Euro to remain vulnerable 09/03/2009
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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
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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.
Market Commentary 05/03/2009
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EURUSD -Bearish sub 1.2590. Targeting 1.2410- otherwise, break above 1.2660
EURGBP Bullish above 0.8910, targeting 0.9010- otherwise, break below 0.8860
GBPUSD Bearish targeting 1.360, then 1,3500- otherwise, break above 1.4250
It is testament to the level of gloom that has descended on the market in recent days that the the much anticipated and historic rate decisions were overshadowed by a return to gloom after yesterday’s brief respite. Comments from Wen Jiabao at the annual NPD overnight, in which he expected the economy to reach 8% growth in 2009, appeared to dash hopes for any additional stimulus- rumours of which circulated the market yesterday, causing risk appetite to improve. Equity markets have resumed their downward path, with European bourses declining over 3%. Markets in the US also continued downwards, by around 3% in NY midday trading. Oil declined on the back of the news from China (with Brent crude down 2.3%) and gold is rallying, although only by less than 1% after pairing back earlier gains.
Economic data from Europe has added fuel to the fire. German retail sales plunged -0.6% in January while the market was looking for a small increase. French unemployment jumped to 8.2% in 4Q from 7.6% in the previous quarter and much worse than the consensus forecast. If that wasn’t enough, the 4Q eurozone GDP report showed a huge downward revision to household consumption to -0.9% from a previously reported -0.2% and down from +0.1% in 3Q. The cut in rates by the ECB of 50bps to 1.5% was in line with expectations and so caused little market movement, after initial volatility. EURUSD is trading around the 1.2550 level, following a declining from 1.2665 to 1.2480. The markets have responded positively to comments from Trichet following the rate cut, that further cuts had not been ruled out. The ECB has changed its tone to a more proactive, if still cautious, monetary authority. EURGBP had a 100 pips swing following the ECB and BOE announcements but has settled to around the pre-announcement levels of just below 0.8900.
As expected, the BOE halved interest rates to a new record low of 0.50%, in line with market expectation. In a widely anticipated move it also announced the start of a a program of quantitative easing- a total of GBP75bn to be injected into the economy, by way of buying corporate bonds, medium and long-term government paper in an attempt to support the credit markets. The fact that it stated that this would be conducted over the next few months, and that it would target longer dated paper, led to a sell-off in sterling as investors had hoped for a figure closer to GBP100bn. Another announcement, another opportunity missed to provide shock and awe to the markets; something the UK looks like it sorely needs, given the data coming out of the country. According to the latest Halifax survey home prices plunged a steeper than expected -2.3% in the month of February, taking the three month rate to an awful -17.7%. Cable’s hourly trendline by 1.4010 looks like the next crucial support area and below likely revisits this week’s lows by 1.3950 next.
Morning Market Update 03/03/2009
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Following a sharp sell-off in equity markets around the world, with US markets closing at a level last seen in the spring of 1997 and a strong rally of the dollar as a flight to safety, the overnight Asian session provided some comfort. The decision by the RBA not to cut its key interest rate (leaving it at 3.25%) lead to a rally in the Australian Dollar against the USD from 0.6340 to a high of 0.6459. In an accompanying statement the RBA said it believed that the Australian economy was ahead of the curve in the global economy. Other data out from Australia painted a relatively positive picture: the Current Account deficit was narrower than expected, posting at AUD -6.5bn in Q4 compared with the forecast of AUD -7.4bn. Tomorrow’s Q4 GDP data will give much clearer direction to the market about whether the Australian economy has managed to escape the worst of the downturn.
The return of risk appetite was helped further by a World Bank report saying that the worst of the financial crisis had passed. The EUR and GBP rose against the dollar, reaching 1.2660 and 1.4159 respectively, before softening once again in morning European trading. The UK Purchasing Managers’ Index, a survey of manufacturing companies which gauges the pace of expansion or contraction, fell to 27.8, a record low and far below the consensus forecast of 34.2. Likewise, equity markets were also slightly down, with the FTSE falling 1.2% and the Dax falling about 0.5% in late morning trading.
Foreign Exchange Report 26/02/2009
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The main story in the FX market has been the consistent weakening of the of the JPY which overnight in Asia breached new lows against the USD of 98.02, its lowest since November 14, in European morning trading. The Japanese currency is headed for its worst month against the USD in 13 years and the worst against the EUR since 2000. The sheer awfulness of the data coming out of the world’s second largest economy has destroyed the JPY’s safe haven status. The trade deficit widened in January to the most in thirty years as exports had slumped by 46%, according to Ministry of Finance officials. The unemployment rate probably hit 4.6%, its highest since February 2005. Data from the Ministry of Finance shows that Japanese investors have a renewed appetite for foreign bond markets, purchasing JPY 1.23 Trn in the week ending the 19 February, preceded in the last years only by the previous week’s purchase of JPY 1.36 Trn. With a total absence of trust in the competence of the government (the Prime Minister is enjoying 10% approval in the opinion polls) to turn the economy around USDJPY should continue higher, targeting the 200 day moving average of 100.5.
EURUSD has traded in a 70 pip range in European trading, following a volatile few days. EURUSD, which has generally risen with greater risk appetite in recent weeks, was well supported following news that UBS was to replace its chief executive and the UK was extending bank guarantees on assets. Nevertheless, the currency pair could not break into the 1.2800 level as reminders of the fragility of the eurozone kept risk appetite in check. Economic confidence in the eurozone fell to new 25 year low of 65.4 from 67.2 in January. Meanwhile in Germany unemployment continued to rise, by 40,000, which despite being lower than expected has reinforced the perception of continued economic pain in the region. In today’s FT, EU Monetary Affairs Commissioner Almunia said that the degree of co-ordination should be seriously improved, suggesting that Europe has “sown the seeds of a slow recovery and will lag the US when the recession ends.” On the the subject of co-ordination, disagreement remains over how the EU should proceed when dealing with the PIIGS countries, particularly Spain and Ireland in their deteriorating credit ratings, exploding fiscal deficits and rumours of exit from the single currency. A failure to agree is likely to weigh on the EUR.
GBPUSD has been well supported at the 1.4100 level for the last few weeks. Having traded as low as 1.4159 overnight Cable crawled back up above the 1.42 handle on news that the UK government is extending its asset protection scheme. Royal Bank of Scotland announced (after reporting a GBP 24.1 Bn loss for the year – the largest in UK corporate history) that it will participate in the government’s scheme and will insure assets worth GBP 325 Bn. The bank will pay a participation fee of GBP 6.5 Bn. The group also announced a sweeping restructuring plan aimed at restoring standalone strength. The BoE’s King, speaking to the Treasury Committee this morning, said that the Treasury has begun a rigorous audit of the nation’s banks. When asked about asset purchases to boost money supply: “We are not going to allow a great inflationary surge. The problem at present is not that the amount of money in the economy is growing too rapidly, threatening an inflationary surge, it’s that the amount of money in the economy is growing too slowly. And that is why we’ve asked the Chancellor for powers to engage in asset purchases in order to increase the amount of money in the economy and I would expect that to happen over the next few months.” The Nationwide Building Society house price survey shows that prices in February fell 17.6% Y/Y (compared to a 16.6% drop in January), making it the largest yearly decline since it began collecting comparable data in 1991.
From the US, Durable Goods orders, New Home Sales and Jobless Claims will be released at 1330 GMT.
Review of the Day 18/02/2009
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The main story in the market today has been the rise of USDJPY, rising to a level to 93.97, a level not seen since January 7th and now targeting a crucial technical level of 94.50. Following a shaky start to the day with equity markets continuing to grind lower, sentiment improved on details of Obama’s $75bn housing relief program, designed to stem home foreclosures. Obama’s plan will create a new program to help up to 5 million homeowners refinance conforming loans owned or guaranteed by Fannie Mae and Freddie Mac. The Treasury Department will buy up to $200 billion of preferred stock in each of the housing companies, twice as much as previously pledged, the announcement said. Some analysts predict that it will entice Japanese investors to buy more debt issued by Fannie and Freddie. This could weaken the JPY further, leading the USD to be the sole safe haven currency.
Earlier, the USD was given a boost by poor housing and industrial production data from the US. Housing starts for January were a record low of 466k, a plunge of -17% m/m from a revised 560k in December and way below the market expectation of 530k. Meanwhile, building permits fell to an annualized rate of 521k in January, in line with market expectations. With new home sales at a record low and record foreclosures, inventory of new home sales is now at a record high of 12.9 months, more than twice the 6 months supply needed for a stable market, according to the National Association of Realtors.
In Europe, the German Finance Minister Steinbruek said that the EU would help vulnerable members of the Eurozone, helping “to stabilize countries and the course of the euro”. In a separate and rather bizarre development the European Commission called on EU member countries to bring their budget deficits in line with the terms of the Growth and Stability Pact, ie keeping under the 3% of GDP limit.
Midday FX Update 18/02/2009
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Investor sentiment has continued to deteriorate towards the economies of Eastern and Western Europe, with Credit Default Swaps for 5 year government debt continuing to widen, gold continuing to rise and reports questioning the ability of stimulus initiatives in the region to deal with an escalating financial crisis. EURUSD touched 10 week lows in Asia, reaching the below the 1.2560 level before squeezing higher to above the 1.26 handle. USDJPY edged higher, from an overnight low of 92.10 to the 92.80 level as Japanese data continues to astonish; the most recent data being a jaw-dropping 84% year on year drop in machine tools orders in January, with a large percentage of this decline coming from the auto industry. GBPUSD did not react much to the minutes of the BoE, released this morning, which showed a 9-1 decision to cut rates by 50bps. Blanchflower advocated cutting immediately to zero. No real surprises about quantitative easing, hence little movement. Earlier, GBP was weakened by reports in the Daily Telegraph that Standard and Poors was revisiting the UK’s AAA rating due to the scale of the bank bailout. GBPUSD had threatened to break 1.4300, before retreating to 1.4097 on the news.
The market has plenty of fundamental data to absorb from the US today, particularly relating to the housing and manufacturing sector. Both building permits and housing starts are expected to post new record lows, as the housing sector suffers from poor demand resulting from tight credit conditions. Industrial production is expected to post an additional drop of 1.5% following a contraction of 2.0% in December. Such a dismal economic picture may add to an already bleak market sentiment, further boosting the USD. Later President Obama will announce measures to boost the housing market, through the subsidizing of mortgage payments. This may reverse sentiment or at the very least, drive up volatility in the FX market.
Edge of the cliff time 17/02/2009
Posted by chrisdshaw in Economics, FX, Politics, Uncategorized.add a comment
A very scary day today. In most of my posts so far I have been monitoring developments in the FX market, and with it the level of risk appetite. Today we have witnessed a total collapse in risk appetite, as the news of the last few days- a lacklustre G7 meeting and a terrifying level of debt exposure of Western European banks- has weighed heavily on the markets. US equity markets are testing their post Lehman lows- the Novemebr 20 low in the Dow to look out for being 7552, and the price of US government debt has soared. US 10 year bills have dropped 20bps- a huge number. Gold has risen another 3.4% to $973 per ounce, a seven month high.
Later today, President Obama will sign in the new fiscal stimulus package; widely viewed as weak and hijacked by Congressional Democrats and Republicans. The markets obviously don’t like it.
And if that isn’t depressing enough reports are coming through that R. Alan Stanford of Stanford Financial Group in Texas has been charged by the SEC of a “massive ongoing fraud”.
FX Outlook for Week ending 20 Feb 16/02/2009
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With little in the way of data and the Presidents Day holiday in the US the FX market was extremely quiet today, with poor liquidity from late afternoon UK time. Of note, the JPY was up slightly against the USD and the crosses as disasterous Japanese GDP figures released overnight led to increased risk aversion.
As variation in the level of risk appetite is the main driver in the FX markets, with the USD and JPY performing in periods of uncertainty and the GBP and commodity currencies- particularly the AUD- performing in periods of renewed confidence, the future direction of and attitude towards the world’s two biggest economies is of interest.
With the JPY seriously hurting from a collapse in world trade and overvalued JPY, shrinking about twice the rate of the US or UK, something has got to give. The economy, while briefly recovering earlier in the decade under Prime Minister Koizumi never achieved levels of growth or prosperity enjoyed by the other G7 economies. And yet it finds itself at the bottom of the heap. The Bank of Japan and Ministry of Finance do not generate confidence in their ability to turn the Japanese economy around, given their performance of the last two decades. Indeed, the BoJ’s head researcher Kazuo Momma is reported as saying that we should be prepared for a Q1 in 2009 worse than the last quarter, which posted an (annualised) decline of 12.7%. There must surely come a point at which the yen loses its safe haven status. given the macroeconomic picture. USDJPY has worked itself into a terminal wedge, which precipitates a large breakout. With an unwinding of the carry trade largely out of the way, the JPY is looking weak against the USD which has also benefitted from its safe haven status and looks set to continue this role. The potential is for a serious breakout to the upside, as early as this week.
EURUSD is also forming a terminal wedge and so a large breakout is also possible. Again, the USD looks like being the victor as there seems to be little to support the single currency. Dismal GDP figures at the end of last week- with Germany posting a bigger decline in Q4 than either the debt ridden US or UK- as well as worries about inaction by the ECB and the deteriorating creditworthiness of some of the weaker members of the eurozone paint a gloomy picture for the region. In Ireland Credit Default Swaps on 5 year government debt, rated AAA by Fitch, jumped 49 bps to 377 on 13 February. That is 18 basis points more than the cost to protect the debt of Costa Rica, a BB rated nation by Fitch, or 11 grades lower than AAA. If that wasn’t enough, as report on my “Systemic Collapse” posting, Western European banks are faced with a potential default of $400bn on loans from Eastern Europe. All in all the USD should, again, win this battle. If EURUSD breaks the strong support of 1.2700, perhaps as early as tomorrow, we could see the pair target 1.20.
The outlook for GBP is, as per usual in this climate, volatile. CPI figures out tomorrow, Bank of England minutes, and Retail Sales figures all have the potential to create large movements, particularly against the USD. However, in keeping with my bullish view on the greenback, the bias should be to the downside in Cable, particular as risk appetite is subdued in this uncertain time. Confidence remains low among investors, as witnessed by a sub 8000 Dow Jones last week and a strong rally in gold. The UK currency is also closely correlated to bank stocks, which are experiencing a new wave of selling pressure following the profit warning given by Lloyds and the possible requirement of the government to inject a further GBP 10bn into the troubled bank. Added to the the insouciant attitude expressed by the government and Bank of England in recent days and the bias is strongly toward the negative. However, if EURUSD breaks below 1.2700 I would expect EURGBP to also weaken.
Brave New World 