A Forex View From Afar

What’s next for the Cad

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GDP numbers this week revealed that the Canadian economy shrank for the first time since 2003. The release for the first quarter of 2008 revels a 0.1% contraction, falling from the 1% growth rate recorder in Q1 and Q2 2007.

The biggest drag for the economy was inventories, which weighed heavily on the GDP, by over 1%. Exports fell too, dragging down the GDP by over 0.3%. The big decline in both exports and inventories were blamed on the automotive industry, falling almost 15% from one quarter earlier.

Canada’s biggest trading partner is the US, both for the import and export industry, with the U.S. eating up almost 80% of Canada’s exports 2006 figures show, while 55% of Canada’s import are from US. It is quite interesting that imports to Canada had fallen in the first quarter, despite Canada having very strong growth in the private consumption sector.

The big drop in Canadian Inventories makes me think about the US Inventories adding a lot of points to the US GDP. If we took out Inventories from the US numbers, in the last two quarters, Q4 of 2007 and Q1 of 2008, the GDP would have come in negative. This however was the case it seems. The question is how come those inventories didn’t fall since U.S. production had weakened, as shown by the ISM number, Exports had increased and US consumption remained strong, but still Inventories didn’t reduce. That is very strange, something just does not add up there.

This certainly isn’t the case for the Canada, if we took out Inventories, the report would show an expanding GDP.

Another big concern for the Canadian economy can be the huge inflation rate that manufacturers have to absorb from raw materials. From March 2008 to April 2008 the inflation experienced by manufactures from raw materials was released at 5.1%, while from April 2007 prices had grown 23%. Huge by all means. At the same time, Canadian Factories increased prices by 1%, from last year. These numbers suggest factories are absorbing a huge amount of inflation, something really not welcome on their balance sheets, and something that needs decreasing inventories and increasing exports to help relieve.

In the mean time the Canadian Dollar tries to push lower, but doesn’t have strength to do so. The one Dollar mark and the 0.9750 area don’t look as they could give up too soon, either way, so another range/consolidation period could come very easily.

The new Bank of Canada Governor, Mr. Mark Carney, suggested rates will be hiked when GDP numbers assure a sufficient growth rate; well, probably not too soon then, and as such we will not expect too much from the Cad, either way.

No Comment | Posted in » Bank of Canada  

Mr. Mishkin departs from the Fed

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Mr. Mishkin has announced his intention to leave from the Fed, to return to his academic research. Mr. Mishkin resignation will create the third empty seat on the Fed’s voting committee, out of the 7 seats available.

This will certainly be a first for the Fed, having to work with 4 Voting Members only. The majority has to agree over an interest rate decision in order for it to pass.

Mr. Mishkin is well known in the academic environment for his Economic Research, being of one the most prolific researchers in his field. A list of his works can be seen here.
Both the WSJ and Bloomberg said his departure was influenced by the big distance from his wife (200 miles, from New York to Washington DC) saying Mr. Mishkin will make a twice as much working at the Columbia University, were he will return.

WSJ point out some of his incomes before coming to the Fed:

His financial disclosure report, released in 2007, shows that in the year before joining the Fed in 2006, he made a tidy sum dispensing advice to central banks, governments and business groups around the world. He collected a $134,858 consulting fee from the Icelandic Chamber of Commerce; $63,188 from the Riksdagen, or Swedish Parliament, who hired him to co-write a report on the Swedish central bank; $15,600 from the Central Bank of Chile, $15,575 from the Bank of Korea, $9,161 from the Bank of Spain and $4,250 from the Bank of Canada. That was all in addition to his salary from Columbia University.

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The Big Guys are talking

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The financial markets have a unique characteristic, when the Big Guys say something about prices, the markets react in the short-term; when they predict an event (e.g. Inflation) they usually fail. Sometimes, with between 200-300 predictions, they get one right, and the whole word finds out about it, glorifying them.

Well, the Big Guys have spoken; let us do a little analysis.
Morgan Stanley said Oil prices could easily reach $150 per barrel, and soon Oil recovered every single penny that was lost in previous trade. From my weak memory, didn’t someone say last week Oil will reach the $200 barrier, to start the upward move? Quite interesting that Morgan Stanley said this when the Oil Market had plunged. Are they long on Oil?

Michael Feroli an economist at J.P. Morgan Chase predicted Inflation will reach 5.1% in August. I really don’t doubt inflation will rise in the short to medium term, but I don’t expect to see it in the CPI read, by no means. Probably they are shorting the Bonds and Treasuries right now

UBS had told former private-banking employees not to travel to US, due to charges of evading taxes. Furthermore, UBS had hired lawyers for more then 50 current and former employees. I don’t know what this Bank does except of write-down after the sub-prime fiasco. I can’t tell what positions they have, but I bet the US Attorney is short on UBS.

Sources:
Bloomberg: Oil Rises After Morgan Stanley Says Brent Oil May Reach $150
FT: UBS tells unit staff to avoid US visits
WSJ: J.P. Morgan: Inflation to Hit 5%

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Case-Shiller: That Housing bottom is not here

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Another release for the housing market, the S&P/Case-Shiller Home Price Indices have recorded the biggest decline since the Index was started 20 years ago. Housing prices had declined further, now reaching a 14.1% decline since last year, without having a bottom in the sight.

Out of 20 metropolitan areas, 19 show declines, Charlotte being the only one with a modest 0.8% gain since last year. In 6 areas prices have fallen more then 20% since last year.



If we add that Housing Inventories, released last week, reached yet another record of 11.3 months, we could say the Bottom in the Housing Market isn’t anywhere in sight, although it could give a huge push forward to the economy, and especially for the Dollar, once the bottom is set and the recovery phase begins.

Another big winner in the housing market recovery will be consumers; it will noticeably increase their confidence due to the housing-welfare relationship. By the way, Consumer Confidence had dropped to the lowest read in 16 years, in-line with housing stats, maybe they will reverse just as quickly once mortgages are available and the economy shows growth.

If we could only kick-start the Housing Market things might get start rolling, but until they do just watch for the Dollar to start prodding some Resistance areas as Trade Desks test out where the heavy Ticket Orders are sitting. Upside Dollar moves may come in the near-term as the natural reaction to an over-sold $ plays out- but take care because the intra-day reversals from those moves that do hit the areas of heavy Ticket Orders will send things packing backfrom where they just came.

9 months Housing Inventories will be a light at the end of the tunnel, and at that time we can maybe plot how the greenback is going to get back the last 9 months of stolen ground, and against which pairs first.

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The Housing slump

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Another U.S. housing release, another failed hope that something could improve. Existing home sales showed that the housing slump is far from at a bottom, although the release number came in better than analyst predictions.

Housing inventories have reached a record 11.2 months, and there are now 4.5 million houses for sale, that is up one 33% since last year, while prices have fallen even further, now a long way from the 2005-2006 tops.

We could say 'nothing is new' in the housing market, that it is hard to see anybody waiting for a rebound in home sales at this point in time.

If we add that 3 million homes are said to join the Inventory over the next two years through foreclosure, the Housing Market recovery looks far off. Not to mention that many expect prices to drop even further from current levels, and that will increase Inventory as optimistic home-owners wait for what they see as Fair Value. Right now, any offer may be the best offer most will see for a while.

By now the drill should be known- no Dollar recovery until the housing market starts reducing the Inventory numbers, and until they reach somewhere around 6 months, as was the norm.

It will be interesting to see how consumers react in this period of contraction, since housing wealth was said to be the reason behind increased consumer spending, and also how the negative $63B U.S. Current Account reacts in response. The $600 Stimulus Checks are arriving this week, at a huge expense to the government checking account.

The weaker US$ could be a good opportunity for US exporters to reduce the Trade Balance, and that may be key to sustaining longer-term growth going into 2009/10.

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Oil at $135. What analyst have to say about it.

Bloomberg had an interview with a range of analysts, from the well known trader George Soros to the Head of the International Energy Agency, Mr. Tanaka about the future of Oil.
Most of the analysts view the market as illogical, and many didn’t exclude Oi's future appreciation;

Link Here

No Comment | Posted in » commodities, economic preview