.

The quarterly data showed a surprising 2.2% up-tick in consumer spending, something that indicates that consumer expenditures, which account for two thirds of the economy, remain resilient. At the same time, inventories dropped at a record $103.7 billion annual rate last quarter, which had a major negative influence over the nominal GDP numbers.

“If we take into account that consumer spending rose in the first quarter despite the tight credit conditions, and that business’ shed almost all the available stocks, we may see some positive surprises in the second quarter” TheLFB-Forex.com Trade Team said.

However, despite all the recent positive news, the economy kept contracting at a very strong pace making the current recession the worst in the last half of century. The business side of the economy shows a rather weaker picture, the GDP report points out.

“Business fixed investments plunged 37.8% in the first quarter, the most on record, while nonresidential and residential construction saw a double-digit plunge. Moreover, companies cut expenses on equipment, software and construction projects at a 38% annualized rate,” TheLFB-Forex.com Trade Team said.

“These numbers show the weakness of the corporate environment, which is struggling to survive,” TheLFB-Forex.com Trade Team noted. “Most likely, corporate bankruptcies are heading toward a record this year,” they said.

The GDP numbers are still weak, and do not show a substantial improvement from the previous quarter. However, the financial markets focused mainly on the unexpected rise in consumer spending. It will be interesting to see how spending will evolve in the coming period, giving that unemployment is still rising at a very fast rate, credit markets are still tight and most importantly, the U.S. savings rate is at very low levels.

The Challenges Of The PPIP Program

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

The Treasury might have scored a big victory recently, since the Public-Private Investment Program, or PPIP, drew bids from more than 100 fund managers. The PPIP program plans to attract private investors that are able to raise more than $500 million in capital to bid for the “illiquid” assets.

“Most likely, some of these potential buyers will be rejected by the Treasury’s term and conditions. However, the remainder would still be able to create a sizable market for the distressed assets,” TheLFB-Forex.com Trade Team said. “By having such a big number of possible bidders, the Treasury might come up with a more realistic price for the toxic assets, one that would also encourage the banks to sell them,” they added.

“The timing may be very good, if all the recent positive news continues in the coming period. If the fund managers perceive that the economy is recovering, they may place some very high bids for the banks’ assets, as theoretically their value will recover with the economy,” TheLFB-Forex.com Trade Team said. “The only problem would be, in this case, to convince banks to let their assets go, and write-down additional losses.”

On the other hand, the main condition for this to happen is that investors must think the economy is bottoming at the time the toxic-assets auction process starts. If not, bids may be lacking, especially at the first auctions, something that might have a negative impact over the entire program.

Additional problems could come from the fact that the recent changes in the market-to-market accounting rules turned many (if not all) of these toxic assets into winners, since now banks can value illiquid assets using their own models. The question that rises now is why would a bank actually want to write-down a loss (the difference between the book value of the asset and the auction’s price) and more specifically, sell it when the bank can be certain that at some point in time the asset will recover its original value?

Mr. Trichet’s Comments And The Euro

Written by A Forex View From Afar on Wednesday, April 29, 2009

The currency market continued to march inline with the S&P futures today, as has been the case lately. S&P futures, together with the overnight spot equity markets can be a very good gauge of the overall risk-aversion phase, which tends to have a strong influence in the currency market.

However, the euro had a slightly different pattern during the overnight session. The main reason seems to be recent comments made by Mr. Trichet, which declared that lowering interest rates is not always the best path to fight a global recession.

“In other words, Mr. Trichet re-affirms what the ECB members had been saying lately, that the key interest rate may not be going lower than 1%” TheLFB-Forex.com Trade Team said. “This, in turn, had a strong effect in the currency market, since the spread between the Fed and the ECB is likely to remain at the current level,” they added.

Moreover, Mr. Trichet showed his support for the ECB actions, saying again that different situations require different actions. In the past meetings, the Chairman of the ECB has stressed empathy for the inter-banking markets, which are lower in the U.S. on short-term maturities, but on the long term, yields are lower in the Euro-area.

“It appears as though it was Mr. Trichet’s comments, in part, that helped the euro be the best performing currency of the day, after on Monday the single currency was sold heavily,” TheLFB-Forex.com Trade Team said. “On positive equity markets, the euro might advance in the coming days, as the Fed appears ready to print additional dollars, while the ECB looks resilient,” they added.

The Link Between “Positive Economic News” And Consumers’ Wallets

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

Some analysts are beginning to argue that the equity markets have bottomed, and are currently in a bull-run that will continue in the coming periods, while the economy has reached a vital turning point. The main arguments for these claims are recent reports, which, overall, have beaten analysts’ expectations. However, an overview of the vast majority of these reports will only suggest that the economy has merely bounced from its low, and the overall economic data is still not very encouraging.

Friday gave us another example, when the European equity markets and the euro rallied after the German Ifo Business Climate rose 1.5 points from a 26-year low.” It depends on what the market is focusing on, either, that the index is at a record low, or that the index rose 1.5 points,” TheLFB-Forex.com Trade Team said.

However, these so-called “positive reports” come at an expensive cost. In order to see the pace of economic contraction slow (as is being suggested in some circles), the government will run a huge deficit over the medium to long term. “This means that the government will cut costs as much as it can once the economy is in a recovery phase or in some cases even before, and will probably raise taxes to raise additional cash,” TheLFB-Forex.com said.

"According to government projections public deficits are likely to stay at very high levels for years to come from now, something that will be reflected in consumers’ wallets, and their lack of action in pulling out cash. The administration is looking at a 12% budget deficit, something that will require more promisory notes to be printed, bound, and issued, with the likely outcome being that they are then bought back at a huge forward cost by the Federal Reserve".

"The Debt/GDP ratio in the U.S. is also likely to weigh on market sentiment, but so long as equities are held in their current range the Usd will continue to get bought. A break higher in equities however will send the dollar lower, the positive side of economic stories will be all that are heard, and consumer wallet action will increase. A short equity market break will lead to a continuation of the last twelve months of scambling to find fair value, both on the dollar and on consumer wallet action" the Trade Team said.

Ahead Of The IMF Meeting

Written by A Forex View From Afar on Saturday, April 25, 2009

The IMF meeting is fast approaching and it will be very interesting to see if the 185 member countries will actually expand the IMF’s resources to provide credit, as it has been promised in the past G7 and G20 meetings.

The issue is very important, since the latest reports of the institute compares today’s emerging economies with the ones seen during the 80’s and the late 90’s when Latin America defaulted, and Eastern Asia saw its own currency crisis (which by the way was doubled as the “IMF crisis”).

“Most likely, the report is referring mainly to Eastern Europe, to which most European countries have a sizable exposure. Countries like Austria, Italy, Belgium, Sweden, and to some extent France and Germany will experience the full consequences of a crisis in Eastern Europe,” TheLFB-Forex.com Trade Team notes.

“Add to that Latvia and Lithuania just saw their debt rating downgraded by Moody’s, and both countries have a negative outlook. If Latvian debt gets downgraded again, it will reach speculative or junk grade, meaning that the country has a limited chance of issuing bonds to fund its deficit,” TheLFB-Forex.com Trade Team added.

The IMF should intervene in such cases, and has done up to now for Latvia and the rest of the Eastern European countries. However, the IMF is running out of funds, something that may compromise the institute’s future plans.

U.K. Deficit Continues To Expand

Written by A Forex View From Afar on Wednesday, April 22, 2009

The Chancellor of the Exchequer, Alistair Darling, forecast a 3.5% contraction in 2009, making it the biggest deficit since World War II. The current projection, of 3.5% is twice as big as the November estimates when the global economy entered into a strong contraction phase.

Currently, the Treasury projects that the country will run a 146 billion pound deficit this year, the biggest on record. This will put upside pressure on the gilt’s yields, meaning that investors will demand more money to fund the U.K. deficit. However, the Bank of England has already acted to counter this, by having direct (and public) interventions in the gilt markets, the U.K’s government instrument to borrow from the financial markets.

For now, the U.K. economy outlook is lying to the downside. Earlier in the day, a report showed that the labor market hit the lowest level in a decade, as the unemployment rate hit a 12-year high. Currently, the OECD estimates that the U.K. economy will contract 4% in 2009, slightly less than the U.S. and the Euro-area

During the Chancellor’s press conference, the pound plunged against the other major currencies. The pound lost 180 pips in less than 30 mins against the dollar, and 100 pips against the euro in a similar period.

The IMF And The Financial Sector

Written by A Forex View From Afar on Wednesday, April 22, 2009

The International Monetary Fund (IMF) recently released a report saying that losses from the credit crisis might reach $4.1 trillion by the end of 2010. Losses stemming from U.S. real estate will reach $2.7 trillion, up from the previously forecast $2.2 trillion in January.

“From these huge sums, the IMF estimates that banks will support much of the losses, around $2.5 trillion,” TheLFB-Forex.com Trade Team notes. “Pension and hedge funds will probably be forced to write-down the rest of the sum”.

“Since the beginning of the credit crisis, the IMF has constantly increased the estimated losses from the financial sector. If the situation in the financial markets continues to deteriorate, mostly due to the situation in the credit markets, the estimated losses will again revised higher in the next Global Financial Stability Report,” TheLFB-Forex.com Trade Team said. “It’s also worth nothing that the IMF said the crisis had reached both households and corporations, something new from the previous report”

In the mean time, markets are starting to wonder how much of the recently reported bank earnings have been influenced by the new accounting rules, which allowed banks to value illiquid assets at their own valuation. For example, Goldman Sachs managed to shed December from the earnings report, avoiding a $1.3 pre-tax loss, while Bank of America’s earnings report was lifted by $2.2 billion by Merrill Lynch. Some estimate that almost half of the reported earnings were influenced by one-time events, such as new accounting rules. No wonder the bank’s default swaps had a small rally over the last few days, taking into account the real situation of the sector.

The Slow Recovery Of The U.K. Economy

Written by A Forex View From Afar on Monday, April 20, 2009

Even though it seems that the pace of the global recession is starting to slow down, the U.K. economy might continue to struggle during the upcoming periods.

The main reason of worry is that the U.K. economy cannot afford to spend anymore, as the outlook on public finance is getting incredibly grim. During the last weekend, the Treasury said that the government is building provisions to cover the losses stemmed by the financials’ rescue package. Up to now, Britain is the first to admit that the taxpayers will support to banking system losses, even though more countries decided to invest funds in the banking system.

Treasury officials avoided providing an exact value for the government’s provisions, but it is speculated that it will be as big 60 billion pounds, or $87 billion. By these numbers, the U.K. deficit is being forecast to reach 11%, the biggest deficit on record.

“Such a big deficit puts immense pressure on public finance,” TheLFB-Forex.com Trade Team notes. “Most likely, the central bank will have to intervene somewhere in the future and buy gilts, something that will probably make inflation run out of control in the medium to long term.” they added.

“Additional pressure will come from the fact that the government now has its hands tied, since it cannot spend its way out of the recession as has been tried already. If things get worse in the real economy, the U.K. economy is likely to sink to very deep levels.” TheLFB-Forex.com Trade Team said. “We have to note that almost every major recession has had a period when things appeared to improve, but then suddenly the downturn intensified.”

Returning to the currency market, the pound plunged 250 pips today, being one of the worst performers of the day together with the aussie. Moreover, the pound broke below the trend-line that held, until now, the upside trend. If institutional traders shift their focus to the poor state of the U.K.’s public finance, the pound might lose ground rapidly compared with the other major currencies.

The Chinese GDP And The Aussie

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

During Thursday’s trading session, the aussie was outperformed by every other major currency. So far, the main reason seems to be that demand for raw materials is likely to fall as the Chinese economy grew at a slower speed than expected.

“Commodities make up the biggest percentage of the Australian export market. As such, the aussie is very vulnerable to any change in the raw materials demand outlook.” TheLFB-Forex.com Trade Team members said. “Raw materials exports make up 35% of the balance of payments. Additionally, out of the top 10 merchandises exported by Australia, seven are raw commodities.” TheLFB-Forex.com Trade Team added

To further strengthen the case, China is the largest export market for Australian exports, so it is easy to understand why the weaker than expected Chinese Q1 GDP had the strongest effect over the Australian currency.

The Australian dollar lost 80 pips against the greenback, after managing to break above the Wednesday’s high during Thursday’s Asian session, while it lost 85 pips against the yen. However, the aussie’s positive days are far from over. The currency will rally when the commodity market actually starts moving higher.

ECB Starts Expectations Anchoring Campaign

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

It looks like the Euro-area is in an “expectations anchoring” campaign about their future monetary policy. Today, council member Axel Weber said that the he does not see the key interest rate below the 1% benchmark.

“Being the Chairman of the biggest European central bank, Axel Weber certainly has a lot of influence in the voting council,” TheLFB-Forex.com Trade Team had said. “Additionally, the ECB was built on the Bundesbank legacy, something that gives even greater influence to Weber,” they added.

Anchoring expectations was a technique used very often by the Bundesbank, and now the ECB is relaying on the same instruments. As such, Weber’s comments can be relied upon, especially when other voting members have said in the last few weeks that the ECB is not likely to go below 1%.

The problem the ECB is facing right now is that the bank’s deposit rate is at too low a level, something that may hurt the inter-banking market. Banks that have excessive overnight cash have two primary options either lend it to another bank or deposit it at the ECB’s facilities. Weber sees that if the key interest rate falls below the 1% benchmark, banks will refuse to lend the excessive reserves simply because the transaction costs will be too high.

TheLFB-Forex.com Trade Team notes that if Mr. Trichet announces that the central bank will not cut interest rates to less than 1%, the single-currency might receive a boost. Currently, the ECB is the only major bank that appears reluctant to reduce the interest rate below the 1% threshold.

European Leveraged Buyout Defaults May hit 15% In 2009

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

The financial markets were forced to absorb news that came from the rating agencies today. Even though the stock markets look as though they may have found a bottom, temporary or not, the credit market still has some downside risks.

Standard & Poor’s (S&P) announced that leveraged buyout defaults might reach 15% in Europe this year. Leveraged buyouts, or LBO’s, are complex financial instruments where a company borrows money (the lever) to acquire a rival company. The assets of the acquired company are used as collateral for the loan. According to S&P’s projections, approximately 100 companies might default this year, from which most are companies that issued LBOs.

TheLFB-Forex.com Trade Team notes that the forecasted 15% default rate is a record high, beating the 2001 downturn. “Credit markets are still suffering from the current crisis, and this is reflected in the number of companies expected to default later this year.” TheLFB-Forex.com Trade Team said. “To make matters worse, governments are issuing huge amounts of debt to fund their stimulus packages, something that increases the spread between the corporate and government credit costs”

“According to the latest data coming from the corporate debt market, the overall quality dropped to the lowest level seen over the last few decades,” TheLFB-Forex.com Trade Team added. “The number of companies that saw their rating downgraded reached 13.8% in 2009, while only 0.5% companies saw their debt upgraded. Taking into account the rising wave of unemployment, and the declines experienced in consumer spending, it’s not hard to see this trend continuing over the next quarter.

Oil Prices Drop After Forecast Revision

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

Crude oil declined $1.50 today, or 2.90% as the International Energy Agency reduced its demand forecasts for the current year, once again.

The agency reports that global demand is likely to fall this year by 2.4 million barrels to 84 million barrels per day, citing the highest inventories over the last 16-years. Much of the downward projections came after first quarter GDP data was worse than initially forecasted. TheLFB-Forex.com Trade Team notes that the pace of oil output reduction is close to the pace seen in the 1980’s.

“The high level of inventories reflects the poor state of the global economy. Currently, crude oil is one of the main sources for energy. A low level of consumption shows that businesses are reducing production, thus add no new value to the economy,” TheLFB-Forex.com Trade Team said. “The forecast downgrade had a direct effect on the currency market, halting the Canadian dollar’s strength to some extent,” they added.

“In a day when the dollar was sold across the board, the Canadian dollar posted just some modest gains. The cad declined 40 pips today but was outperformed by every other major pair. However, oil’s decline did not provide a base for the dollar. Currently, the fundamentals of the Treasury market are supporting the dollar’s decline” TheLFB-Forex.com Trade Team commented.

It looks like the Canadian dollar will have to choose a direction to trade without a strong commodity backing it. For now, the cad is trading barely above the 1.22 support level.

How Low Will The ECB Go?

Written by A Forex View From Afar on Sunday, April 12, 2009

After cutting interest rates less than expected at the last meeting, the European Central Bank’s leading members appear to be giving a clear signal over what the bank should do next.

In the latest interview, the governor of the Austrian central bank Ewald Nowotny said that the key interest rate should not go below the 1% level. This statement backs what other key ECB members have said over the past few weeks. Among them, the Vice-President of the European Central Bank said that the key interest rate could move somewhat lower, but in a “measured way”. Additionally, Axel Weber, which leads the Bundesbank, said that 1% is his personal bottom line.

Putting the pieces together, it appears that the ECB does not want to cut below 1%, even though the bank adopted a number of quantitative policy measures. “Despite having a much higher interest rate than the Fed, the money market rates in Europe are lower then in the U.S., and this gives the ECB more space to maneuver.” TheLFB-Forex.com Trade Team added.

“If the ECB decides not go any lower than 1% and MR. Trichet or any other of the voting members makes this official, the euro may find very strong support.” TheLFB-Forex.com Trade Team added. “The single currency might strengthen not only against the dollar, but against a whole range of currencies, especially against the pound” they said. “However, this would also have a side-effect, since the euro will gain ground against the Eastern European currencies, which are ready to sink in a pool of foreign denominated debt.”

TheLFB-Forex.com Trade Team notes “Since every other major central bank reached the lower limit of the monetary policy, the ECB policy measures are more important than ever for the euro’s valuation.” Keep an eye on what the ECB members are saying, you never know when the euro might take off”.

BOJ Monetary Policy Meeting Produces Nothing New

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

The Bank of Japan policy meeting came and went, but nothing substantial really happened. The bank decided to maintain the overnight call rate at 0.10% - the lowest among the industrialized world – while it expanded, once again, its accepted collateral.

“The yen plunged 80 pips ahead of the interest rate decision, but this was most likely a serial correlation move, since it was seen in the other major pairs too”, TheLFB-Forex.com Trade Team said. “The BoJ’s interest rate meetings are really non-events that fail to move to market” they added.

The decision to accept, as eligible collateral, municipal and government bonds will help small and medium banks by increasing their liquidity. This comes after the BoJ began widening its collateral base recently, to facilitate Japanese banks in order to provide credit lines for the business holders and consumers.

TheLFB-Forex.com Trade Team notes, “The Japanese economy is in a bad shape. Some private forecasts point to the economy contracting up to 5% this year, as exports continue to plunge and internal demand slows. Furthermore, the economy is susceptible to external pressure, since exports make up a big percentage of the economy. The correlation between the Japanese GDP and its export market one quarter earlier approached 70% over the last decade.”

Today, TheLFB-Forex.com Trade Plan paid 80 pips on the yen, in a trade that started during the early Asian session and ended during the mid-European session.

U.K. Economy Under More Pressure

Written by A Forex View From Afar on Monday, April 06, 2009

The pound starts the week underperforming the major currencies, after failing to break above the 1.4950 resistance level. The pair failed two other tests in January and February, the present one being the third in-line. In the mean time, the pound’s decline triggered the TheLFB-Forex.com Trade Plan short numbers, gaining traders 100 pips with practically no draw-down.

During Monday’s session, the pound plunged 0.96%, considerably more than the other major pairs. The pound rose 0.8% during the Asian session, but these gains were easily reversed during the U.S. session, as the market re-entered in a risk-aversion mode. Currently, the pound has formed a bearish engulfing pattern on the daily chart, as it bounced off the 1.4950 swing area.

The pound’s decline comes as a number of voices were raised about the U.K.’s ability to fund its budget deficit. According to the latest forecasts, the U.K. government might be facing a 10% deficit this year, the biggest among the developed countries. To make things worse, the Institute for Fiscal Studies said that the government will have to raise the income tax by 8 percent, to bring the government budget to a more normal stance by 2015-2016, something that is very unlikely to happen. Previously, the BoE governor, Mervyn King, also complained about the poor state of the U.K.’s borrowing market.

TheLFB-Forex.com Trade Team notes that the BoE will be forced to intervene in the primary bond market, by buying gilts unsold to private investors. This will embark the BoE on a true quantitative easing policy, unlike the current policy that now involves only buying corporate bonds. “On the medium to long term, most likely, the pound will be a certain victim of the huge U.K. deficit, since the central bank will have to print money to bring the yields down” TheLFB-Forex.com Trade Team said. “The U.K. economy and pound will suffer even more if the global downturn intensifies, since it will force the government to borrow more”

The Press Conference Bullet Points And Analysis

Written by A Forex View From Afar on Thursday, April 02, 2009

• The Governing Council decided to reduce the key ECB interest rates by a further 25 basis points
• Today’s decision takes into account the expectation that price pressures will remain subdued
• The latest economic data and survey information confirm that the world economy, including the euro area, is undergoing a severe downturn
• Economic activity has weakened markedly in the euro area, as domestic demand has contracted in parallel with the downturn in the world economy
• Available data and survey indicators suggest that economic activity in the euro area has remained very weak in early 2009. It is likely to remain very subdued for the remainder of the year
• There may be stronger than anticipated positive effects due to the decrease in commodity prices and to policy measures taken
• On the other hand, there are concerns that the turmoil in financial markets could have a stronger impact on the real economy
• Annual HICP inflation has fallen further, from 1.2% in February to 0.6% in March
• The decline in inflation since last summer primarily reflects the sharp fall in global commodity prices over this period
• We expect to see headline annual inflation rates declining further in the coming months and temporarily reaching negative levels around mid-year. Such short-term movements are, however, not relevant from a monetary policy perspective.
• Annual HICP inflation is expected to remain below 2% in 2010
• Available indicators of inflation expectations over the medium to longer term remain firmly anchored
• The latest data confirm the high month-to-month volatility of developments in M3 and its components observed since the intensification of the financial turmoil
• The pace of monetary expansion in the euro area has continued to decelerate markedly
• Developments within M3 clearly reflect market participants’ specific investment responses to the intensification of the financial turmoil
• The flow of MFI loans to non-financial corporations and households has remained very subdued
• The decline in short-term lending may be indicative of a reduction in loan demand related to the weakening of economic activity.
• Regarding fiscal policies, it is necessary that countries’ commitments to a path of consolidation in order to return to sound fiscal positions are credible, respecting fully the provisions of the Stability and Growth Pact
• This is essential to maintain the public’s trust in the sustainability of public finances, which is important both for the economy to recover and for supporting long-term growth
• Many countries will need to specify further credible consolidation measures for 2010 and beyond

The questions and answers section took off with Mr. Trichet appearing very casual and relax, speaking about the future monetary policies. The Chairman of the ECB said that the present 1.25% is not the floor and does not exclude sending the key interest rate any lower.

At the same time, Mr. Trichet outlined that the deposit rate, which is currently sitting at the 0.25% will not be reduced any more. This implies that the monetary channel between the three main interest rates (deposit, key and lending) will shrink at the following meetings. Even though it did not explicit specify the decision that backed the 0.25% interest rate, Mr. Trichet said that the decision was taken unanimously.

Unlike at the other press conference, Mr. Trichet referred to the Fed, by saying that the money rates in the Euro-area are lower than in the U.S., despite the interest rate spread. Mr. Trichet also said that currently, the ECB’s balance sheet is larger than the Fed’s when compared with the GDP size. Most likely, these comments came as the ECB received strong criticism for not doing more to fight the credit crisis.

Most market participants expected the ECB to announce a new quantitative easing policy today, probably a possible intervention in the corporate debt market. However, Mr. Trichet said that full details would be disclosed at the next meeting, which will be held in 7 May. Additionally, Mr. Trichet put a lot of empathy on the fact that the bank is already in a non-standard method, being the first central bank that adopted quantitative easing methods by providing unlimited funds to banks.

What To Expect Tomorrow From The ECB

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

Tomorrow, the market expects the ECB to reduce the Minimum Bid Rate by 50 basis points, down to 1%. Since the current rate cut cycle has begun, the ECB reduced the key interest rate by 275 points or 325 basis points if tomorrow’s projections come true.

Additionally, most market commentators have said that tomorrow the ECB will announce a new quantitative easing plan, to buy corporate debt. This assumption came after Mr. Lucas Papademos suggested such a move may come from the European Central Bank, echoing Mr. Trichet, which said at the last press conference that the bank is judging to implement new “unconventional measures”.

If the ECB will adopt this measure, to intervene in the corporate debt market, the euro might get some strong support. Until now, the ECB is the only major central bank that did not directly adopt a quantitative easing method, even though Mr. Trichet said that the bank actually may in the future.

The Chairman of the ECB referred to the measures to provide unlimited liquidity to the banking system from the Euro-area, instead of doing auctions, and in the same time increase the assets that it receives as collateral.

On a slightly different note, a Bloomberg report shows that the ECB might start buying Eastern European currencies, like the Polish zloty and the Romanian Leu, to help the regional economies recover faster. Over the last two quarters, or so, the local currencies’ plunge had been a real threat for the region’s economy. In case of a possible intervention, the ECB might avert a possible crisis in the region, something similar to what happened in 1998 in Asia.

Ukraine and the Impossible Trinity

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

Ukraine announced it will impose strict rules on the capital movement, while also forcing banks to quote the national currency, the hryvnia no lower than a limit set by policy makers.

These moves are meant to stop or at least to reduce the strong capital outflow that threatens the Ukrainian economy, as is the case with most other emerging economies. However, this also drives the country near to a default scenario.

Over the last few months, the hryvnia has lost almost 40% of its value against the dollar, as investors turned the inflows looking for a higher yield, into outflows looking for nothing more than safety. The National Bank of Ukraine lost one third of its reserves during this period, as it tried to curb the currency’s decline.

What the Ukraine is currently trying to impose, strict capital flows, is certainly not what investor’s want to see or hear. Additionally, the country is running through a “small” political crisis, being lead by a President that is pro-Europe, while the government is pro-Russia, something that has the potential to disrupt the country’s fragile stability (if it has not done so already). Along with the current political struggle, the Ukraine now faces another problem, called the impossible trinity.

During the early 1980s, when the foundation of an open economy was being laid, economists developed the so-called impossible trinity model, which states that a country cannot control its monetary policy, its currency and its capital movements simultaneously. In order to function properly, a country has to give up to one of the three.

However, this is exactly what the Ukraine is trying to achieve these days. Until now, the Ukraine controlled its monetary policy and had a free, tradable, currency, as most open economies do. However, now it will also control its currency and its capital flows, trying to achieve something that no other country has achieved for the long term.

In a normal open economy, as investors pull money out of the country, the local currency depreciates, until a certain point when it is not profitable (or justifiable) to depreciate the local currency. Because the Ukraine will keep the hryvnia at artificial high rates, it will create an incentive to draw more money from the country, until the point when the government runs out of funds. Secondly, by keeping the currency rate at an artificial level, it makes the exporter’s life harder, while encouraging imports, expanding the trade deficit.

In this case, I have the impression that the Ukraine is heading towards a very hard social and economic crisis, which will ultimately end up as a political crisis. This comes, after the rather fragile economy passed through a similar situation in 2004. The impossible trinity is among the few economic concepts that have never failed, until now, and the history of economic crises reminds us of that.

TheLFB Team & The View From Afar Blog

© 2008 A Forex View From a far Trading Blog

Trade Desk View

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

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