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Forex Analysis

Peoples Bank of China Cut Rates

Written by A Forex View From Afar on Thursday, November 27, 2008

The People’s Bank of China cut the interest rate by 108 basis points, down to 5.58%, the fourth interest rate cut in the last three months.

This was the largest rate cut in the last decade for the Chinese central bank. The last time the bank cut by this magnitude was during the 1997 Asian crisis, when many of the Southeast Asian countries were paralyzed by huge declines in the value of the national currencies and escalating foreign debt. Back then, the IMF had a couple of dozen countries knocking at their doors for a loan. The Chinese Government has also announced a stimulus plan, in order to support the economy. It is said, the rescue package will reach nearly $600 billion.

For the moment, the biggest threat for the Chinese economy is the high number of unemployed persons. Due to the global slump in demand, factories laid off workers to reduce costs. China, a country in which industrial production has had impressive growth during the past few years, has been hit very hard by the tough international business conditions. The Chinese unemployment rate is expected to rise to the highest level seen in the last few years. The official unemployment number is 4.2% for the moment, but this number does not include large populated areas from the rural parts of the country.

If China, which is practically the world’s back engine, is preparing for hard times ahead, having both the central bank and the government taking pro-active actions, means the world may face some very hard times. Currently, most central banks expect growth to pick up in the third quarter of 2009, but chances are, these estimates will be changed to a later date.

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Preparing For A Tough Holiday Season

Written by A Forex View From Afar on Thursday, November 27, 2008

Asian shares advanced overnight, even though the gains were modest. The European markets continued the positive momentum, advancing for the fourth consecutive day. The U.S. markets will be closed today.

Today, the U.S. will celebrate Thanksgiving Day, the date that unofficially marks the start of the holiday season. However, things are not so rosy ahead. Consumer spending dropped in October the most since 2001, marking the fourth consecutive month of declines. Spending makes up about 70% of the economy, so this report only increases the chances of a full recession in the coming quarters. In addition, consumer sentiment hit a 28-year low in November.

The two reports show that the coming holiday season might not be as it once used to be, with strong retail sales. Both retailers and manufacturers derive an important part of their profit from this part of the year. Most analysts expect the holiday earning season to miss the initial estimates. If so, the market will have another round of disappointment come the following earnings season.

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U.K. Banks Still In Need Of Capital

Written by A Forex View From Afar on Tuesday, November 25, 2008

In testimony today, Mr. King, head of the Bank of England said banks still need much more capital, before they will be able to function near normal conditions. Right now, credit lines are starting to dry up in the U.K., sending the economy into a recession for the first time since 1991.

In the last few months, the U.K. Government nationalized the three largest banks, HBOS, Lloyds and Royal Bank of Scotland in a $56 billion bailout. Furthermore, Mr. Brown, the U.K. Prime Minister announced a plan for a $38.7 billion stimulus plan by next year, roughly 1% of the economy.

Most analysts expect the central bank to continue the rate-cut cycle, in order to support the economy and avoid a dangerous deflationary period ahead. The current 3% overnight rate is already the lowest seen in the last few decades.

The direct implications of these two actions, in normal market conditions, (not driven by the fear factor), are a weaker currency. The stimulus plan would take the government deficit to the highest level since the late 1980’s, implying that more currency would have to be printed, and put further downward pressure on interest rates.

Until now, reports have shown that the U.K. economy was the hardest hit among the G7 from the credit crunch, contracting 0.5% in Q3, or 2% annualized. As such, the pound is expected to continue to weaken against the other major currencies, including the dollar, as long as the market is in a risk aversion mode.

The ironic thing is that, Britain was the place where the technique of “spending” the way out of a recession by increasing the Government’s expenses and devaluating the currency, first derived. The genius behind this method was Keynes, and the practice helped revive the world economies after the Second World War. Wonder if it will work now?

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Paulson Expected To Announce New Strategy

Written by A Forex View From Afar on Tuesday, November 25, 2008

Sources say the Treasury together with the Fed will announce today a new plan in order to support the consumer credit market with the remaining $350 billion left in the bailout fund.

The plan to boost liquidity in the consumer credit market is not new, since it was announced two weeks ago by the Treasury Secretary, Mr. Paulson. After the announcement, equity markets plunged on concerns that the rest of the bailout money will not reach the banking system. Some suggest Mr. Paulson is adopting this plan because of the pressures coming from the two political parties to help the real economy rather than Wall Street bankers.

The Treasury expects credit card rates to drop lower, as a consequence of the new lending program, helping consumption to pick up. At the same time automobile purchases and college education lending programs will also be targeted. The press conference is expected today, at 10 a.m. EST.

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Government Announces Plan to Rescue Citi

Written by A Forex View From Afar on Tuesday, November 25, 2008

Citigroup is set to receive a lifeline from the U.S. government, in order to avoid bankruptcy. More than $300 billion worth of bad debt will be guaranteed by the Treasury in the coming months. In addition to the security package, the bank will receive a $20 billion cash infusion, totaling $55 billion received from the Treasury through the Troubled Asset Relief Program (TARP).

Last week, Citi’s shares plunge a record 60%, as the bank was trying to sell itself to avoid Chapter 11. Even though these rumors had never been confirmed, the bank fell to the lowest price in the last decade. Throughout this period, the bank’s officers and executives insisted the bank is very well capitalized and has strong reserves of liquid assets. Now, it seems that was not the case after all.

At the current share value, the bank’s market cap is around $20 billion, far less than the write-downs that would have resulted from the portfolio of $300 billion worth of bad debt.

The move to save another bank will probably have a positive effect on the equity markets, as it shows the government is not about to let another Lehman situation happen any time soon. However, futures traders have not yet reacted to the news release, as the S&P Futures are down by 15.70 points, currently.

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Expectations From the RBA

Written by A Forex View From Afar on Wednesday, November 19, 2008

In a speech held on Wednesday, the Reserve Bank of Australia Chairman, Mr. Glenn Stevens, confirmed to some extent, the market’s expectations that more rate cuts are coming in the following period.

The Australian economy is set to suffer a major slowdown next year, but some analysts say it will manage to avoid a recession, if the necessary steps are taken. The Australian central bank has already taken the steps towards monetary easing, by cutting a total of 200 basis points within the last three meetings. In his speech, Mr. Stevens announced support for the government expansionary policy, which usually implies increasing the government expenses.

Right now, the markets are expecting at least a 50 basis point rate cut at the next meeting, down to 4.75%. The market’s expectations have full chances of materializing, since the RBA adopts an inflation-targeting regime, in which anchoring future expectations is a crucial tool in implementing the monetary policy. A similar behavior (anchoring future expectations) can be seen at almost every major central bank.
Mr. Stevens has also declared “the cycle of greed and fear cannot be regulated away”, referring to the credit crunch and its origins.

Furthermore, the RBA Chairman said central bankers should focus more on asset swings and leverage, and trying to anticipate bubbles while they are forming. This is a remark that will probably model the financial system in the coming years, since many fingers point to the Fed for letting the housing market enter into a bubble and at the same time allowing the banking system to over-leverage itself. These two (bad) decisions were the main causes of the credit crunch.

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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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