A Forex View From Afar

A Trader's Look At A Trader's Life

Forex Analysis

BoE With Pound Inflation Headache

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

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

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

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

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

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

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

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

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

No Comment comment | Posted in » , ,  

Trade Desk Thoughts: Oil Falls, Majors Hold

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

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

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

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

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

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

No Comment comment | Posted in » , ,  

The Implication Of The IMF Bonds And Their Aftermaths

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

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

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

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

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

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

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

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

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

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

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

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

No Comment comment | Posted in »  

Global Unemployment Rates Bouy The Usd

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

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

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

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

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

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

global unemployment rate

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

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

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

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

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

No Comment comment | Posted in » ,  

ECB Press Conference Analysis

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

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

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

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

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

No Comment comment | Posted in » , ,  

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

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

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

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



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


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

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

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

TeamLFB provides forex related market analysis and trade signals

No Comment comment | Posted in » , ,  

Subscribe to: Posts (Atom)

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.

Find entries :