A Forex View From Afar

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Forex Analysis

What To Look For Ahead Of The London Open

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

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

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

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

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

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

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

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

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

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The Truth Is Just Too Painful To Handle

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

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

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

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

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

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

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Global Recovery Doubts?

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

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

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

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

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

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

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

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

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

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

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

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

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

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The Fed And The Repo Market

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

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

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

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

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

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

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

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

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

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Financial Sector Re-Valuation: Forex Impact

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Interest Rates Or Growth; What Gives?

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

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

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

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

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

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

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

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

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

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The Dollar’s Future As A Reserve Currency

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

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

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

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

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

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

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

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Is Mr. Inflation Coming Back To Town?

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

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

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

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

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

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

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

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Trading Is About Managing Risk, Not Positive Trades

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Mortgage Rates, The Fed And Treasuries

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

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

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

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

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

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The ECB Press Conference: “Independence Fears”

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

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

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

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

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

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

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

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

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

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Markets Prepare For ECB and BOE Interest Rate Decisions

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

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

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

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

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

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

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Baltic Countries Continue To Struggle

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

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

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

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

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

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

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Commodity Markets Push Canadian Dollar Higher In May

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

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

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

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

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

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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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