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Dangerous times for the euro 19/10/2009

Posted by chrisdshaw in Economics, FX, Politics, Uncategorized.
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BNY Mellon’s Simon Derrick tells the FT why the Indonesian Rupiah is his favourite currency, the AUD is his favourite G10 currency, why the US dollar will continue to decline, that the GBP may be reaching a bottom as political considerations may warn the Labour government away from parity against the EUR, and why the Eurozone may be facing some difficult days ahead if its currency keeps attracting foreign reserves.

Verbal intervention gives US Dollar (temporary) relief 09/10/2009

Posted by chrisdshaw in FX, Uncategorized.
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Chief Economic Advisor to President Obama Larry Summers, has re-iterated the administration’s supposed support for a strong dollar, adding to comments made by Ben Bernanke on Thursday who emphasized Fed willingness to raise rates when the economy improves to prevent inflation.  This follows a nervous week as, post G7, policy makers from around have openly expressed concern about the rise in the value of their currencies relative to the US Dollar. Over the last 48 hours one could almost detect a whiff of fear of a run on the dollar, particularly during widespread reports that Asian central banks- among them Thailand, Hong Kong, South Korea and Indonesia- had aggressively intervened to prevent further appreciation in their currencies.

Given the level of concern over the Dollar, one would have expected a sharper reversal than has occurred in the last 24 hours. USDJPY has gained 120 pips since this morning and EURUSD is back below 1.4700 but the market feels primed for more Dollar selling next week. After all, Bernanke’s comments did little more than state the obvious and did not signal any near-term tightening, given the current weakness of the economy.  it is becoming increasingly difficult to figure out what a “Strong Dollar” policy amounts to any more.

Commodity currencies stay king 07/10/2009

Posted by chrisdshaw in Economics, FX.
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The AUD, NZD and CAD all reached new 12 month highs against the USD today, as commodities continued their bullish run. Gold reached a new high of $1,048, oil was up  $1.34 to $71.75 a barrel, while soft commodities were supported by forecasts of rain and snow in central United States. Although the USD has since clawed back some of the gains from these currencies, as well as the JPY, EUR and GBP,  a lack of economic data in the US session has failed to provide strong direction to the FX market. Or rather, the market appears to be ignoring any data that may provide a reversal to existing trends; a weaker USD and GBP. Worse than expected, read negative, Q2 Eurozone data made a limited impact on EURUSD, whereas better than expected UK Nationwide consumer confidence figures did little to support Sterling; still reeling from Tuesday’s dire Industrial Production data. Tomorrow’s ECB and BOE meetings on interest rates are unlikely to produce any surprises, although a return by ECB officials concerning “volatility” in the markets may produce some movement.

An emerging theme among commentators in the FX market has been towards the rediscovery of interest differentials as a driver for currency movements. The RBA’s decision to increase interest rates is the first of its kind in the most actively traded G10 currencies, signaling to some FX strategists at least, some return to normality. With expectations among the investment community and domestic monetary policy makers for continued low interest rates in the US and UK well into 2010, the FX market may see further gains among the commodity currencies, particularly the AUD in the next few weeks and months. Beyond, the end of this year, prospects for the AUD, NZD and CAD may be far less certain.

A continued rally in, for the example, the AUD, relies quite heavily on the premise of continued strong, unimpeded economic growth in China and the Far East. Stephen Roach in today’s FT returns to his familiar theme of global imbalances. He warns that China’s path to growth is arguably as unstable for the region and world economic growth and the deficit fueled recovery in the US.

Streuth! RBA raises rates 06/10/2009

Posted by chrisdshaw in Economics, FX.
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The Royal Bank of Australia has surprised everyone (well, 19 out of the 20 economists surveyed by Bloomberg) with a 25bp hike in its key cash rate. Governor Glenn Stevens, in his post-meeting statement, said: “With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy”.

Treasurer Wayne Swan said: “The Australian economy is outperforming other advanced economies and I guess many economists will see the decision today as a consequence of economic recovery”.

Global equity markets and commodities have rallied on the back on the news. Gold has reached a new record high of USD 1,036. This is also partly a symptom of a slightly weaker US Dollar, which sold-off overnight on the back of a story by the UK Independent newspaper, that oil producing countries were in advance talks with European countries about moving away from the greenback towards a basket of currencies when pricing oil.  The story has since been strongly denied by GCC officials.

Unsurprisingly, the AUD has beaten all other major currencies. The GBP, by contrast, has resumed its trend downwards, following much worse than expected industrial production figures for August released earlier today- the lowest level since 1987. USDJPY is trading stubbornly around the 89.10 level, whereas EURUSD is currently trading just above the 1.4700 handle,having tested the 1.4750 level.

Grown-up politics reaches the UK- support for Sterling? 06/10/2009

Posted by chrisdshaw in Economics, FX, Politics.
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One of the more depressing themes to have emerged in recent months has been the inability of the main political parties to address the growing fiscal problem in the UK. Despite numerous warnings by credit rating agencies, concerns expressed by the IMF and growing murmurs among the investment community about the need for a new era of fiscal austerity, neither of the two political parties until recently had spelt out precisely what they would do. Indeed, Gordon Brown demonstrated new lows in his ability to be straight with the British people, insisting until very recently that Labour would continue to increase spending (“investing”) in real terms over the next few years, in contrast to the Conservatives’ ideologically motivated cuts. This attempt to put clear blue water between himself and his opponents looked ham-fisted and disingeneous. The lack of credibility in Brown’s statements added to his already diminishing authority in government and the country. It also inhibited serious debate between the two parties about the tough choices the government will have to make after the election.

However, as Brown’s position has been undermined by Treasury figures, briefing by cabinet members and the entire investment community, grown-up politics has finally prevailed, with the Prime Minister finally admitting that in the unlikely event of his party winning the next election he would in fact make cuts. This has now allowed the Chancellor to outline Labour policies, including freezing public sector pay. The  Conservatives, meanwhile, have begun to announce their own plans. A more mature and honest debate was long overdue, particularly with the British people. A recent Ipsos MORI poll revealed that only 24% think spending on public services needs to be cut to improve the public finances. One of the many factors weighing on Sterling has been the political inactivity over addressing the fiscal deficit. The latest developments are welcome and provide investors one less reason to sell sterling. All else being equal, the new political environment should be mildly positive.

Dollar facing renewed pressure, Aussie to gain 06/10/2009

Posted by chrisdshaw in Economics, FX.
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The FX market has started the week in muted form, with the US Dollar facing renewed selling pressure. Positive economic data released earlier in the day in Europe supported the EUR and GBP against the dollar, as did profit taking from investors on risk averse long US Dollar positions following Friday’s poor Non-Farm Payroll figures. Risk appetite has since picked up, with a US equity market rally on the back of Goldman Sachs recommending large banks and ISM data showing service sector expansion for the first time in 12 months.

Overall, the lack of any significant statement on the currency markets by the G7 following this weekend’s meeting in Istanbul, also weighed heavily in the US Dollar; particularly in light of statements last week by G7 officials and Geithner restating the “Strong Dollar” policy. Instead, they repeated concerns of “excess volatility and disorderly movements in exchange rates”. Given that the FX markets currently display none of these conditions the absence of any definitive statement shows an absence of substantive support for the greenback. Comments this evening (ET) from the head of the New York Fed William Dudley stating that the Fed Funds rate would remain “exceptionally low for an extended period” has put further pressure on the USD, reinforcing its new found role as a funding currency.

The most notable winner against the USD today was the Australian Dollar, reaching a high of 0.8797 on Monday from the close of 0.8640 on Friday. All eyes are on the RBA interest rate decision, announced later this evening. Although the consensus forecast strongly expects the 3.00% cash rate to be left unchanged, the market has fully priced in a 0.25% rise in interest rates by November. Whether the AUD rally be over following tonight’s decision remains to be seen. However, given the current bearish tone to the the USD, GBP, a more complicated picture for the EUR, and a possibility of intervention in the JPY, any pullback in the AUD is likely to be short-lived, a bullish trend is likely to resume.

Sterling’s Going Down 26/09/2009

Posted by chrisdshaw in FX.
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The GBP has taken a real hammering over the past week. Both from a technical and fundamental perspective the signs are not too positive for Sterling for the remainder of the year. The UK simply hasn’t recovered as strongly as most other countries in the second half of 2009, consumers are in a long process of deleveraging with no end in sight, government spending hasn’t kick-started the economy nearly as well as was hoped by the Brown government. Next year, whoever is in power, the government of the day will introduce savage cuts in public spending and with what looks like a permanently diminished financial sector it requires some leap of imagination to figure out what will be the new engine of growth. Export led growth appears to be main answer, particularly from the Conservatives which appears to be very happy to see Sterling decline further. A combination of tight fiscal and loose monetary policy for the foreseeable future and official policy towards sterling being- at best- one of benign neglect, the British pound has much further to fall.

My favourite trade is to short GBPAUD, given the lucky country’s solid finances, strong export market to China and the far east and high interest rates. However, Cable and EURGBP are the main drivers of Sterling. GBPUSD has broken out of a fairly tight trading range of the last three months and looks like having broken a key support level of a classic head-and-shoulder neckline. FX360 charts it future progress.

Daily Feeds 17/09/2009

Posted by chrisdshaw in Economics, FX.
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China will be a bigger bubble than Japan – Pragmatic Capitalist

Pound to Drop to Euro Parity, Dollar to Reach 85 Yen, Says BNP– Bloomberg

UK retail sales show signs of stagnating– FT

Housing starts in US climb to 9 month high– Bloomberg

September’s here 01/09/2009

Posted by chrisdshaw in Economics, FX.
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The first day back after the summer break for European traders has heralded some interesting moves in the currency markets. With a notable gap opening up in opinion over prospects for global economic recovery direction in FX over the summer been sporadic,with most currencies trading in narrow, though volatile, ranges. Despite seemingly positive economic data from Asia, Europe and the US, the markets took on a distinctively negative tone towards the end of the day, with the USD gaining against all currency pairs, bar the JPY, in European afternoon trading. The AUD has been particularly hard hit, following the announcement by the RBA that rates would remain on hold for the foreseeable future; a disappointment to Aussie bulls who were expecting a more hawkish statement. Better than expected Chinese PMI figures helped boost equity markets in Asia and, initially, Europe, as did figures showing a drop in German unemployment. The first chink in the armour began with UK worse than expected manufacturing figures in the form of the PMI index, which reversed an early morning rally in Cable to 1.6377. The pair fell throughout the day to a low of 1.6111, before staging a late recovery. Despite yet more data from the US- ISM data showing the fastest 2 month growth in US manufacturing since 1983 and much better than expected July pending home sales growth- the market was spooked by increased concerns about the health of the banking sector and worries about the continued weakness of the American consumer. The USD benefitted from its safe haven status, with equity markets, bond yields and energy prices all suffering.

September is a nervous month for investors, with a reputation for being the worst monthly performer for the year. This year the nervousness is even greater as equity markets have ratcheted up ever more impressive gains over the summer and many economists- most notably those from Goldman Sachs and Morgan Stanley- are now talking about a world-wide V- shaped recovery. Other investors, and to be fair central bankers, are not so sure. In any case the first day of September has not disappointed in causing heart flutters.

Currency Update 14/07/2009

Posted by chrisdshaw in FX.
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Most of the main G10 currency pairs traded in a narrow range today, despite plenty of potential market moving economic data and corporate earnings results. A bullish and, as it turns out, correct forecast of second quarter earnings for Goldman Sachs by Meredith Whitney on Monday helped equity markets rally. The British Pound and the Australian Dollar, currencies that are positively correlated to risk appetite rallied against the US Dollar on Monday. Today’s price action has been altogether more subdued.

In the US retail sales and PPI were, at first glance, better than expected. Retail sales rose 0.6% in June, although core sales rose by only 0.3%. Similarly, despite the producer price index rising to its strongest level since November 2007, the core index rose by less than one third of headline growth. The rise in oil prices by 10% in the last month has had a significant impact on both sets of results, providing a deceptive picture of the health of the US economy. By contrast the UK’s figures out today were altogether more upbeat. The RICS house price balance showed a reading of -18.1 in July compared with -43.8, the highest level since September 2007. Similarly, retail sales were better than expected, rising at an annualised rate of 3.2% compared with 0.8% in May. Cable hovered around the 1.6300 level. Sterling has benefitted in recent days from a return to risk appetite. The currency is vulnerable to corporate earnings news and global macroeconomic data. Given the amount of new information available to the market Cable has every chance of breaking out of the 1.6000- 1.6500 range.

The Eurozone fared worse yesterday, with the German and Euro ZEW investor confidence surveys showing a dip in expectations for the economy. Investor sentiment in Germany fell to 39.5 in July from an  expected 48, while across Europe the ZEW fell below expectations to 39.5, from a previous reading of 44.2 in June. European industrial production data also underperformed, to 0.5%, lower than the expected 1.5% consensus expectation.