• Finance Ministers And Central Bankers Are Running Out Of Time To Revive Growth And Sentiment
• Switzerland Adds Currency Intervention To The List Of Desperate Steps Policy Makers Are Willing To Take
• If GE Loses Its Top Credit Rating, It Won’t Be Long Before Unstable Economies Meet The Same Fate
How long do policy officials have to revive economic growth and stabilize the financial markets? How much worse can conditions become if the global leaders cannot come to a significant, joint policy response to the world’s ills? These are the questions the market is grappling with now; and ‘just how bad can things really become’ may be a question traders have to seriously consider over the coming weeks and months. While the fundamental outlook for general risk trends is not encouraging, carry interest received a significant boost this past week. The Index jumped over 650 points since last Friday, marking a notable break above resistance in the pressure-ridden, falling wedge formation that had taken responsibility for the steady downtrend in carry interest (and thereby sentiment) since the October panic. However, this break is hardly confirmation of a rebound in optimism. The breech relieves the stress on the market to force a major trend; yet the index is still entrapped within long-term congestion. Such sentiment is reflected in the market’s more risk-sensitive asset classes. The Dow has recovered from a 12-year low, Treasuries have pulled back from record highs and the safe-haven US dollar has eased of its own three-year highs. Furthermore, some condition indicators have shown significant improvement: currency market volatility has certainly stabilized; risk reversals show are returning to neutral levels; and yields are starting to return.
It is easy to be comforted by the recovery of such notable indicators and markets; but the broader trends must be taken into account. A week’s rebound in equities and pull back in the US dollar mean little when they are still set within major trends and only arms distance from their respective extremes. Realistically, these are cautionary improvements as the market awaits clear fundamental shifts that signal a tangible recovery in economic activity as well as lender and investor confidence. Over the past few weeks, there have been signs of both improvement and deterioration. Quantitative easing, sizable stimulus packages, government guarantees and efforts to boost reflect a broad array of policy aimed at curbing the worst recession since WWII. However, these efforts have not been universal. Whereas the US and UK have acted quickly and aggressively to their swelling problems; both Japan and the Euro Zone have lagged with their own responses. Without a unified response to this global problem, there is little doubt that conditions will worsen. Recently, the Asian Development Bank has suggested lost asset value could top $50 billion and the World Bank has projected the first global contraction since the 1930’s. Momentum behind this recession is being fed by the slump in investment and consumer spending, which itself is largely based on sentiment. With production and consumption slowing, major corporate bankruptcies becoming more frequent and now whole economies on the verge of default, drastic measures must be taken to prevent what could become a global depression.
Written by John Kicklighter, Currency Strategist
Article Source - Finance Ministers And Central Bankers Are Running Out Of Time To Revive Growth And Sentiment
"President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures. We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried."
While the announcement represented political posturing (to an increasingly restless, domestic Chinese audience), it should nonetheless be heeded as a warning, that the US cannot expect China (and other foreign Central Banks) to fund US budget deficits indefinitely.
Let’s put aside the rhetoric for a moment, and examine the data. This week witnessed strong demand for Treasury securities, which were auctioned by the Treasury Department on consecutive days. Despite historically low yields (see chart), investors continue to snap up Treasury Bonds, mainly for the sake of risk aversion. The newly-revived issuance of 30-year bonds also went off without a hitch, and were more than 2x oversubscribed. Most relevant to this discussion is the fact the foreign Central Banks accounted for as much as 46% of demand!
The most recent Federal Reserve Statistical Release paints a similar picture. While foreign Central Banks and other international institutions reduced their holdings of US government securities slightly from the previous week, the decrease was essentially negligible. Overall, such entities have increased their holdings by at least $440 Billion over the previous year, bringing the total to approximately $3 Trillion (depending on the data source). China’s contribution remains substantial. Of its $2 Trillion in foreign exchange reserves, “Economists say half of that money has been invested in United States Treasury notes and other government-backed debt.”
However, there are a few reasons why I don’t think this trend will continue. First of all, the buildup in foreign Treasury holdings that transpired over the last decade was largely a product of unsustainable global economic imbalances, as net exporters to the US invested their perennial trade surpluses in what they perceived to be the world’s most secure investment. Temporarily putting aside whether Treasuries are actually secure, economic indicators suggest that Central Banks simply do not have the capacity to increase their holdings by much more. China’s trade surplus plummeted to $4.8 Billion last month; one economist projects a surplus of only $155 Billion in 2009, compared to nearly $300 Billion in 2008.
You can also remove from the list Japan- the second-largest holder of US Treasury securities- which is now running a trade deficit. Instead, both countries have publicly announced plans to use some of their forex reserves to fund domestic economic initiatives.
Then there is the equally unsustainable short-term buildup in US Treasuries, which is largely a product of technical factors. As I mentioned above- and which should be clear to all investors- the current theme underlying securities markets is one of risk aversion. In fact, it now appears that a bubble is forming in the bond market, and “any exodus now could spark selling across the board. Foreign debt holders would likely repatriate their funds immediately to reduce the risk of being last to convert.” As soon as markets recover- of which there are already nascent indications- investors will probably reduce their holdings of government bonds, or at least not increase their holdings.
Even the most conservative projections indicate a cumulative budget deficit for the next few years measuring in the the Trillions. Unless the risk-aversion theme obtains for the next decade, it seems unlikely that foreigners can be tapped to fund more than a small portion, leaving the Federal Reserve (with the help of its printing press) to make up the shortfall.
Fundamental Outlook for US Dollar: Bearish
- US Dollar Index Breaks Key Support, Signals Losses Ahead
- Retail Sales Fell Less than Expected in February
- Chinese Premier Questions the Safety of US Assets
US Dollar weakness is set to continue in the coming week as an upward correction in risky assets sends capital out of safe haven assets in search of yield. Last week, the US Dollar Index conclusively broke below a rising trend line that had guided prices higher since mid-December, opening the door for an extended pullback against the spectrum of major currencies. Indeed, the greenback’s average value against its major counterparts is now -93.7% inversely correlated with the MSCI World Stock Index. The Australian and New Zealand Dollars are likely to be the key beneficiaries once again as lucrative yields at 3.25% and 3.00% attract investors.
Although the economic calendar packs plenty of high-profile releases, traders are unlikely to see anything that has not already been priced into the exchange rate. Manufacturing sentiment is expected to sour once again, core inflation metrics are set to continue inching lower, and the rate decision from the Federal Reserve has no room to surprise with rates effectively at nil already. None of these developments add anything new to the established landscape and are unlikely to stir significant volatility across the forex markets. The statement accompanying the rate announcement seems to pack less punch than usual as well considering Ben Bernanke and company are already throwing the monetary policy equivalent of everything but the kitchen sink at borrowing costs.
The weekend’s G20 summit presents a wildcard. Yesterday, Chinese premier Wen Jiabao bluntly questioned the security of US assets, saying American lawmakers need to “ensure” their safety and musing that “We have lent a huge amount of money to the United States… of course we are concerned about the safety of our assets. To be honest, I am a little bit worried.” The Chinese government has little reason to want to talk down the US Dollar because the comparatively cheaper Yuan helps support an already suffering export sector, so Wen’s comments should not be taken lightly. If this kind of rhetoric sees any significant traction at the G20 meeting, the greenback’s correction may prove significantly deeper than otherwise expected.
Euro Forecast Unclear on Euro Zone Fears, Financial Conditions
Fundamental Outlook for Euro This Week: Bearish
- Euro gains slow on weak retail sales data
- Improved investor sentiment nonetheless improves euro outlook
- Euro nears a technical breakout
The euro finished at multi-week highs against the US Dollar, as a week-long rally in the S&P 500 hurt the safe-haven US currency. The short-term correlation between the EUR/USD and the S&P remains near record-highs, and recent trends imply that further stock market gains would lead to Euro strength. Wave after wave of bearish European economic data nonetheless limits optimism for the heavily-traded EMU currency. Fresh economic distress highlights structural risks to the Euro Zone, and FX markets will keep a close eye on developments through the weekend’s G20 summit.
Traders await the conclusions from contentious meetings likely to take place among global economic leaders. US officials have clearly stated their desire for an aggressive global response to the economic and financial crises, but their European counterparts have shown clear resistance to matching sizeable US fiscal and monetary stimuli. Fears of snowballing fiscal deficits and the terms of EU membership prohibit many members from aggressive public spending, and this may in fact leave the Euro Zone at a disadvantage. Furthermore, the European Central Bank seemingly lacks the power to enact similarly aggressive monetary policy. These two key limitations suggest that the US may enjoy more favorable conditions for eventual economic recovery. The risks of EMU and ECB inaction on domestic financial and economic crises continue to mount, and the euro could potentially suffer against the US dollar through the medium term as a result.
Through the shorter-term, traders will keep a close eye out for the coming week’s key European inflation and investor confidence results. Analysts predict that Euro Zone Consumer Price Index inflation picked up through the month of February. Such results could further handicap the European Central Bank’s ability to boost domestic economic prospects. Unless we see real risks of deflation, the ECB is unlikely to drop interest rates far beyond current levels. Otherwise, surprises in upcoming German ZEW figures could elicit responses in financial markets and—by extension—the euro itself. Given that the EUR/USD continues to trade almost tick-for-tick with global stock indices, it will be critical to watch whether the S&P 500’s recent recovery leads to further short-term gains.
Japanese Yen Could Fall on Intervention Concerns Amid G-20, BOJ Meetings
Fundamental Outlook for Japanese Yen: Bearish
- Swiss National Bank’s intervention spurs speculation of Bank of Japan intervention in JPY
- Japan posts first current account deficit in 13 years as exports fall 46.3% from a year ago
- Japanese machine orders plunge a record 39.5% in January from a year ago
The Japanese yen ended the past week off on a mixed note, as the currency gained versus the US dollar, British pound, and Swiss franc but fell against the Canadian dollar, euro, Australian dollar, and New Zealand dollar. While much of this had to do with a resurgence in risk appetite, as evidenced by the 9 percent rise in the Dow Jones Industrial Average from the March 6 close through the March 13 close, we also have to consider renewed prospects of currency intervention. This was brought back to the forefront by the Swiss National Bank, who said on March 12 that they would work to prevent any further appreciation of the Swiss franc against the euro.
The situation in Switzerland is very similar to that of Japan, as exporters have been hurt by the gains in their national currencies against the currencies of their biggest trading partners. For Japan, this refers specifically to China and the US, which are the top two importers of Japanese goods (according to the CIA World Factbook), as the Japanese yen has gained over 9 percent against both the Chinese yuan and US dollar over the past 6 months. Japanese officials have cited concerns about the yen’s appreciation in the past, but they have yet to move toward hard-lined verbal intervention, let alone physical intervention. With the G-20 meeting over the weekend, there is potential for discussion of currencies to occur, and if this is actually written into the final communiqué, the yen could pull back sharply.
However, that is not the only piece of event risk looming on the horizon for the Japanese yen. The Bank of Japan is expected to announce late on March 17 that they have left their target rate unchanged at 0.10 percent, but the release of the Bank’s monthly report at 01:00 ET on March 18 should provide more information on their view of economic conditions. Over the past few months, the BOJ’s report has reflected consistently worse economic assessments, and this may continue to be the case as the higher value of the Japanese yen takes a toll on the country’s export industry. Given the mounting speculation over the potential for Japanese currency intervention, there is also a risk that we could see such an announcement with this central bank meeting, which would likely drive the Japanese yen lower. However, if the markets ultimately find that neither the G-20 nor the BOJ even mention currencies, the Japanese yen could see a bit of a boost by the end of the next week.
British Pound Traders Focus On Policy As 23-Year Lows Loom
Fundamental Outlook for British Pound: Bullish
- The Bank of England kicks off its quantitative easing effort with a successful 10.5 billion pound purchase
- Industrial production shrinks the most in 28 years as the global recession weighs heavily on the United Kingdom
- UK Finance Minister Alistair Darling takes world’s policy officials to task to stabilize world’s markets and economy
The British pound has recovered some ground against the benchmark dollar; but not enough to put it out of harms way next week. In fact, the GBPUSD pair is just a few hundred pips off a long-term triple bottom that spans all the way back to 1985; and few would disagree that the sterling’s long-term trend is bearish. Clearly technical traders are deferring to fundamentals to make a decision on direction as the ultimate move the market makes could redefine the long-term trend. The week ahead holds critical fundamental influence; and could therefore catalyze the break pound traders have been waiting for.
Redefining a trend is not the job of a single indicator or a shift in market sentiment. To put the pound into multi-decade lows or in a true bullish reversal we will need to see the fog surrounding financial and economic fears lift. Market health is a genuine global phenomenon now; and the advantages of one economy’s investments versus another is largely based on the health of the economy. Considering the market consensus for the UK through 2009, this is a bad position to be in. The IMF has projected the UK’s 2009 recession would be the worst in the industrialized world. However, large institutions are often the last to come to such realizations; and the market has already priced in what may be the worst of the dour forecast. In fact, the pound may be oversold as the market has lowered its expectations relative to the UK’s counterparts. Over the past months, the government has made aggressive strides to correct its deep slump. Quantitative easing, nationalization and large stimulus funds speak to officials commitment to genuinely turning the economy around. This contrasts the Euro Zone’s inability to come to region-wide solutions or Japan’s political problems in passing necessary aid. This means that one of the biggest hurdles to the pound’s rebound is sentiment. Should the G20 meeting this weekend end with little in the way of global results, a case-by-case evaluation of economic potential may find the UK in good light.
While a lot rides on the UK’s future relative to its global counterparts, an active economic docket will ensure that news and policy in other economies won’t be the only driver for pound price action. The top event risk for the coming week lies in Wednesday’s combined release of the BoE minutes and employment data. The government’s assessment of economic activity will almost certainly be dim especially with Government King sounding so glum recently. However, the employment numbers are less objective and will give a genuine benchmark for growth potential through the first half of the year. Steady job losses will equate to a drop in consumer spending and therefore, deeper contraction in economic activity. The other notable releases for the week will be the Rightmove House Prices indicator and public lending figures. Both have an obvious influence on growth forecasts; but they will further offer a loose measure of credit activity – an essential gauge for an economy that is already relegated to the worst of the economic recession and financial crisis.
Written by Ilya Spivak, David Rodriguez, John Kicklighter, Terri Belkas, John Rivera and David Song, Currency Analysts
Article Source - Forex Trading Weekly Forecast - 03.16.09
What is Forex?
The foreign exchange market (Currency, Forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. Forex transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when world over countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.
Today, the Forex market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market has continued to grow. According to Euromoney's annual Forex Poll, volumes grew a further 41% between 2007 and 2008.
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This enormous market is like the dangerous sea where you can meet lots of sharks and dangerous waters but at the same time it is the only one where two weeks of trading can hypothetically bring you $1,000,000 out of $1,000 of initial investment.
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The statistics is that as much as 95% of traders come to losing their money at Forex, 5% have profit and less than 1% of traders make large fortune at Forex. You shouldn't produce, sell or advertise anything trading at Forex. Your assets are your knowledge, experience and a small amount of cash.
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Good luck to everyone!