A Forex View From Afar: bonds

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.

| Posted in » bonds, Fed, forex, stocks

ECB Starts Expectations Anchoring Campaign

Written by A Forex View From Afar on Thursday, April 16, 2009

It looks like the Euro-area is in an “expectations anchoring” campaign about their future monetary policy. Today, council member Axel Weber said that the he does not see the key interest rate below the 1% benchmark.

“Being the Chairman of the biggest European central bank, Axel Weber certainly has a lot of influence in the voting council,” TheLFB-Forex.com Trade Team had said. “Additionally, the ECB was built on the Bundesbank legacy, something that gives even greater influence to Weber,” they added.

Anchoring expectations was a technique used very often by the Bundesbank, and now the ECB is relaying on the same instruments. As such, Weber’s comments can be relied upon, especially when other voting members have said in the last few weeks that the ECB is not likely to go below 1%.

The problem the ECB is facing right now is that the bank’s deposit rate is at too low a level, something that may hurt the inter-banking market. Banks that have excessive overnight cash have two primary options either lend it to another bank or deposit it at the ECB’s facilities. Weber sees that if the key interest rate falls below the 1% benchmark, banks will refuse to lend the excessive reserves simply because the transaction costs will be too high.

TheLFB-Forex.com Trade Team notes that if Mr. Trichet announces that the central bank will not cut interest rates to less than 1%, the single-currency might receive a boost. Currently, the ECB is the only major bank that appears reluctant to reduce the interest rate below the 1% threshold.

| Posted in » bonds, ECB, economic preview

What To Expect Tomorrow From The ECB

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

Tomorrow, the market expects the ECB to reduce the Minimum Bid Rate by 50 basis points, down to 1%. Since the current rate cut cycle has begun, the ECB reduced the key interest rate by 275 points or 325 basis points if tomorrow’s projections come true.

Additionally, most market commentators have said that tomorrow the ECB will announce a new quantitative easing plan, to buy corporate debt. This assumption came after Mr. Lucas Papademos suggested such a move may come from the European Central Bank, echoing Mr. Trichet, which said at the last press conference that the bank is judging to implement new “unconventional measures”.

If the ECB will adopt this measure, to intervene in the corporate debt market, the euro might get some strong support. Until now, the ECB is the only major central bank that did not directly adopt a quantitative easing method, even though Mr. Trichet said that the bank actually may in the future.

The Chairman of the ECB referred to the measures to provide unlimited liquidity to the banking system from the Euro-area, instead of doing auctions, and in the same time increase the assets that it receives as collateral.

On a slightly different note, a Bloomberg report shows that the ECB might start buying Eastern European currencies, like the Polish zloty and the Romanian Leu, to help the regional economies recover faster. Over the last two quarters, or so, the local currencies’ plunge had been a real threat for the region’s economy. In case of a possible intervention, the ECB might avert a possible crisis in the region, something similar to what happened in 1998 in Asia.

| Posted in » bonds, ECB, forex, retail forex

A Possible ECB Intervention In The Corporate Debt Market

Written by A Forex View From Afar on Monday, March 30, 2009

Following the European Central Bank’s tradition to pre-announce its important decisions, the Vice President, Lucas Papademos, said last week that the central bank could start buying corporate bonds. This comes after Mr. Trichet announced, at the last interest rate meeting, that the bank is preparing to adopt a new set of “unconventional” policies.

According to Mr. Papademos, the ECB could intervene in the secondary corporate debt market to bring yields down. A similar decision was taken by the Bank of England, which decided to use up to 75 billion pounds to buy corporate debt, and more recently, by the Bank of Japan. At the same time, the Fed decided a slightly different approach, to buy government debt and mortgages.

Most likely, the ECB are preparing to take this stance because they cannot intervene in the government debt market, unlike the other central banks. This happens because the ECB is formed by 16 countries, and such a move would raise many technical and fundamental problems regarding what country’s debt to buy, and in what quantity.

In Europe, a staggering majority of private loans are issued by commercial banks. As the credit crisis struck the financial world, banks began de-leveraging their balance sheets and cutting back on new lending programs. A possible ECB intervention would loosen the tight credit conditions, to some extent.

Market participants expect this measure to be announced this week, at the ECB press conference. However, its effect in the currency market is still unknown because of the lack of any further details about the plan itself. However, if the ECB disappoints, the euro will probably see strong selling pressure.

| Posted in » bonds, ECB, forex

The U.K. Dilemma

Written by A Forex View From Afar on Thursday, March 26, 2009

Even though the U.K. economy is shrinking at a very fast pace, around 1.5% in Q4, the U.K. Prime Minister gave in to the idea of a new stimulus package.

Currently, the country’s outlook is rather gloomy, having the most important economic indicators near record lows. Retails sales continued to decline in February, while sales of small stores dropped the most since 1986, when records first began. Mortgage approvals are holding barely above record low levels, while unemployment claims jumped in February the most on record sending the jobless rate to a decade high. Private forecasters have said that the U.K. economy will shrink between -3% and -4% this year.

Despite the very poor outlook surrounding the economy, the governments’ hands appear to be tied. Both the Chairman of the Bank of England (BoE), Mervyn King, and the Chancellor of the Exchequer, Alistair Darling, have expressed their concerns about the deterioration of the public finances.

On top of this, yesterday, the U.K. Treasury failed to sell all the intended gilts at auction for the first time in seven years. This shows that investors are finding the debt issued by the U.K. government overvalued.

Every time the Treasury fails so sell its debt, it adds an additional burden on the taxpayers’ shoulders as investors request higher yields to be paid. A new stimulus package would imply that the Treasury has to sell even more debt, something that would have a substantial effect on the gilt’s value.

| Posted in » Bank Of Englad, bonds, retail forex

German Economy Set To Contract?

Written by A Forex View From Afar on Tuesday, March 24, 2009

The latest forecast for Germany points out that the economy might contract a whopping 6% this year, as the credit crisis reduces foreign demand for German made goods.

Commerzbank, one of the leading German banks, said that the German economy might contract 6% to 7% in 2009. At the same time, Deutsche Bank and BNP Paribas project a 5% contraction in 2009 for the German economy. The German Institute for Economic Research estimates that the economy will contract between 4% and 5% this year.

By far, these estimates are the worst for any European economy, including the much-spoken-about Eastern Europe. Among the developed countries, only Germany and Japan share such an downbeat forecast.

As was said before, the export component is the biggest drag on the German GDP. Until now, exports have dropped by 20%, while the outlook clearly lies to the downside. Even if the global economy would miraculously bottom, demand and thus exports would still need some time before picking up again. Exports account for almost 40% of the German GDP.

Obviously, Germany is not the only victim of the credit crisis in Europe. Today, the Czech government collapsed, by gaining a no-confidence vote from the parliament, while just yesterday, the Hungarian government resigned. Wonder who will follow next?

| Posted in » bonds, economic preview, forex

The Toxic Asset Plan

Written by A Forex View From Afar on Tuesday, March 24, 2009

Today, the equity markets around the globe rallied as the Treasury was unveiling its plan, meant to save the financial system.

Overall, the plan looks simple, since its only scope is to provide liquidity in the secondary market. This is because the Treasury treats the current credit crunch as a liquidity problem, and (still) considers the banks’ assets fundamentally sound.

The newly announced plan proposes to use the taxpayer’s money to leverage the investors’ funds, up to 6:1 for a loan, and 1:2 in order to buy the assets. In addition, these loans will be insured by the FDIC, so in essence, investors would support only a very small fraction of the actual cost of the distressed asset.

However, this still does not guarantee that investors will overpay for these assets, because the private investors will be the ones to suffer the first losses. Therefore, it will be in the investors’ best interest to come up with a low bid for the toxic assets, reducing their risk exposure.

In this case, banks will not be tempted to sell their assets. It would seem that, if these assets are really worth something (the Treasury treats them as fundamentally undervalued), why would banks want sell them at huge discounts. Secondly, many of these assets are still overvalued on the bank’s balance sheets. Even if the bank would want to sell them, they would have to write-down their value first, something that might not be too good either for the bank or for the overall system because it will trigger systematic write-downs.

With a bit of luck, maybe the new asset plan will get some traction in the financial markets otherwise today’s rally might turn around very quick. Additionally, as some market commentators have pointed out, it might be among the administration’s last shots at saving the financial markets.

| Posted in » bonds, Fed, forex, stocks

One-step forward or one-step back?

Written by A Forex View From Afar on Friday, March 20, 2009

The Fed’s decision to buy up to $300 billion of long-term Treasuries and double the purchases of mortgages to $1.45 billion was a surprise to most market participants.

The surprise is even bigger, if we add that just two weeks ago the Chairman of the New York Fed, seen as the second man in Federal Reserve, said “at this point in time the Fed has judged buying long-term Treasuries is not the most efficient means of easing financial market conditions”. This is a huge change in just two weeks, and it certainly raises some questions as to why the Fed made this decision, if it is not efficient.

Moreover, Mr. Bernanke has build an academic reputation as a supporter of the inflation targeting regime, which implies that the central bank must be as clear as possible in its actions. The Fed’s past actions have proven that the central bank follows these general guidelines, since the central bank has anchored expectations pretty well (until now).

In the last few years, the Fed has gone through some major changes with Mr. Bernanke at the rudder, and has mostly, managed to break free from the Greenspan era, when market participants focused on how many times the Chairman blinked, or where he looked when he spoke, rather than what he actually said. Mr. Greenspan spoke most of the time in “riddles” that gave some major headaches because the message was never fully understood.

The decisions taken yesterday (to intervene in the debt market without anchoring the market’s expectations first) remind us of the Greenspan era, something that is not very positive from my point of view. Yes, it was a true shock and it had clear effects in the financial markets, but it is still a question of how positive these effects will be in the long-term. If, supposedly, the market/economic conditions continue to deteriorate, the market will expect the Fed to provide another shock. If the FOMC fails to provide it, the financial markets will be very disappointed.

Another problem with the Fed’s statement issued yesterday is that it does not clarify how they have chosen the sums. Why they chose $300 billion for Treasuries, and $750 for mortgages is still unknown, but my guess if that the officials will clarify this at some point in the future, since this is not such a major issue.

The overall conclusion would be that the Fed had communication issues yesterday, and from my point of view took a step backward instead of the forward. Referring to the actual decisions taken yesterday, the markets still need time to clarify how effective they really are.

| Posted in » bonds, Fed, forex

The Chinese Conundrum

Written by A Forex View From Afar on Sunday, March 15, 2009

Before the G20 conference this past weekend, top Chinese officials had complained about the safety of the U.S. Treasuries.

Being by far the largest U.S. bondholder, China has a lot of influence over the debt market. It is said that, the People’s Bank of China holds up to $1 trillion in Treasury notes and government-backed debt, issued by public/private entities like Freddie and Fannie.

It is easy to see why the Chinese government is concerned about the fate of U.S. debt, since such a huge amount of debt holds two major risks: interest rate risk and currency risk. Bonds have a unique relationship between its price and yield, as one rises the other drops. As such, if the yield rises on a bond, its price would fall. Here is where the Fed comes in play.

Eventually, the Fed would have to raise the interest rate, even though this might not happen in the near (or medium) future. A higher interest rate would drag the price of U.S. Treasuries lower, while increasing its yield. From such a move, the Chinese foreign reserves would take a hard hit, because U.S. bonds will lose their value.

Another hit that China might take comes from currency risk. U.S. Treasuries are denominated in dollars, and a steep depreciation of the greenback would pose a huge risk, even though many say the Usd/Cny rate is manipulated.

Neither of these two outcomes are likely to happen in the short term, but as the credit crisis comes to an end and things start to return to normal, money will start pouring out of the U.S. economy in search of higher yields. As such, the dollar and Treasuries will be certain victims, something that should worry the Chinese officials.

Currently, Chinese officials cannot do too much about it, but in time, they will have to begin to diversify from U.S. debt. One of the golden rules of building a successful portfolio is to diversify, something that they have not done, and now the State Administration is paying the price for this. Most analysts say that, President Obama will have a huge problem funding the federal deficit if China was not buying Treasuries.

| Posted in » bonds, economic preview, Fed

Eastern Europe Debt Cut Lower

Written by A Forex View From Afar on Thursday, February 26, 2009

Two Eastern European states saw their debt-rating cut lower, near the default risk in the last days. Ukraine and Latvia saw their debt rating downgraded by S&P, to CCC+ and BB+ respectively.

According to the default swaps contracts, the market sees a high probability (above 50%) that Ukraine will default over the next year, reaching a 92% chance that the country will default within the next five years. Currently, Ukraine's debt is the most expensive in the world to protect. Consistent with the default rates study over the last three decades, about 25% or one quarter of the bonds with the C rating default.

How it was said in almost every article regarding the fate of Eastern Europe, the biggest problem in the area is the high degree of debt denominated in foreign currencies. Having the local currencies plunged in double digits percentage, foreign debt is a huge problem. In particular, the Ukrainian grivna has fallen 50% against the dollar in the last few months, multiplying the country’s problems.

The S&P downgrade came even though the IMF said no Eastern European country is near the default level, or in talks with the monetary fund for another loan. However, if Ukraine will default in the next few months, problem will arise for all the Eastern Europe, since investors see a high correlation between the regional economies.

One should asses that, if a country will default on its own debt, it will close the last door that leads to recovery. In addition, the consequences of such an action would be felt for years in row, so practically, the real chance of a country to call for bankruptcy is very small.

| Posted in » bonds, ECB, forex

Treasury's Money Supply

Written by A Forex View From Afar on Thursday, February 12, 2009

The latest reports show that the Fed is preparing to add four new primary dealers, as the Treasury is set to auction up to $2.5 billion this year, in order to raise cash for the much needed stimulus programs.

Primary dealers are the main bidders for U.S. debt, issued periodically by the U.S. Treasury. Currently, there are 16 primary dealers, including all the big names from the Wall Street, the lowest number on record, preparing to bid for what will probably be the biggest amount of treasuries ever sold. From the primary dealers, treasuries pass into the secondary markets and become marketable. In other words, primary dealers are the main market makers for U.S. debt.

By adding four new dealers, the Fed will try to reduce the spreads in the primary market, as some traders have complained lately that the market has become rather illiquid, with relatively small volumes. An illiquid market means the government would have to pay more at its auctions, and this is not too good when you are preparing to sell a record amount of debt.

The Treasury is preparing to borrow up to $2.5 billion of debt this year, almost four times more than the amount of debt issued in 2008. This means that for every basis point, the government will have to pay $250 million per year in interest, or $70,000 per day.

The huge amount of debt issued might be another reason the Fed wants to start buying longer-term debt. This way, it will reduce even further the yields on the Treasury bonds, helping the government pay less in annual interest, and at the same time sending the mortgage and commercial paper lower (in theory, that is).

All this debt come at a huge cost, and most likely, the dollar will be sacrificed. Having the Fed buy U.S. bonds, the printing press will once again start working day and night, increasing the money supply at a strong pace. From economics 101, when the supply surpasses the demand side, the price has to fall somewhat lower until a new equilibrium point is met.

| Posted in » bonds, forex

Interest rates Vs. Yields

Written by A Forex View From Afar on Monday, February 09, 2009

Even though the Fed has pledged to maintain the key interest rate at very low levels for an extended period, the yield on the longer loan instruments rose at a strong pace in the last month.

In the financial markets, governments and corporations use bonds to issue new debt and finance their activity. The yields on these bonds represent how much the entity would have to pay for its loan, so a lower interest rate is in its advantage. In order to conduct the monetary policy, the Fed influences only short-term rates, up to a year. However, the Fed has no direct control over the longer-term yields, but it tries to influence them through a whip effect.

Moreover, these longer-term bonds, such as the 10 and the 30-year, have risen quite spectacularly lately. From the beginning of the year, the yield on the 10-year bond rose by 30%, from 2.40 to 2.90 points, while the yield on the 30-year bond rose 35%, from 2.81 points to 3.68 points

As the yields on the U.S. government debt rises, it raises the marginal cost of holding cash reserves, and thus it undoes the Fed’s rate cuts. In addition, these higher yields are sent all over the market, raising the cost of mortgages, personal loans and adds a crucial weight to the U.S. debt, especially now, when the 2009 budget deficit forecasts are measured in $ trillions.

Lately, there have been strong speculations that the Fed would be tempted to start buying treasuries in the primary and in the secondary markets with a maturity longer than a year, in an attempt to further expand its balance sheets. Nevertheless, this holds a major problem, because it will assure investors that they will be able to find a counterpart in the Fed, tempting sellers to sell at a higher price. In other words, the Fed is willing to assure the demand side, disrupting the supply-demand relationship.

If the Fed will really start buying long-term treasuries, its implications in the currency market would be adverse. Firstly, it would allow investors to run out of dollar denominated assets in other risky assets, searching for a higher yield, which would be dollar negative. During this time, the yield on treasuries will remain relatively flat, or it will head somewhat lower (which indicates risk aversion), but still the dollar would lose ground.

| Posted in » bonds, Fed, forex

BOE Policy

Written by A Forex View From Afar on Sunday, February 08, 2009

As the Bank of England is reaching the shores of conventional monetary policy, it now tries to use and implement new measures in order to pull the U.K. economy out of the recession.

Starting this week, the BoE might start buying commercial paper, in order to bring the borrowing yields down to levels that are in-line with normality. In normal market conditions, which we are currently not, central banks operate through buying and selling government issued debt. Now, the major central banks from across the world have expanded these rights.

From now on, the Bank of England would be a major player in the corporate debt market. The BoE plans to act both in the primary and in the secondary corporate bond market. This, in turn, will help the corporate environment by bringing the yields down on existing bonds (throughout the secondary market), and assure cheap liquidity in the primary market.

This decision will certainly aid the U.K business environment, helping some companies avoid debt rating downgrades and running out of cash. As such, the U.K. financial system might gain some more strength, which should theoretically help the U.K. pound. Until now, the sterling has been responsible for both positive and negative news streaming out of the U.K. financial system.

The pound’s outlook lies on the upside in the following period. The market (and thus the pound) might get a big push forward from the stimulus plan vote, which will help the markets buy risk, and sell the safety of the dollar. In the short run, the 1.48-1.49 level will be very important for the pound. In that area, the pair faces an important swing area and a trend-line that holds the pair from early November. If it breaks higher, the pound has a clear path towards 1.53-1.55 area.

| Posted in » Bank Of Englad, bonds, economic preview, forex, retail forex

BoJ Interest Rate Analysis

Written by A Forex View From Afar on Thursday, January 22, 2009

In the early hours of Thursday, the BoJ released its 2009 and 2010 updated forecast in the monetary policy statement that followed the interest rate decision.

The members of the policy board estimated that the economy will contract by 2.0% in 2009, even though the initial forecast, dating back to October of last year indicated a 0.6% expansion. The 2010 forecast was also revised lower, from 0.1% in October to -1.8% now. However, the policy board expects the GDP to pick up again in 2010, having the economy expand by 1.5%.

The bank has also shifted lower its inflationary view. The bank estimates the CPI read will show deflation in 2009. The bank expects the CPI to come down to -1.1% in 2009, from the estimated number of 0% in October. In addition, the bank also expects the CPI to remain under the 0% benchmark in 2010.

The BoJ issued a very downbeat forecast, which shows that the Japanese economy will again face deflation, something that the bank has tried to fight for years and never succeeded. In all probability, the central bank will try again to implement a quantitative easing approach, buying a wide array of debt instruments to bring yields down.

Most likely, the BoJ will focus on corporate debt to bring yields down, making it easy for the corporate environment to borrow and access liquidity. At the same time, these measures will drastically expand the monetary base, adding inflationary pressures (even though this has never succeeded in practice by the bank).

Furthermore, in order to shift to the upside the inflationary expectations, the bank will be temped to intervene in the currency market, as it has done before. In the past few weeks, top Japanese officials complained about the yen’s strength, and said an intervention is very likely. This is no surprise, since yesterday the yen reached a 13-year low against the dollar, choking exports.

Usually, central banks disappoint very rarely, and are committed to what they say and preach. In the medium to long term, expect strong yen rallies on positive U.S. future numbers, and some unusual resilience to break lower, on negative equity markets.

| Posted in » BoJ, bonds, economic preview, forex

Treasuries And Corporate Debt, Two Different Stories

Written by A Forex View From Afar on Tuesday, December 16, 2008

Even though lately, yields on the instruments the U.S. government uses to borrow, treasury notes, have fallen to zero, or close to it, the yields for corporate debt is trading at a record high.

For example, the long term debt paper issued by Verizon, which has an investment grade rating, yields around 9%, while, debt issued by Kodak Eastman yields a whopping 17% for a 5 year maturity period. At the same time, treasuries are trading at records lows and some investors are even accepting negative yields (theoretically the borrower should receive interest from the lender). The equivalent treasury yield for the Verizon loan is around 2.60%, 3 times less, while for Kodak’s debt is 1.50%, 11 times less.

This is pretty much a consequence of a very low liquidity environment and safety flights, not to mention the herd mentality. Investors are selling every possible asset, in order to buy treasury notes, lifting their price. Because of the reverse relationship between the price of a bond and its yield, when investors buy a bond, its yield drops.

Expensive debt means two important things. First, it adds additional expenses since the company would have to pay much more for their debt. Second, it threatens some companies with bankruptcy, because they cannot access liquidity for the daily operations or raise enough cash to water the credit crunch’s consequences.

This is not a healthy environment for business’ to prosper, and it spells trouble ahead. So tomorrow, even thought the Fed had cut 75 basis points, the only real winners are the treasury notes, and not the real economy.

| Posted in » bonds, economic preview, forex

Libor Starts To Move Lower. The freeze thaws.

Written by A Forex View From Afar on Friday, October 31, 2008

Following the global rate cuts and the impressive measures taken to ensure liquidity in the financial markets, the Libor rates are starting to show signs of relief.

The 3-month dollar Libor, or the rate at which banks borrow money from other banks with a maturity of three months, declined for a full 14 days, to 3.19%. The overnight dollar Libor rate, used to fund overnight activity, dropped to 0.79% a record low as the market expects more rate cuts to follow shortly.

Action taken by the ECB, looking for a similar outcome, driving the inter-banking rates lower, the central bank has pumped over a $1 trillion into open market operations. The euro 3-month Libor rate also declined yesterday for the 14th consecutive day, down to 4.83%.

However, even though short-term rates are at very low levels due to the huge liquidity central banks provide, banks still do not lend on longer maturities. The spread between the shorter-term and the longer-term loans is still very large, despite recent declines. The 3-month dollar Libor is 220 points above the Fed’s rate, compared with just a few dozen points in normal market conditions.

The question now is how low and how quickly will the rates fall. Central banks are now walking at the “extreme end” of monetary policy. Central banks operate by influencing short-term rates, and hoping (it is really hoping) to move the longer maturity rates; very similar to a whip. However, as banks are reluctant to loan to each other, a central bank has practically no control over the “end” of the whip, thus, the high spread between the shorter-term (which are at record lows) and the longer interest rates.

| Posted in » bonds, economic preview, forex

First signs of relief are here

Written by A Forex View From Afar on Wednesday, October 15, 2008

The global markets indicate that the first signs of relief are here, after indicating investor fear and uncertainty for the last few weeks .

The so-called “fear index”, the VIX, fell from the all time top reached on Friday, and is now trading around the 53 point value, showing the market has found some confidence. Libor, the rate at which banks (should) lend to each other, declined this week as the recent government auctions restore the banks confidence, to some extent. The 3-month dollar Libor rate fell 12 basis points, the most since the middle of March, while the corresponding euro rate fell 7 points, the biggest one day decline this year. It also should be noted that despite recent developments, money rates still are at unusual high levels, much higher than in current market conditions.

For now, it looks like the government/central bank interventions were a success, at least with the money market rates. However, in the currency market, the latest actions had a limited affect. The market started to slowly buy risk, but so far, the currency pairs did not manage to break any important support or resistance levels, and most of the time they just moved around swing points. If no rumors will emerge again about bankruptcies and bank failures in the following sessions, it is very likely traders will start to look for overnight swaps, making the yen crosses move higher.

| Posted in » bonds, forex, stocks

The need for a bailout

Written by A Forex View From Afar on Tuesday, September 30, 2008

The House of Representatives might have vetoed the Treasury’s plan to bailout financial institutions, but the market still sees a very strong need for a rescue package.

The market’s response as the news of the vote unwrapped, confirms that investor’s confidence is close to zero. Global equity markets tumbled the most in 21 years, while the major U.S. indexes posted some record declines.
If someone wants to look for any further evidence that the financial system needs a serious bailout plan, then just look at the number of banks recently bankrupted or were forced to “sell themselves” on both sides of the pond. Lehman, Merrill, AIG, Washington Mutual, Wachovia in the U.S and Fortis, Dexia and Hypo Real Estate in Europe are just the latest banks that can be added to the of credit crunch casualty list.

A new bailout plan with explanation and serious clarification on what the Treasury will do with the cash it receives might give it the potential it needs to pass the vote. However, till then, who can vote for a blank check with $700 billion on it that not too many know its clear purpose or effects?

Reports are just starting to appear with the effects of the credit-crunch over the real economy. Tougher access to liquidity and credit, weak consumption and small owners complaining about the business environment are just to name a few. If banks will not start to do what they are intended to do, lend, then this will be just the beginning as the whole economy is torn apart.

An alternative to the bailout plan would be for the Treasury to bankrupt every possible bank, until only one stands. Since Mr. Paulson has strong relationships with Goldman Sachs, it will not be hard to imagine which would be the last one standing. Moreover, since now they receive deposits, who really needs more than one bank??? Oh, let’s not forget that the U.S. still needs Bank of China to support its debt, but that would be another story.

To finish this article, who knows what a Wall Street bank is now? The answer is simple: a bank is nothing more than a future government entity.

| Posted in » bonds, economic preview, Fed, forex, stocks

Markets driven by fear

Written by A Forex View From Afar on Tuesday, September 16, 2008

The markets are now being driven by fear, jumping up one day and down the next, and traders move in and out of the treasury’s safety with every news story regarding financial stocks.

The mechanics behind the volatility seen lately may vary, but the main motive remains fear. Nowadays the market is driven by rumors about who will follow Lehman and who is next on the Fed’s “Merger and Acquisition” list. This has led to a strong rise in the CBOE volatility index over the past few weeks. On Friday, the CBOE volatility index (Vix) rose 5%, while today the Vix jumped 12% at mid session and is now trading at the highest point over the last month.

On Friday, the Euro and the Pound posted their biggest gains against the dollar in recent months. This occurred after both pairs were sold uninterrupted for more than a month. Just a couple of months ago, Fed Fund futures were pricing in a rate increase by the end of the year, but now, with Lehman’s failure, traders are starting to price in another rate cut, further reducing the yield differential.

Treasuries have had the biggest surge since January in the face of the financial crisis. Treasuries were bought in a flight-to-safety, as riskier assets are liquidated.

Another characteristic of the fear factor is the U.S. session becoming noticeably the most volatile session. This comes after the U.S. session had been as sluggish as the Asian session. The same thing occurred earlier this year, when the markets were trembling in the face of oil at $150 and the U.S. economy was staring at a recession.

When trading with a high leverage and with relatively small stop losses, as retail traders usually do, volatility becomes the biggest enemy. Whipsaw movements happen frequently and losses are logged that during other market conditions, would have been winners. If unsure about the next move, a wait and see approach might not be such a bad idea. Nobody can tell when the next rumor will hit the market these days or what the reaction may be.

| Posted in » bonds, commodities, economic preview, forex, stocks

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%

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.

| Posted in » bonds, forex, stocks

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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.