A Forex View From Afar

When loosing Grip

Written by A Forex View From Afar on Monday, March 31, 2008

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Since the beginning of the financial markets turmoil, Central Banks look to be struggling maybe to fulfill their attributes, either fighting inflation, assuring growth or maximum employment. One step further on and some may start to see the concept of the free market falling apart.

Firstly, we have the ECB, struggling to achieve it’s 2% CPI goal, which is currently running at 3.5% year over year. So, the ECB is not in such good a position right now, they missed the target by 1.5%, they are without too many opportunities for a rate increase any time soon.

The Bank of England is dealing with the same problems of rising inflation, but the BOE has a greater problem now; financial stability. Just a couple of months ago, the 3rd biggest lending bank in UK, Northern Rock, failed. To make the problem much worse, HBOS took a major hit after rumors spread about a similar path to Bern Sterns. Until now they remain rumors.

The cases of the European Central Banks and Bank of England, are starting to show that maybe Central Banks are starting to lose their capacity of anchoring inflation, and inflation expectations, which is a very bad thing.

Fighting inflation is their main objective. Losing this battle, even in the medium term, will affect investor’s credibility of, and trust in, the banks and maybe worse, will could influence the Central Bank’s credibility in the face of each region’s residents.

Speaking about anchoring inflation, The Fed is another example of a Central Bank that is very close to the point where inflation could get out of control; fortunately just not in the Great Depression Style;

The Fed is now starting to feel a little twist of fate it would seem from “the market is always right” point of view, and “the market will regulate itself”. They are starting to see the need to tighten regulations and maybe the need of interventions in the market. This is what basically Mr. Paulson is promoting, a regulated market. They only needed two severe bubbles to burst to realize regulation is not such a bad thing after all.

The famous Paul Krugman, said about regulations; they are just a measure for the markets to see that something is happening, nothing more, and nothing less.

The need to remain optimistic is crucial, as Mr Bernanke said to Congress recently; We would ask that the public still trust in the Fed.
With the backing of the consumer the US economy, and therefore the US$, will climb higher over 2008/9, without the consumer things look less rosy, and the Euro could continue its climb northwards.


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Housing Bubbles: Not only in the US

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

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The drop in the construction area is not only felt in the US, but Spain also suffers of it. The beautiful country, which acts as a magnet for tourists around the world, now starts to experience the downturn of a housing bubble

Completed house sales for January dropped 27% year-on-year, according to the National Statistics Institute (INE), while total lending to home-buyers fell almost 28% to €13.4bn ($21bn, £10.5bn). The value of the average mortgage was down 3%, to €142,794, despite higher financing costs.

Even if prices didn’t drop too much (measured in mortgage cost), the sale of houses dropped at a very fast pace.

It should be said that, from 1997 to 2005, prices grew at an impressive rate, totaling 247%, while 20% of the available houses were unoccupied. This clearly shows speculative interest was at the highest peak possible, creating a bubble.

The problem is where was the government all this time? Oh, I forgot, these kinds of bubbles are “good” (short-term speaking) for the economy, creating a welfare state for the population. Probably the government prolonged this bubble, after the elections, let others handle it…Does all this ring a bell? It’s the current case of US and Japan of the 90s, which until now haven’t recovered
The interesting point is at the same time, US and Spain had reached its housing peak in 2005. Now let’s see who gets things rolling first.

Probably the strong Euro won’t attract too many foreign investors very soon. Or maybe, the Spanish Housing Market is in a reverse correlation with the Euro. A strong Euro, a weak housing market.


Source:
FT: Spain’s property market headed for a fall

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Housing Bubbles: Not only in the US

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

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The drop in the construction area of the economy is not only being felt in the US; Spain also suffers from the ill right now. The beautiful country, which acts as a magnet for tourists around the world, is now starting to experience the downturn of a housing bubble

Completed house sales for January dropped 27 per cent year-on-year, according to the National Statistics Institute (INE), while total lending to home-buyers fell almost 28 per cent to €13.4bn ($21bn, £10.5bn). The value of the average mortgage was down 3 per cent, to €142,794, despite higher financing costs.

Even if actual prices did not drop too much (measured in mortgage cost), the sale of houses dropped at a very fast pace.

It should be said that from 1997 to 2005 prices grew at an impressive rate, over 247%, while 20% of the available houses were unoccupied. This clearly shows speculative interest was at the highest peak possible, creating a bubble.

The question is; where was the government control during this time? Oh, I forget, these kinds of bubbles are “good” (short-term speaking) for the economy, creating a welfare state for the population. Probably the government prolonged this bubble, after the election, to now let others handle it. Does all this ring a bell? It’s the current case of US, and the Japan of the 90s which until now still has not recovered.

The interesting point is that US and Spain reached their housing peaks the same time, in 2005. Now let’s see who gets the first things rolling to address the same situation.

The strong Euro probably will not attract too many foreign investors anytime soon. Or maybe the Spanish housing market is in a reverse correlation with the Euro; a strong Euro = a weak housing market.


Source:
FT: Spain’s property market headed for a fall

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Fundamental day

Written by A Forex View From Afar on Wednesday, March 26, 2008

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Today we had one of those Fundamental days, where new macroeconomic thoughts come into our minds and trading ideas depart, or even better, our trade ideas get re-enforced

On one side of the Atlantic, on the European Shores, business owners are starting to see a brighter future ahead, reflecting in the 3 months positive IFO Business Climate and Expectations. This somehow positive attitude was also seen in Mr. Trichet speech; Inflation remaining Europe’s biggest fear (at least for EcB).

The current ECB objective is to safeguard inflation at 2% over the medium term, and today Mr. Trichet made clear for the first time what medium term actually means: 18 to 24 months. It is good that it gave a clear indicator in time, but it is not a big surprise: this is the standard time accepted by academic views for monetary policies to take effect, sometimes even faster.

Mr. Trichet re-enforced our views, at this time; we clearly do not see any rate cut from the ECB on 2008. As we posted previously, if CPI remains above the target, as soon as the credit crises clears we will not be surprised to see a rate increase.

All this happened on the shores of Europe, were miraculously the storm on the other side of the Atlantic is not reflected.

After the US posted yesterday’s “good” performance in statistics, today Durable Goods and New Home Sales had the role of reminding us were we really are. Durable Gods came worse then expected, but New Home Sales beat analyst expectations.

Lucky them, but New Home Sales are at the lowest point in 13 years, so clearly even if they beat analyst expectations, this was not good at all.

Other victims of the credit crises are developing economies, like Iceland. It was a subject heavily debated today, Iceland's Central Bank (Seðlabanki Íslands) raised the interest rate with 125 Basis Point move to 15%. The Icelanding Krona, is a victim of the “safety run”, which involves selling high yielding currencies, and speculative positions from buying bonds.

The Iceland CPI chart shows a real economic drama that unfortunately is happening in other countries too.


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Not so Confident?

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

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We saw three releases today and all slapped the Market around in one way or another. Both the main US economic components were hit today; the Housing market and Consumers

Consumer Confidence Index numbers hit the screens, showing consumers are starting to get less and less enthusiastic about the future. A bad picture is being created here, since 70% of GDP is based on consumer spending.



The Consumer Index came at a 5 years low, while the Expectation Index component came at a 35 year low, when Watergate and Oil crises were at their peak. A recession is declared if two or more consecutive quarters with confidence levels are below 100. We are below 100 since April last year. Figure that out.

“Looking ahead, consumers' outlook for business conditions, the job market and their income prospects is quite pessimistic and suggests further weakening may be on the horizon. The Expectations Index, in fact, is now at a 35-year low (Dec. 1973, 45.2), levels not seen since the Oil Embargo and Watergate."’

In big terms, the Richmond Fed Index draws almost the same picture: future expectations continue to decline. The difference between these two, is that Richmond Fed Index shows current conditions slightly improved. This is the reason why the survey came in at 6 versus the -5 expected. Manufactures complained about higher prices; raw materials increased at the highest rate since 1993.

The S&P/Case-Shiller US National Home Price Index showed that Houses Prices dropped by most ever recorded in January.

Putting these 3 surveys together, a troubled future is seen. All 3 are considered smaller releases in their own right, but they had the power to send Equities from yesterday’s strong gains to the red territory today.

Future expectations play a big role in monetary policy, and these kind of releases, even if they are smaller, may force the Fed to forget (again) about inflation and assure growth by cutting Interest Rates (again). The question then comes as to whether the Fed ready to take the role of the Bank of Japan who are looking to get back towards the 0.25% mark by the Summer it seems.


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The Bank of England Says "No Thanks" To MBS Shopping

Written by A Forex View From Afar on Monday, March 24, 2008

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Mervyn King, Bank Of England’s Governor, announced that BoE will not buy mortgage backed securities (MBS) to release the inter-banking pressures. This statement comes after a private meeting between BoE officials and banking system representatives.

Why would someone want to buy such an asset, now? After banks had made bad bets, now they want to shovel it on tax-payers shoulders, and it would seems rightly so that the BoE says; "thanks, but no thanks". Already, the population is effected by falling home values, increasing payment rates and higher gas prices. To make consumers pay for someone else’s bad investments is by far a wrong idea. I can understand (somehow) accepting the top MBS as collateral, but to outright purchase them is another story. If banks want to rebuild public and investors confidence, then write down your bad debt and disclose all the hidden debt files, and possibly do it before regulators force your hand.

The good news is we found out that a Central Bank can withstand the pressures and lobby from private firms, and we would hope that is the way it stays for the long term…