A Forex View From Afar

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A Fud Funds Futures Story

Written by A Forex View From Afar on Wednesday, July 30, 2008

Fed Funds Futures contracts are pricing a hold on overnight interest rates for the next meeting outcome, scheduled for 5th August.

If the Fed do hold, as the market expects, it will be the second FOMC meeting at which rates are kept at 2%. This after the Fed cut at the April meeting by 25 basis points. According to the Cleveland rate probability the market sees a 90% chance of a hold on Fed Funds next Tuesday.

Fed Funds Futures

Regarding future expectations, Fed Funds Futures are pricing a rate increase for the December settlement date. This outlook has the potential to influence the dollar’s valuation, especially if we add the data from the latest period, which suggest the US economy had found a bottom. The old greenback may be further empowered by the fact that the Eonia future contracts in Europe are starting slowly to move up, reflecting the market view that the ECB will likely hold rather than raise.

As such, the dollar bulls may overcome the market for the time being. However, these futures expectations may alter quickly once one of the central banks steps again in the market to do some more jawboning, keep your eye on the calendar; they tend to sneak these speeches in under the radar. Outside of hot air it does look as though the euro has some work to do to hold current valuations, and that makes 1.5550 a very pivotal area to work up or down from.

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Are Banks A Good Bet? Part II

Written by A Forex View From Afar on Tuesday, July 29, 2008

After what we saw in the last day, a big No would be the answer. This article comes on top of the first part (although we didn't expected yesterday to happen so soon!).

Merrill Lynch had just announced it will sell $8.5 billion of stock and liquidate $30.6 billion of bonds in order to maintain its credit rating. The selling would go like this: $30.6bn CDOs sold to Lone Star for $6.7bn. That is the equivalent of 22 cents for every dollar (the word cheap is not enough to describe this transactions). In order for Lone Star fund to buy the Super Senior CDO, this is true, Merrill lent them $5bn. Again, Merrill lent $5bn to a fund so that the fund could buy assets worth of $6.7. Practically, Merrill gave away $30.6bn of paper for $1.7bn.

Within all of this we see that Merrill has quite a interesting background. This is Merrill's sixth write-down, after they said repeatedly there is no need to for additional capital, and that there would not be any other write-downs. Bank write-downs have reached $40bn at this stage. Last week, Merrill announced earnings, giving no signs as they would want to sell stocks or bonds. Usually the decision to sell assets would have been announced last week, with the earnings. The apparent reason was Merrill had only just taken the decision this week. Now we only have to find someone who could actually believe that a $6b loan on $30b of paper was thrown together over the weekend.

Anyway, Merrill is off by 55% this year. If they continue this way, the road is open for more losses, but at least they gave a sorely needed boost to the glass half full equity traders, and that fed itself nicely into Usd strength.

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Are Banks A Good Bet?

Written by A Forex View From Afar on Monday, July 28, 2008

How much confidence do the financial markets have in banks? None, Zero, Nada – No matter how you say it, the result remains the same

TheLFB Jul 28 XLFThe XLF index, which tracks financial companies in the U.S. markets, has dropped more than 50% since the high that was made last summer and now the index is looking ready to push the price action under the 20 points area. This certainly shows investors’ trust is limited and that they do not want to be caught near any financial shares.

Then we have the bond yields of financial companies. Bonds are usually a form of loans used by financial companies to finance their asset acquisitions. A higher yield means investors do not value the bond and see it as a risky one (due to the reverse correlation between the bonds’ price and yield). Yields for financial companies are now at the highest point since 2000, but back then, the Fed Funds were at 6.5%. Right now, the Fed Funds are at 2%, making the spread between Treasuries, (considered a safe haven) and financial bonds, very steep. This shows investors require a higher premium for holding those bonds. For example, Lehman Brothers borrowing costs for its five-year bonds rose to 7.7%, while 5 year Treasuries are now trading at 3.26%, making the spread 4.44%

Financial shares are down
Even if the spread does not seem huge, we are speaking about losses reaching millions of dollars. Over time, higher premiums can translate into balance sheet losses since banks will have to pay back more to their lenders. If yields remain so high, and they probably will, the financials will have to carry a big weight over the coming quarters, longer than previously estimated.

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Euro-zone Sentiment on the Slide

Written by A Forex View From Afar on Thursday, July 24, 2008

Back to www.thelfb-forex.com

Recently the Euro-zone has developed a new trend on the calendar by missing virtually every possible release that gauges investor sentiment and future expectations. From the simplest releases to the most complex, the Europeans have missed them all, and that in itself is very unusual, and bucks the trend.

On Thursday the Euro-area has three scheduled releases that can be used very well to gauge expectations: the German PMI (Purchase Managers Index), Euro-area PMI and the IFO release. The PMI release has shown clearly that the service and manufacturing side of the economy in the fifteen member states are in a contraction phase, and that analysts expect a further deterioration from last month. At the same time, the IFO surveys show the Business Climate index is barely holding onto positive ground and that future expectations are in a falling trend, and have been since September last year, reaching the lowest read of 94.7 last month.

If the analyst estimations are missed again on Thursday the euro may continue to tumble below the 1.5700 area, where it seems the pair may find a support for the time being. At this time the market is looking at long dollar positions and if the above works through, the market will have another reason to buy the dollar and sell the euro. In doing so it can really test the resolve of whoever has parked protective orders at 1.5650, because they are there, and at the same time test oil speculators resolve. A stronger dollar equates to weaker crude oil prices, and that may create a euro slide as inflation expectations and growth forecasts decline.

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A day with a Wall Street Banker

Written by A Forex View From Afar on Wednesday, July 23, 2008

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08:00 Wake Up. Thank goodness for the 'mobile office'. Check that the web cam is switched off
09:00 Still in bed, reading WSJ/FT and criticizing the sub-prime mess
09:15 Check for any employees that may be late. They will get a penalty for that
09:35 Get the courage to come down from bed
10:30 Reach the office and the first coffee. 7/11, not Starbucks
11:00 Meet the parties that were scheduled at 09:00
11:15 Field the Treasury guy's calls saying that we are in deep trouble. The dollar is depreciating, because of smart-guys lending to clients with no income. The dollar has got dangerously low, and is affecting the asset/liabilities ratio
11:16 Call back the Treasury staff and tell them to relax, we take care of our own books. The accounting office will sort this out
11:25 Enjoy the in-house spa treatment
11:45 Field the accounting office calls saying that we are in bankruptcy. Oh no, No worries here. Tell him the treasury guys will sort it out. Note to self- Didn't he hear of the strong dollar gains lately that the treasury guys were looking for
12:05 Some newbie from the Fed calls me for some stress testing. Do we need that??? Stress is something that comes from too much coffee and our corporate policy restricts employees to a maximum of one coffee per day, 7/11, we are controlling expenses. So no stress here
12:06 Remember the old time when Ally was in charge. The only stress test back then was who sends the Fed Funds lower, us or the Fed
12:30 Lunch, followed closely by daily Midday sleep
15:15 The lending officers calls to approve some loans. Somebod with a minimal income wants a $3m house. Sure, no problem, approve them. They look like honest people, they'll pay it back, they did before
15:20 Call the Treasury to package the new $3m loan as AAA, and sell it. Instead of the risk that Mr 3m defaults we are going to buy some high quality bonds from Citi and UBS. We sell them brown paper, they give us quality paper back. Thank goodness that the rating agencies are behind the curve.
Note to self- Add the rating agencies to night-time prayers
15:21 The Treasury guys complain again about some ratios, but who cares about them? They said something about the dollar posting some gains? Or was it losses? Can't remember correctly, but who really cares
15:25 Switch to Bloomberg TV for the afternoon wrap. They said the dollar index lost 2 points today. Is that good or bad?
Note to self- Call the Treasury to confirm which way is good for the dollar
15:26 The same Bloomberg presenter said it was because of irresponsible lending and some bonds with a wrong ratings? This is good, right?
Note to self- Ensure that Mr 3m's docs do not contain my name
16:03 Find out that those bonds are ours.This is good, we are on TV with free positive publicity
16:10 Head home. Thinking the bonus this year. Our lending officers can't keep the pace with the requests, we buy quality paper from other banks and plus we get free publicity. The council will love me
16:12 Just found out our bank's share are down 15% this year. Good news indead.
Note to self- contact broker to buy more of our discounted shares.

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The Fed and the Inflationary Dragon

Written by A Forex View From Afar on Wednesday, July 16, 2008

Inflation; this is what happens when the Fed listens to the market and cuts 75 basis points in inter-meetings, only days before the actual FOMC get-together. Cutting rates garners inflation and we are seeing it fan the dragon’s flames right now. Inflation year-over-year reached an astonishing 5% in the U.S. and is now at the highest inflation level reached since 1992. The CPI release showed the biggest monthly gain since 1991 and the second second-largest rise since 1982.

Loose monetary policy is to blame for the current inflation levels. That, added to the fact that many of the rate cuts still haven’t reached the real economy, increase the chances that those rate cuts that we have not yet felt in the economy will further strengthen the inflationary pressures. Usually a rate decision requires anywhere from 6 to 18 months to create an impact.

Having no real growth, as the Fed Chairman reiterated in his recent speeches, leaves no open door for a rate increase any time soon and thus, inflation may still have room to rise. Second round effects appear to be very near, since the high degree of inflation experienced within the transport index right now will soon reach the other CPI sectors, like food and apparel (which are currently experiencing deflation).

Weak growth coupled with an inflationary economy does not leave any other option now for the FOMC members but to jawbone their way through the summer. That is something we have got quite used to hearing from the Fed. Fed funds futures are already pricing in a hold for the next two meeting’s outcomes; it’s now time to see if the currency market will price in the dollar’s inflation. Starting from a base of huge support at 71.50 is a great place to start.

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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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