A Forex View From Afar

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Forex Analysis

The U.S. Toxic Asset Plan – The Greatest Plan That Never Lived

Written by A Forex View From Afar on Monday, June 08, 2009

The plan that was built and designed to save the world from an imminent implosion of the famous U.S. toxic plan is starting to look just like a distant memory, since U.S. officials are planning to halt its application.

The Treasury, under Mr. Geither’s leadership, was planning to use the U.S. Toxic asset plan to help banks get rid of the toxic assets locked on bank’s balance sheets. The plan was supposed to find the best price for the toxic assets in an auction sale, were hedge funds and banks would had bid with a staggering majority of funds taken from the Federal Deposit Insurance Corporation.

However, the plan fell short because both banks and other financial institutions appeared reluctant to join the toxic asset plan because of fears that Congress would impose pay caps to the companies’ executives if funds were used. That is not the smartest decision; to threaten the pay check and eventually the position of the person in charge of making important decisions, when you are trying to reach an agreement with them is a little hard to implement.

In addition to investors’ reluctance to join the program, government officials look ready to halt the U.S. asset plan. Recently, the FDIC postponed a pilot sales program, which was supposed to benchmark the system. Moreover, Treasury officials said that banks can now raise enough capital individually, making the program look ineffective.

TheLFB-Forex.com Trade noted that, to some extent, the U.S. asset buying plan was one of the greatest plans that did not see the light of day. Even though the plan provided strong support for the equity market when it was announced, it looks like it was nothing more than hot air. For now, the Treasury can change its focus once again towards the U.S. debt mountain, adding some more hot air to that instead, with public displays of a “Strong Dollar Policy”. From what the financial market have witnessed over the course of the last decade, empty words and wild talk seems to be the way forward. And now to the bubble-mobile, we have another boom cycle to create.

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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.

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The ECB Press Conference: “Independence Fears”

Written by A Forex View From Afar on Thursday, June 04, 2009

At the ECB press conference, the central bank updated its forecasts for 2009 and 2010. According to the ECB’s staff projections, the economy will contract a whopping -5.1%, to -4.1% in 2009, much worse than the previous projections, released in March, which expected the economic activity to contract between -3.2% and -2.2%. The 2010 growth projections were also revised lower, from -0.7% to 0.7% in March, to the current forecast of -1.0% and 0.4%.”

“Inflation expectations were left mainly unchanged at the current ECB staff projections report. TheLFB Trade Team said. “The ECB expects CPI inflation to range between 0.1% and 0.5% in 2009, but to pick up a stronger pace in the 2010, ranging between 0.6% and 1.4%.”

“Overall, Mr. Trichet press conference was more bullish than usual, and said for the first time that the pace of contraction is easing in the global economy. However, Mr. Trichet also warned that growth is expected to pick up only in 2010 (and thus the poor 2009 GDP projections) when asked about the recent green shots in the financial markets. Except for this, the introductory statement did not provide any new information.”

“The Q&A session had two main themes: the new covered bond buying program and the recent comments made by Germany’s Chancellor Angela Merkel. Additionally, from time to time Mr. Trichet received questions about the fate of the Baltic economies, mainly Latvia.”

“The President of the ECB refused to give away too many details on most questions, mostly providing partial answers and most of the time dodging the essential of the inquiry. About the new asset buying program, Mr. Trichet said that the program’s size is 60 billion euros, and does not want to provide any additional information.”

“However, when asked about Angela Merkel’s recent comments, in which she complained about the decisions taken by the Fed, BoE and mainly by the ECB, Mr. Trichet said only that he had a conference call with Germany’s Chancellor in which she assured that the bank’s “fears independence” is not at risk in any way. In the following few questions, Mr. Trichet only reiterated this answer that the bank’s independence is not at risk.”

In the forex market, the major currencies plunged compared with the dollar after the ECB’s interest rate decision. As Mr. Trichet provided his statement, the euro retraced earlier declines, but then started to move lower once again. For now, the currency market appears to be looking for a solid anchoring point.

• The Governing Council decided to leave the key ECB interest rates unchanged at 1%
• The current key ECB interest rates are appropriate taking into account the decisions of early May, including the enhanced credit support measures, and the information and analyses which have become available since
• Economic activity weakened considerably in the first quarter of 2009. Economic activity in the euro area contracted by 2.5% quarter-on-quarter, after a decline of 1.8% in the fourth quarter of 2008
• Activity over the remainder of this year is expected to decline at much less negative rates. After a stabilization phase, positive quarterly growth rates are expected by mid-2010
• The risks to the economic outlook are balanced
• On the positive side, there may be stronger than anticipated effects stemming from the extensive macroeconomic stimulus under way and from other policy measures recently taken
• Confidence may also improve more quickly than currently expected
• On the other hand, a stronger impact on the real economy from the turmoil in financial markets, more unfavorable developments in labor markets, the intensification of protectionist pressures and, finally, adverse developments in the world economy stemming from a disorderly correction of global imbalances, may impact the outlook
• With regard to price developments, annual HICP inflation was, according to Eurostat’s flash estimate, 0.0% in May, compared with 0.6% in April
• Annual inflation rates are projected to decline further, and temporarily remain negative over the coming months, before returning to positive territory by the end of 2009. Such short-term movements are, however, not relevant from a monetary policy perspective
• Any threat to price stability over the medium to longer term can be effectively countered in a timely fashion
• As has been emphasized many times, the Governing Council will continue to ensure a firm anchoring of medium-term inflation expectations
• The latest data confirm the continued deceleration in the pace of underlying monetary expansion and thus support the assessment of moderate inflationary pressures
• In April, the annual growth rate of M3 declined further to 4.9% and that of loans to the private sector to 2.4%
• The latest developments in M3 components continue to reflect to a large extent the impact of past reductions in key ECB interest rates.
• Regarding fiscal policies, the latest projections by the European Commission point to a sharp increase in the euro area. The deficit ratio is projected to rise to 5.3% of GDP in 2009 and further to 6.5% in 2010, from 1.9% in 2008, with the debt ratio exceeding 80% of GDP in 2010

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Markets Prepare For ECB and BOE Interest Rate Decisions

Written by A Forex View From Afar on Wednesday, June 03, 2009

The European Central Bank (ECB) and the Bank of England (BOE) are expected to keep rates on hold, after reducing the monetary policy stance at a record pace over the past year. Both central banks have the policy rate at the lowest level on record, in order to help the economy recover from what seems to be the biggest downturn since the Great Depression.

The Bank of England is expected to keep rates on hold at 0.50%, the lowest rate in the bank’s three century history. Also, the central bank is seen maintaining the current asset purchase program at 125 billion pounds, after it was extended at the previous meeting by 50 billion pounds.

TheLFB-Forex.com Trade Team noted that the U.K. economy saw the first signs of recovery in May, as the price of houses unexpectedly increased, while the service side of the economy expanded for the first time in a year. This may lead to the U.K. central bank to provide a bullish statement tomorrow, since the bank has already said that the recession is easing in its latest minutes. Additionally, the most bearish member in the voting committee, Mr. David Blanchflower stepped down on 1 June, which might uplift the overall view of the committee on the economic outlook.

At the ECB, things are a little different. The European bank has just announced a new (and small, related to the size of the economy) quantitative policy, and has already received criticism about this. At the last meeting, the European Central Bank announced a plan to buy up to 60 billion euros in covered bonds, in order to help the market recover and lift the inflation expectations. However, the bank’s decision received strong criticism from Angela Merkel, Germany’s chancellor. These comments seem even stronger since the German government has been known to never comment on the central bank’s monetary decisions. Currently, Germany is the biggest economy in the Euro-area, and the ECB was built on the Bundesbank’s legacy.

As such, the ECB is expected to keep the interest rate at 1%, while chances are very small that the central bank will expand its plan to buy covered bonds. TheLFB-Forex.com Trade Team expects Mr. Trichet to put emphasis on the global recovery and on the recent developments in the commodity markets.

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Baltic Countries Continue To Struggle

Written by A Forex View From Afar on Tuesday, June 02, 2009

Even though it seems the global economy is on its way towards recovery, overall, not every country is enjoying the comeback.

In the European Union, the Baltic country of Latvia is enduring a very tough period. The economy contracted a whopping 18% in the first quarter from one year earlier (in nominal terms), while TheLFB-Forex.com Trade Team expects the GDP to shed a quarter of its value by the end of the credit crisis. The unemployment rate surged to 17.4% in April, from 6.1% one year earlier. By every standard, the Latvian economy is in terrible shape. TheLFB-Forex.com Trade Team argues that the economic contraction is even greater than the one experienced by the U.S. during the Great Depression.

However, things have not been always like this. For years, the three Baltic States (Latvia, Estonia and Lithuania) had the strongest growth rate among the developed economies, especially Latvia, which averaged double digit expansions during the 2005-2007 periods. As a consequence, the three countries came to be known as the Baltic Tiger.

However, it all came to an end during the credit crisis as the huge current account deficit, (bigger than 20% of the economy) net outflows of cash and double digit inflation choked every small attempt of economic recovery, TheLFB-Forex.com Trade Team noted.

These days, a growing number of economists, including the IMF, say that Latvia should devalue its currency. This would send the Latvian Lat much lower against the dollar and the euro as the central bank tries to inject money into the real economy.

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Commodity Markets Push Canadian Dollar Higher In May

Written by A Forex View From Afar on Monday, June 01, 2009

The financial markets saw some strong trends in May, as more and more investors became bullish on the global and equities

The most important rally observed in May, that had widespread influence over the financial markets, was the in raw materials. Crude oil, gold and metals surged as demand from China and the other emerging economies were stronger than expected. Some analysts even suggested that China is using its huge FX reserves to buy and deposit cheap commodities, instead of buying Treasury notes. However, this theory fades as recent reports showed that China still bought Treasuries in the last part of year, despite the complaints issued by top Chinese officials.

Together with oil, the cad experienced the strongest monthly decline since the 1950’s, in May. The Canadian dollar was pushed higher against the dollar as crude oil surged. The cad has a close correlation with the energy markets, since energy products are Canada’s main export products. The Canadian dollar weakened only 2 weeks out of the 13 since the rally in the equity and commodity markets started, in early March, something that suggests the pair’s strength, TheLFB-Forex.com Trade Team said.

The pound also saw some strong upward pressure during the previous month of trading. The pound gained more than 9% in May, much more than the S&P 500 index, which returned 5.30% over the same period. TheLFB-Forex.com Trade Team said that currencies outperforming equity markets happen very rarely. The pound was driven higher as evidence is mounting that the decline in the U.K. housing market is slowing, even possibly reaching a bottom, they added. Both the U.K. and the U.S. economies were hit very hard by the housing market decline, and traders are now betting that the economy will recover with the housing sector. Moreover, a number of investors are speculating that inflation will surge in the coming period in the U.K, which also empowers the pound.

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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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