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Long Hot Summer 2.0 23/02/2009

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Police predict a middle class revolt.

Midday FX Update 19/02/2009

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Fears about the future of eurozone economy and financial system have been tempered today by reports that the German government would back assistance to a troubled Euro-zone member states. This is in spite of an EU rule known as the “no bail-out” clause which prohibits collective liability for debt incurred by an EU member state. Western European banks are massively exposed to Eastern European debt. Eastern European countries have taken a huge hit from the loss of their chief engine for growth, exports. Risk appetite has picked up, with oil increasing and gold selling off. EURUSD rallied strongly in European morning trading from an overnight low of 1.2526 to over 1.27 by 1pm GMT. Also helping the Euro was release of the the German DIHK, which concluded that the weaker Euro was starting to be helpful for exports. Nevertheless its outlook for 2009 was “bleak”. GBPUSD also benefited from the more sanguine mood, rising in European morning trading from 1.4260 to 1.4420. This was despite data showing a large drop in tax receipts in January,  precipitating a sharp increase in the fiscal deficit. European equity markets were in positive territory for the first time in seven days. US data, which showed a smaller than expected decline in producer prices and much higher then expected initial (627k) and continuing (4987k) jobless claims, had surprisingly little effect on the foreign exchange market. The BOJ left rates unchanged at 0.1% as expected while the government has downgraded its assessment of the economy for the 5th straight month and describes the economy as being in a severe state. USDJPY continued its ascent, testing the key 94.50 level.

Overall, the market appears to be catching its breath from the sharp decline in sentiment over the last couple of days. The comment made by the German official about rescuing other countries, was just that- a comment, and an unattributable one at that. Conditions remain dire and the recent pause in the sell off in Euro currencies and the JPY is merely a result of profit-taking by dollar bulls. Technically, EURUSD and GBPUSD are reaching strong resistance levels, with may traders looking to re-enter a short trade in these currencies: EURUSD targeting 1.25, and GBPUSD targeting 1.40.  USDJPY is close to testing the key 94.50 level (it reach 94.44). A break higher would change fundamentally the landscape of the FX market- confirming the end of the strong JPY.

UK “close to depression”- BNP FX Head 19/02/2009

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This clip from yesterday morning gives a depressing assessment of the UK economy. From Hans Redeker, BNP’s Head of FX Strategy

HBOS Head of Risk Management Revealed 18/02/2009

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The legendary Evel Kneivel! The Daily Mash comes up trumps.

Edge of the cliff time 17/02/2009

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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”.

Midday Update 17/02/2009

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Following a lacklustre day yesterday the currency markets reignited overnight with concerns about the EUR leading to a decline in EURUSD, enough to trigger stops below the 1.2700 level, to a 10 week low. This followed an announcement by Moody’s Investors Service that it may downgrade a number of European banks with Eastern European exposure. EURUSD is now trading just above the 1.2600 level, with the next target of 1.2550, the December low. On the plus side the ZEW in Germany, which measures investor sentiment showed a February reading of -5.8, better than the market expectation of -25.0 and better than the dismal -31.0 in January. The survey said that the improved reading was due to the expectations of a positive effect of the monetary and fiscal stimulus packages. However, apart from an initial spike after the release, EURUSD unaffected.  In Japan, the Finance Minister has announced he would resign, following controversy over his behaviour at a news conference in at the G7 where he looked drunk. The UK CPI declined less than forecast to 3% y/y compared with the market expectation of 2.7% and  december figure of 3.1%. Sterling gained about 100pips against the dollar to the 1.4250 level. An ONS official said that the fall in prices less than expected due to unusually heavy discounting in December.

Market Report 13/02/2009

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The overnight session in Asia was a relatively subdued affair for the FX market, with the EUR and GBP strengthening as a result of short covering ahead of this weekend’s G7 meeting. The Euro’s rally, which led to a high of 1.2940 against the USD promptly ended with dire economic GDP figures from the Eurozone. Overall, Eurozone GDP declined by 1.5% q/q compared with the market expectation of -1.3%. France, which is still not technically in recession as it recorded growth in Q3, experienced a 1.2% drop in Q4; the worst quarterly drop since 1974. Italy’s GDP contracted by 1.8% in the same period; its worst quarterly fall since records began in 1980 (that doesn’t seem right, I must check that). Both these figures were in line with expectations. It was Germany’s contraction’s was particularly unexpected, with a 2.1% contraction versus a market expectation of -1.8%- the worst figure since 1990. GBP had earlier benefitted from the bleak news in the Eurozone, gaining sharply against the EUR, with EURGBP trading down to 0.8830, and the USD, with Cable rallying 250bps up to just above 1.4600. Given that Sterling has been seen as a bellweather for risk appetite, the rally could be assumed to represent optimism that the upcoming G7 meeting in Rome would yield greater coordinated action to resolve the banking crisis. My midafternoong in Europe Cable had lost 200 pips to trade at around 1.44 following a profits warning from Lloyds which saw UK bank share prices plummet and comments from PM Brown that the fall in sterling had made Britain more competitive. In the US, the Obama administration is planning to announce a program to help subsidise mortgages, according to Reuters. The plan will seek to help homeowners before they fall into arrears on their loans. The US equity market spiked up on the back of the news, at the end of New York trading. However, there is every reason to suspect that such an announcement will add to the deterioration of investor confidence, especially as markets have been scathing in the lack of detail hitherto offered by the White House on resolving the banking crisis. Expect the the stallwarts of risk aversion, the USD and JPY, to strengthen next week. GBP should test the 1.40 level against the USD; the  EUR  1.27.

Quote of the Day 12/02/2009

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Luo Ping , a director-general at the China Banking Regulatory Commission, says in New York: “Except for US Treasuries, what can you hold? Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

He adds: “We hate you guys. Once you start issuing USD 1 Trn-USD 2 Trn . . .we know the USD is going to depreciate, so we hate you guys but there is nothing much we can do.”

Lunchtime Update 12/02/2009

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The Foreign Exchange market “declined” according to a post on an FX trading website! By that it meant that the recent sharp rise in gold- rising a further 2.7% yesterday to $941 a troy ounce- was not accompanied by a strong move in EURUSD. As the price of gold rose, there was no corresponding sell off in the USD. The pair remains rangebound, although witnessed a fall to below 1.28 this morning risk aversion remained elevated with continued concerns over the direction and focus of the US stimulus package and the lack of detail on the bank rescue package in the US, and further bad news coming out of Europe. 

USD- Congressional leaders have reached agreement on the economic stimulus bill pushed by the White House, cutting spending on health and education in order to retain support of moderate Republicans in the Senate. The final agreed package is $789bn. Equity markets were up yesterday, although sentiment remained bearish following Tuesday’s non-statement by Geithner. 

EUR- Eurozone data has done little to provide upside to this bearish week. Industrial production fell -12% on an annualised basis in December following a previous -8.4%. The flight to safety led EURUSD lower. Having briefly broken through the 1.2800 pivot point the pair should test the 1.2730 level. EURJPY slipped more than -80 pips into the 115.80/90 level. Spanish GDP figures were marginally better than expected at -1% Q/Q versus the consensus forecast of -1.1%. The ECB monthly report cut its growth estimate for 2009 to -1.7%. It also predicts barely any growth in 2010; at 0.6% compared with its previous prediction of 1.4%.

GBP- Sterling continued to look weak, with Cable dropping to a low of 1.4135 before recovering. EURGBP broke through 0.9000 and has tested the 20 day SMA 0.9065 resistance level. The comments made by King yesterday in the Quarterly Inflation Report continue to reverberate around the market, with markets now fully pricing in zero percent rates and quantitative easing. This has led, predictably enough, to a rush to gilts, lowering yields along the curve by between 30 and 50bps.

Review of the Day 11/02/2009

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Markets continued to demonstrate risk aversion today, following uneasiness about the lack of details about the bank rescue plan announced by US Treasury Secretary Geithner. The yen was the chief beneficiary of this trade, with sterling the most punished. The UK currency’s performance recently has been closely correlated to bank stocks. This week’s focus on the banking sector, together with a dismal assessment of the UK economy, has weighed heavily on sterling which today saw a fall of over 1% of its value against both the USD and the EUR. The BoE’s King said that the UK economy was in a “deep recession”, predicting that GDP could fall an astonishing 4% in the first quarter of 2009 alone.  King indicated that the BOE would pursue a zero interest rate policy, as well as initiating quantitative easing. GBP had rallied earlier on better than expected jobs data (73K compared with the consensus forecast of 89K).  This followed yesterday’s sharp fall following the Geithner announcement.

The lack of clarity by the Obama administration on how best to make banks, and hence capital markets, fully function has depressed the market which had been counting on a decisive announcement. The market rallied last week- “buying the rumour”. However, yesterday and today’s price action has been about much more than “selling the fact”. Geithner’s admission that the administration has still not worked out how to price the toxic assets disappointed many market participants, who were encouraged by Obama’s sense of urgency a few days earlier. 

Elsewhere, the Swedish Riksbank cut rates by 100bps, versus the market expectation of 50bps; underlying the deteriorating economic picture the world over. The CAD was little changed against the dollar despite Canada posting it’s first trade deficit since March 1976. The market has been increasingly bullish on the outlook for commodities as the very aggressive stimulus package in China is expected to help demand pickup in the second half of 2009.