Brave New World

The beginning of a currency war? 12/03/2009

The rules of the game have suddenly changed. In one fell swoop the Swiss National Bank has introduced by far the most aggressive monetary easing since the crisis began in 2007. In addition to cutting interest rates by the expected 0.25% the SNB announced quantitative measures as well as direct intervention in the FX market to weaken the CHF. Direct intervention, in the form of buying EURCHF, took place at the time of the announcement; pushing the pair up 400pips from 1.48 to 1.52 in a matter of minutes. Prior to today’s announcement the CHF was approaching the record high of 1.43 it set against the EUR in October. The intervention is a direct an effective measure to prevent any further appreciation against the EUR. 

It is a pretty significant event and represents a new phase in the economic crisis. The last direct intervention in the FX markets from a major economy was six years ago. Until today central bankers had a tacit agreement in place not to enter into a competitive devaluation race. Even though some European politicians argued that the UK government was talking down sterling, the rate was still determined by the market. The SNB move now paves the way for other countries, particularly those whose economies rely on exports to devalue their currencies. In particular, it could pave the way for the Bank of Japan to address the overvalued JPY and put further pressure on the ECB to add to quantitative easing. Any series of competitive devaluations is likely to boost the dollar. The other big winner is gold, which rose 16% yesterday on the back the news from Switzerland.

Market Commentary 11/03/2009

EURUSD Upside potential remains while above 1.2730/40, below may see back down to 1.2670/80 initially, key trend line support at 1.2630

GBPUSD Based on down channel base at 1.3660/70, corrective bias higher while above 21 hour SMA at 1.3750, below may see 1.3670/80

Equity markets managed to retain the gains made from yesterday’s massive rally.  European indices closed broadly flat. The change in risk appetite, followed an email from Citigroup yesterday saying that the bank had been profitable in January and February. The USD, which has benefitted from the flight to safety as markets have tumbled, experienced a modest weakening throughout most of Wednesday. EURUSD gained about 100pips in European trading, despite yet more disasterous news from Europe. German factory orders slipped a sharp -8.0% in January on the back of a -7.6% decline the prior month. This took the annual rate to -37.9% and the worst since records began in 1992. Nevertheless, the euro has managed to shrug this off as the correlation of higher stocks higher  looks to be back in play at least for now. Sterling has continued to keep it’s position against the USD. The currency has benefitted from a re-injection of some market faith in the banking system and a increasingly hopeful views on the effect of quantitative easing. The fact that the Bank of England has continued to target inflation whilst injecting fresh money into the system has reassured some in the market. Still, it is early days and it is unlikely that any last confidence will be demonstrated in the equity markets, or in the FX markets (resulting in a rally in GBP, AUD and CAD) ahead of the slow motion car crash also known as the G20 meeting, in three  weeks.

Sterling under renewed pressure 09/03/2009

As I write Cable has made a strong break through the 1.3900 support level, with little in the way of support for the pair right down to 1.3550. The pair has traded in a 9 pip range in the last 6 weeks, and any significant and lasting break below the 1.39-40 level would chart a new course for the GBP. There is little in the way of event risk but the currency is particularly sensitive to global risk sentiment. Given that most expectations are to the downside, that the global economy may now have reached its darkest hour, little is supporting sterling. The fleeting support GBP was given on Thursday following the BoE’ announcement the introduction of quantitative easing- a monetary tool as yet untried in the UK- and the subsequent sell-off on Friday demonstrates market nervousness over monetary policy in general and the UK government in particular. The announcement over the weekend that the Government is to take a 75% stake in Lloyds TSB, is the latest in along line of hodge podge announcements for the market to digest.

Yen- Further deterioration in safe haven status 09/03/2009

Nothing appears to bode well for the Japanese economy. Figures released this morning showed that the world’s second largest economy and one of the largest exporting nations has racked up a record current account deficit of JPY 172bn. The JPY has traditionally been seen as a safe haven currency, thanks largely to its trade surplus which often focused minds on the currency’s undervaluation. Related to this was the pressure the currency was under during the “golden” era of the carry trade, just a few short years ago. The JPY’s low yield relative to other currencies in times of  global macroeconomic stability and growth, particularly the AUD and NZD meant that retail investors from Japan moved funds out of Japan and institutional investors used it as a funding currency. As sentiment turned, Mrs Watanabe moved her savings back from Auckland to Tokyo and stressed hedge funds needed to square positions and buy yen. That wave of buying pressure on the yen is now over and, in the process, ramped up the price of Japanese exports, which account for a large percentage of GDP, at precisely the time when global demand collapsed in Q4 of last year. The economic picture is severe. The Bank of Japan’s Deputy last week said, “the speed and severity of the decline is something we haven’t experienced in decades.” And this comes from an official who presided over Japan’s “lost decade” in the 1990s. The last few weeks has seen a weakening of the JPY and a loss of its safe haven status. The sense of crisis is not helped by a political system in disarray, with the Prime Minister’s approval rating barely in double figures and the main opposition leader facing corruption charges and refusing to step down. A national election must be called by September.

Key events this week: Tuesday– February CGPI (-1.2 y/y exp) and January machinery orders (-4.5% exp), Wednesday Q4 GDP (12.7% q/a), Friday– Industrial Production

Euro to remain vulnerable 09/03/2009

The EUR is at a technical and fundamental crossroads. In price action, the currency has taken to congestion that is on the verge of confirming a major bearish reversals against the US dollar, British pound and Japanese yen. The key to future direction will be in fundamentals. The German government has announced a EUR 145bn liquidity fund to help large domestic firms. However, the same level of commitment has yet to be shown to resolving the macroeconomic stresses witnessed in large parts of the European Union. Hungary’s request for a EUR 180bn bailout was rejected by the EU last weekend. At least initially, German Finance Minister Steinbruek rejected any calls to rescue Austria should the Eastern European debt crisis blow-up, given its hue exposure to the region. What to do about the hitherto free wheeling and now withering Spanish and Irish economies has not been addressed. So long as data remains weak, credit spreads widen and- in the case of Eastern Europe- currencies depreciate against the single currency, a lack of concrete mechanism and Europe wide policies will continue to weigh on the EUR ahead of the G20 summit. A failure after that key meeting in a month’s time could well lead to a run on the currency. 

Key Events this week: Monday- Euro-area finance ministers meeting, French business confidence. Tuesday- French industrial production, French trade, German consumer prices, German trade and the German current account. Wednesday- German producer prices and factory orders. Thursday– Eurozone producer prices, French employment, French consumer prices and German industrial production. Friday- Eurozone retail sales and German wholesale prices.

USD- Remaining supported… for the time being 09/03/2009

The Dollar’s position as last safe haven currency should continue in the next couple of weeks. The greenback made gains last week against the GBP, EUR and JPY and weakened slightly against the CHF, NZD and AUD. So long as risk appetite continues to diminish the currency will gain from a flight to safety among domestic and foreign investors. The DXY made strong gains last week, as global equity markets tumbled on the back of poor economic data and further concerns about the health of the financial system. Further data out this week is expected to confirm a dismal domestic picture. Key data to watch is on Tuesday with wholesale inventories, Wednesday with Monthly budget and Thursday with retail sales. If you look for them there are some crumbs of comfort- ISM manufacturing has risen 3 points from a near 30 year low in December, the nonmanufacturing composite rose more than 5 points in January since November and signs that credit markets are thawing albeit painfully slowly. The Term Asset- Backed Securities Lending Facility will be launched in mid-March, freeing up credit for consumers. Still, the housing market is is still in a mess- with inventories continuing to pile up. Moreover, demand in the form of exports and capital spending has continued to plunge. The ISM export orders index in February was 16 points below its 20 year mean. Commercial construction outlays plunged at a 27% annual rate in the three months ended in January, the sharpest in seven years. Hopes for a recovery in the near term- as in 2009- look tenuous at best. In terms of USD support deterioration and risk if systemic risk abroad look to safe guard the dollar’s safe haven status. However, an unprecedented level of new debt issuance needs to be supported by the Chinese; and this can only take place if growth there remains at a sufficient level to stave off calls to spending domestically, rather than bailout their rich trading partner.