A Forex View From Afar

A Trader's Look At A Trader's Life

Forex Analysis

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.

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.

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.

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.

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.

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.

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.

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…

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.

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.

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.

The ECB Press Conference: Bank Decides To Initiate Open Market Bond Operations

Written by A Forex View From Afar on Thursday, May 07, 2009

• The Governing Council decided to reduce the interest rate on the main refinancing operations of the Euro-system by a further 25 basis points and the rate on the marginal lending facility by 50 basis points, to 1.00% and 1.75% respectively.
• Current key ECB interest rates are appropriate taking into account all available information and analysis
• The ECB will conduct liquidity-providing longer-term refinancing operations with a maturity of 12 months
• The operations will be conducted as fixed rate tender procedures with full allotment […] the fixed rate may include a premium to the rate on the main refinancing operations, depending on the circumstances at the time.
• The Governing Council has decided in principle that the Euro-system will purchase euro-denominated covered bonds issued in the euro area
• Furthermore, the Governing Council has decided that the European Investment Bank will become an eligible counterparty in the Euro-system’s monetary policy operations
• These decisions have been taken to promote the ongoing decline in money market term rates, to encourage banks to maintain and expand their lending to clients, to help to improve market liquidity in important segments of the private debt security market, and to ease funding conditions for banks and enterprises.
• Today’s decisions take into account the expectation that price developments will continue to be dampened by the substantial past fall in commodity prices
• The latest economic data and survey information suggest tentative signs of a stabilization at very low levels, after a first quarter which was significantly weaker than expected
• The world economy, including the euro area, is still undergoing a severe downturn, with the prospect of both external and domestic demand remaining very weak over 2009 before gradually recovering in the course of 2010
• This weakening in the first quarter appears to have been significantly more pronounced than projected in March
• On the downside, there are concerns that the turmoil in financial markets could have a stronger impact on the real economy, as well as that protectionist pressures could intensify
• At the same time, there may be stronger than anticipated positive effects due to the decrease in commodity prices and to the policy measures taken.
• The decline in inflation since last summer primarily reflects the sharp fall in global commodity prices over this period.
• Signs of a more broad-based reduction in inflationary pressure are increasingly emerging.
• We expect to see headline annual inflation rates declining further and temporarily remaining at negative levels for some months around mid-year.[…] short-term dynamics are, however, not relevant from a monetary policy perspective
• The latest data confirm the continued deceleration in the pace of underlying monetary expansion
• Month-on-month developments in M3 and its components have remained volatile, with data for March showing a contraction in most of the respective outstanding amounts
• The outstanding amount of MFI loans to the private sector contracted further in March, reflecting mainly a negative flow of lending to non-financial corporations
• All in all, since the intensification of the financial crisis in September 2008, the Euro-system has taken a series of measures that are unprecedented in nature, scope and timing.
• We have observed a clear decline in key money market interest rates that euro area banks typically use as benchmarks to reset floating rate loans and price new short-term loans
• Monetary policy has provided ongoing support for households and corporations.
The Governing Council decided to intervene in the Euro-area’s bond market. The European Central Bank will buy up to 60 billion of covered bonds, which are financial securities backed by the cash flows from mortgages. To some extend, covered versions are the European version of the ABS instruments, only much safer. Mr. Trichet also mentioned that the intervention in the covered bond is not a quantitative easing program, but an “enhance credit support program”.

Additionally, the Council members decided that the European Investment Bank will be able to bid in the bank’s open market operations. This means that the ECB will open its doors to government debt instruments, something that was out the bank’s reach until now. The bank also decided to increase the open market operations’ maturity up to 12 months, which can be use by banks to strengthen their balance sheets and unload most of their toxic assets.

TheLFB-Forex.com notes that the euro traded very volatile during the press conference. In the first 15 minutes, the euro plunged 90 pips and recovered everything back. The single-currency gained 150 pips and almost touched the 200-day moving average during the press conference as Mr. Trichet said that he cannot exclude lower rates, but the current one are appropriate.

What To Expect From The ECB And BoE

Written by A Forex View From Afar on Wednesday, May 06, 2009

The currency market is anxiously awaiting the interest rate decisions from the Bank of England and the European Central Bank, which will be released tomorrow morning. The BoE is expected to keep rates on hold and say that it will continue the asset buying program, while the ECB is expected to reduce the key interest rate by 25 basis points.

Additionally, market participants anticipate that the ECB will introduce a new quantitative method, even though the market is still not sure exactly how, since the ECB cannot intervene in the government bond market as the other central banks do. Instead, the ECB members have repeatedly said that the bank is already adopting a quantitative easing method by providing unlimited funds to the European banking system. Most market participants do not consider this to be a quantitative easing method.

Over the past few weeks, a number of ECB members expressed their opinion that the lowest threshold in the Euro-area should be 1%, and anything lower would simply disrupt the inter-banking lending. If Mr. Trichet expresses this opinion tomorrow, the euro may receive a boost, TheLFB-Forex.com Trade Team said. They also added that this might substantially improve the euro’s outlook over the medium and long term, if the recent positive global economic news reports are added to the equation.

On the other hand, it seems that the BoE has already reached the limits of monetary policy. The bank has limited room to further reduce the interest rate, if any, as the voting members saw strong deflationary pressure that threatened to “undershoot” the inflation target.

However, TheLFB-Forex.com Trade Team notes that in the November inflation report, the BoE forecast the CPI read to stand somewhere slightly above the 1% benchmark level, but the inflation gauge was release at 2.9% in March, and even rose a few basis points in February. Some analysts are arguing that the BoE decision was oversized, something that might cause strong inflationary pressures over the medium to long term, and will support the pound’s value.

The Libor Rate Falls Below 1%, A Record Low

Written by A Forex View From Afar on Wednesday, May 06, 2009

The three month dollar Libor rate fell to 0.99% this morning, breaking, for the first time, below the 1% benchmark rate. Libor or London Interbank Offered Rate tracks the interest rate at which banks borrow unsecured funds from the money markets. Currently, it is estimated that roughly more than $350 trillion worth of loans worldwide are linked to the Libor rate.

The Libor rate saw a strong uptrend in the first phase of the credit crunch, as the uncertainty regarding the health of the financial system was reflected in the money market rates. The Libor rate peaked at 4.818% in November, but the decision taken by the Fed and the other central banks helped alleviate the inter-banking strains. In particular, the main factors that influenced the Libor rates were the Fed’s decision to offer dollar swaps with the other major central banks and pledge to sustain the balance sheets of any other falling banks, so the Lehman situation will not be repeated.

TheLFB-Forex.com Trade Team notes that the timing is even more interesting, since today the market expected the stress test results. “According to the latest rumors, ten out of the 19 banks tested will be asked to increase their capital base, something that should have had a negative effect on the market, but so far it has not”, TheLFB-Forex.com Trade Team said.

Having the Libor rate drop to a record low level, more optimism is being injected into the equity markets. The main indexes from the U.S. and Europe erased the declines seen in the first two months of the year, helped by optimism that the global contraction is slowing down. The record low Libor rate should further strengthen the case, since it helps businesses and consumers’ access credit and liquidity with more ease, something that was not the case over the last year.

Analysis Of Monday's Trading Session

Written by A Forex View From Afar on Monday, May 04, 2009

The currency market again saw a day of dollar selling on Monday, but the majors posted only modest gains against the Japanese yen, if any.” The main reason might be the closed Japanese trading session, which reduced significantly the liquidity of the Japanese yen in the foreign exchange market”, TheLFB-Forex.com Trade Team noted. Consequently, the Usd/Yen traded in a 25-pip channel during the overnight session, which eventually gave way as the yen plunged towards the support area formed by the 20 and the 200-day simple moving averages.

The Asian session saw the major pairs gain ground, but the London open reversed the trend and sent the pairs below the Sunday open price. The dollar was again sold shortly before the U.S. open, as the market expected the recent positive news to continue with today’s pending home sales and construction spending reports. The market expectations were overwhelmed when both releases printed better than the expected numbers.

Having the major pairs break above important price points of the last six months of trading it starting to look like the currency market is pricing in a gradual recovery of the global economy. However, both the dollar index and the financial markets will have a big test coming in the following periods, as three central banks are expected to announce interest rate decisions this week plus the results of the banks stress test.

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.

Want to subscribe?

Subscribe in a reader.