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IMF Is Preparing For A Bad Period Ahead

Written by A Forex View From Afar on Friday, January 30, 2009

The International Monetary Fund, the organization that monitors the global financial markets, is planning to borrow $100 billion from Japan and another $150 billion through its first bond sale.

The IMF has played a key role in the latest financial crisis, some even saying than was necessary. During the Asian currency crisis, in 1997, the IMF was seen by many as being guilty for the magnitude of the crisis. The Asian Financial Crisis also remains in historical terms as the IMF Crisis.
However, it was the IMF that provided the funds needed for the Asian economies to recover. The same thing happened in the past year, when Iceland, together with other eastern European states, knocked at the fund’s gate for additional cash reserves.

Now that things appear to be going from bad to worse, the IMF tries to raise more cash, as it seems more countries might need to access money from the IMF. In the last few months, there were some intense speculations that Romania would need to borrow up to $6 billion to cover some of their current expenses. However, it looks like the Romanian government is going to take the needed money from the European Union, from a recently created fund to help the emerging economies. Adjusting from the Asian Crisis experience, the IMF imposes some strict fiscal and monetary rules that might not be approved (or accepted) by all governments.

The IMF hunt for cash and liquidity means that the fund is preparing for another wave of countries nearing bankruptcy. From time to time, a look over the emerging currencies might not be so bad, because they tend to drop very fast. In the last half year, the Hungarian forint, Romanian RON and the Polish Zloty lost at least 40%.

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From Banking to Auto's

Written by A Forex View From Afar on Tuesday, January 27, 2009

After nationalizing most of the banking sector, the U.K. government has shifted its attention to the auto industry. The lifeline would be offered for producers developing low-emission vehicles and training programs for some workers.

However, almost none of the major U.K. car manufacturers target such a market, yet. U.K. cars are usually stylish cars, with big petrol engines like the Bentleys, Range Rovers and Jaguars, all of which burn lots of petrol, some more than others, such as the Bentley.

This decision shows the strong determination of the U.K. government to save the country for a prolonged recession. Estimates are now running as low as -2% for the 2009 GDP and this number will probably be revised lower, if the situation from the financial sector and the labor market continues to weaken.

The British authorities have already committed to shore up most of the financial sector, buying the three biggest U.K. banks. Just last week, the Royal Bank of Scotland had gave up a 70% stake to the U.K. government. In the long run, the recent actions taken might help the U.K. economy recover faster than expected, or at least show some signs of vigor ahead of the other major economies, which would be reflected in the pound’s strength. However, at this point these are just speculations…

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The Bubble Years And The Bubble Economy

Written by A Forex View From Afar on Tuesday, January 27, 2009

Mr. Bernanke suggested in the last period, that the Fed might start buying longer-term debt. Tomorrow, the Fed may discuss this option, and possibly implement it. This means the Fed will further enlarge its role in the market, something that may not be a good thing.

In normal markets, the Fed acts in the short-term debt market with a maturity up to a year (also called Treasury bills). This happens because the Fed needs to be in control of the overnight lending rate, or the rate at which the primary banks trade funds. By buying and selling T-bills, the Fed has control of the rate most of the time, controlling the whole economy and the business cycle throughout.

However, in these unusual days, the Fed has reached the limits of conventional monetary policy. The short-term interest rates are as low as they can get, leaving the Fed with no room to move. In this environment, the Fed is expected to start buying longer-term debt, up to 10-years.

The immediate implications of this move will be that the yields on the longer-term bonds will move lower, as the price is driven up. This should steadily promote markets taking more risk, as the yields drop considerably. The search for revenue/profit will overtake most of the fear in the market, but this will happen slowly. In addition, some say the Treasuries already show bubble-like behavior.

As the economy recovers, the Fed will eventually have to lift rates again. If treasuries are really on a bubble, as some suggest, a possible rate hike from the Fed would be catastrophic for the economy, sending the yields higher in a snowball effect, obstructing the financial system once again. If the Fed will really go into the market and buy longer-term bonds, then it should develop an astonishing exit strategy from the ultra-low rates, to avoid another bubble.

One should think that the world economy has reached its current condition by facing two strong bubbles in just a few years. First, it was the tech-bubble and then it was the housing bubble. Now, we could be heading towards a Treasury-bubble.

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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.

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BOE Meeting Minutes

Written by A Forex View From Afar on Wednesday, January 21, 2009

Today, the minutes from the BoE meeting held on 7-8 January were released. The report showed that the vote was not unanimous, with eight votes for a 50 basis point rate cut, and one for a larger, 100 basis point rate cut.

Apart from this, the January meeting brought something new. It was the first time in the current easing cycle that the bank discussed to leave the interest rate unchanged.

Until now, the bank’s assessment was that the inflation read is in big danger of “undershooting” the bank’s target, now it seems some parts of this risk have vanished, helped by the on-going rate cuts and a huge depreciation in the pound’s value. The central bank’s view is now that the risk is somewhat balanced.

In the last few lines of the minutes, the bank inserted a vital clue that helps anchor future expectations. The minutes show that the bank has acted preemptively until now and, in case the economic outlook does not shift any further to the downside, it would be wrong to view any rate cuts forthcoming.

However, the Committee voted for a 50 basis points rate cut, in order not to damage the market’s confidence in the financial system and in the real economy. A detached vote came from Mr. Blanchflower who called for a 100 basis point rate cut. As a note, most market participants are used to Mr. Blanchflower’s bearish view, so this vote can be easily ignored.

The meeting’s minutes came at a good moment for the pound. The pair shed 1/3 of its value in the last year, falling more than during the “Black Wednesday” event, when the U.K. was forced to abandon the European Exchange Rate Mechanism.

An additional look on the daily chart shows that since the pound has traded freely, after the 1992 occurrence, it never went any lower than the 1.40 area. This suggests that the pound may see, in the short-term at least, some upward pressure, bouncing off a very strong support area, also sustained by a fundamental shift.

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European Commission Updated Projections

Written by A Forex View From Afar on Monday, January 19, 2009

The European Commission, the institute responsible for the European legislation and its implementation, today cut the Euro-area’s growth forecast to -1.9% for 2009.

The European Commission’s forecast is the grimmest report from a public institution. The previous forecast from the same institute, issued just two months ago, in November, said the economy would expand by 0.1% in 2009. The current estimates released by the ECB, known as the staff projections, points to a 0.5% contraction in the Euro-area in 2009. However, as Mr. Trichet said during last week’s press conference the staff projections are going to be drastically lowered in March.

The European Commission also said that the Q4 GDP growth is expected to be as low as -1.5%. Even though this is a very negative and worrying number, it looks like it is surprisingly close to the other three major economies’ forecasts. The Q4 GDP numbers for Japan, U.S. and U.K. are expected to range from -1.5% to -2.0%, the worst in the last few decades in some cases.

Furthermore, the ECB’s Governing Council member George Provopoulos, said in a interview that it is off the mark to expect the bank to cut interest rates to 1%, or below. In the last few weeks, the ECB members have repeatedly said that the central bank would try, at all costs, to avoid reducing the overnight rate too much, something that would create a liquidity trap. However, George Provopoulos, who is also the Chairman of the Bank of Greece, did not exclude further rate cuts in the future, and neither did Mr. Trichet in his interest rate speech, last week. It should also be noted that the ECB was focusing on inflation in July, and only a few weeks later the bank conducted its first rate cut.

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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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