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Tuesday, November 22, 2016
Intraday key level: 2459-96
Targets below: 2434, 2410-06, 2389-79, 2363, 2335 and 2305
Targets above: 2511, 2546, 2562, 2583 and 2627
Sensible range 1: 2379-2511
Sensible range 2: 2459-2546
By Boris & Kathy, Mon, 17 October 2016, category: Market Review - 1:29 PM
The U.S. dollar traded higher against all of the major currencies last week with the exception of the Australian and Canadian dollars.
The British pound was the worst performer but the big stories were EUR/USD, which knocked on 1.10’s door and USD/JPY, which is eyeing 105. The Canadian dollar bucked the trend thanks to oil. This week will be a busy one with central bank decisions, employment and inflation reports scheduled for release along GDP numbers from China.
• FOMC Minutes Show Voting Policymakers Generally Agreed the Case for Hiking had Strengthened
• Advance Retail Sales (SEP) 0.6% vs. 0.6% Expected
• Retail Sales Ex Autos (SEP) 0.5% vs. 0.5% Expected
• PPI Final Demand (MoM) (SEP) 0.3% vs. 0.2% Expected
• PPI Ex Food and Energy (MoM) (SEP) 0.2% vs. 0.1% Expected
• PPI Ex Food, Energy and Trade (MoM) (SEP) 0.3% vs. 0.1% Expected
• U. Of Michigan Confidence (OCT P) 87.9 vs. 91.8 Expected
• U. Of Michigan Current Conditions (OCT P) 105.5 vs. 104.2 Prior
• U. Of Michigan Expectations (OCT P) 76.6 vs. 82.7 Prior
• Empire State Manufacturing and Industrial Production- Potential for downside surprise given that a strong dollar could hamper manufacturing activity
• CPI- Potential for upside surprise given gas prices slightly higher. Import prices and PPI also up
• Housing Starts and Building Permits- Potential for upside surprise given rebound expected after soft numbers in Aug
• Fed Beige Book Report- Likely to report continued improvement in economic activity
• Philly Fed Index- Manufacturing activity may be hampered by stronger dollar
• Existing Home Sales- Potential for upside surprise given rebound likely after soft Aug
Key Levels - USD/JPY
• Support 101.00
• Resistance 105.00
Friday’s stronger than expected U.S. economic reports failed to inspire new gains for the U.S. dollar. Americans are spending more and inflation is up but the greenback was trading strongly ahead of these reports so the rally fizzled after the data. It was still a good day for the dollar especially versus the euro, British pound, Japanese Yen and Swiss Franc. Retail sales rose 0.6% in the month of September, the strongest gain in 4 months. Excluding auto and gas purchases spending rose by 0.5% - both reports were in line with expectations. Producer prices increased 0.3%, which was stronger than the market’s 0.2% forecast. Consumer sentiment pulled back in October according to University of Michigan after strong gains in September.
The sentiment index dropped to its lowest level since September 2015 while the expectations component of the report dropped to the lowest since September 2014. Despite the uptick in retail sales, the drop in sentiment encouraged investors to take profits on long dollar positions ahead of the weekend. Also, the contribution to GDP growth will be less in Q3 than in Q2 because spending July and August were weak. Fed Chair Janet Yellen spoke today and didn’t say anything market moving. She indicated that maintaining accommodation too long could have its costs which reaffirms her hawkish bias. This sentiment was shared by Fed President Rosengren who said, that the market’s expectations for a December rate hike sounds about right. Looking ahead to the coming week the U.S. dollar could take a back seat to more important non-U.S. event risks on the calendar. This includes the European Central Bank monetary policy announcement, Bank of Canada Rate Decision, Australian and U.K. employment reports, RBA Minutes, China’s Q3 GDP number along with U.K. and Canadian retail sales. These are the most important releases amongst a long list of other market moving events. From the U.S., the consumer price report, housing data, Empire State and Philadelphia Fed indexes are the main pieces of data on the U.S. calendar. CPI is an important input into Fed policy but with inflation so low, it has become less market moving than the jobs and spending reports. With that in mind, unless there is a huge one way move in U.S. rates, we could see less consistency in the performance of the majors this week. We are still bullish U.S. dollars but it will be important to watch Treasury yields – if they fall, the dollar could experience losses but if 10 year yields hit fresh 4 month highs, we can expect strong gains in the greenback.
• PM May Accepts that Parliament Should Be Allowed to Vote on Brexit Plans
• CPI and PPI- Potential for upside surprise given thanks to weak GBP, Input costs rises most since Feb 2013 for services. Manufacturing also sees significant increase. Construction prices up
• Jobless Claims Change- Potential for upside surprise given services employment grew at fastest pace in 5 months. Strong growth in manufacturing
• Retail Sales- Potential for upside surprise given rise in BRC retail sales, shop prices and confidence
Key Levels - GBP/USD
• Support 1.2000
• Resistance 1.2500
Courtesy of an exceptionally busy economic calendar, sterling will also be in focus this week . Not only will the British pound be responding to the outcome of the British High Court who has a hearing on Parliamentary approval of Brexit, but retail sales, inflation and employment numbers are also scheduled for release. Previously most U.K. economic reports have been strong, easing concerns about the impact of Brexit. We believe that this week’s economic reports will show continued improvements as the weakness of sterling boosts consumption and price pressures.
The big story this past week was Prime Minister May’s concession to allow Parliament to vote on Brexit and Governor Mark Carney’s comments. Carney said he is not indifferent to GBP weakness but they could tolerate higher prices, which means there’s no urgency to intervene in the currency. Hearings before the British High Court began on Thursday and will continue until Monday. May argues that she has the sole right to determine when Article 50 is invoked but if the court finds that Parliamentary approval is needed, it would delay the process beyond the first quarter of 2017. This outcome could be enough to drive GBP/USD to 1.2450. It would also suggest that there would be a softer exit. However if the high court decides that it does not want to interfere with the Lisbon Treaty, then GBP/USD will reverse its gains quickly and aggressively. Either way, the decision will be appealed and sent to the Supreme Court who may hear the case before year-end.
We may or may not learn about this order in the future but that is the only explanation for Friday’s move. Considering that fundamentals support a weaker currency, we expect GBP/USD to trade in a new lower range and investors shouldn’t hope for any help from the Bank of England who is probably delighted to see this recent weakness in the currency. No central bank likes big moves but after the initial decline GBP/USD rebounded and is now down only 1.5%. A weaker sterling goes a long way in boosting inflation, supporting trade and tourism – 3 areas of the economy that need help. With no U.K. event risk on the calendar, GBP/USD is vulnerable to a short squeeze this week but between Brexit and the flash crash the market has completely forgotten about this past week’s stronger PMI reports that showed manufacturing, service and construction sector activity accelerating. These 3 areas of the economy received another in shot in the arm from the plunge in the currency so if Prime Minister May plays her cards right and limits Brexit headlines for the this week, we could see a relief rally.
• GE Trade Balance (Euros) (AUG) 20.0b vs. 19.5b Expected
• GE Current Account (Euros) (AUG) 17.9b vs. 15.0b Expected
• GE ZEW Survey (Current Situation) (OCT) 59.5 vs. 55.5 Expected
• GE ZEW Survey (Economic Sentiment) (OCT) 6.2 vs. 4 Expected
• EZ ZEW Survey (Economic Sentiment) (OCT) 12.3 vs. 5.4 Prior
• EZ Industrial Production (MoM)(AUG) 1.6% vs. 1.5% Expected
• ECB Rate Decision- ECB will say policy remains accommodative but economic conditions could improve thanks to lower euro
• ECB Current Account Balance- Weaker German CA offset by stronger FR
• EZ CPI- German CPI up but French CPI declined
Key Levels - EUR/USD
• Support 1.0900
• Resistance 1.1200
This week’s European Central Bank meeting will be the real test for euro which dropped below 1.10 versus the U.S. dollar. Whether this level holds or gives all depends on ECB President Mario Draghi’s tone. We’ve seen a lot of conflicting headlines about the central bank’s thinking. Two weeks ago the big story was on tapering asset purchases and this week there was talk about extending / tweaking QE. Everything that we’ve heard from policymakers tell us they are comfortable with the current level of stimulus but stand ready and willing to increase it if the economy weakens.
The last time the ECB met, President Draghi expressed more confidence about the outlook for the Eurozone economy, using the word resilience on numerous occasions. However they also lowered their growth forecasts and announced Eurosystem committees to further evaluate stimulus options. Interest rates will be left unchanged but if Mario Draghi reinforces his concerns about the economy and puts greater emphasis on the need for more stimulus, further losses are likely. If he’s optimistic and we think he will be because the there’s been significantly more improvement in the German and Eurozone economies since the last ECB meeting. The recent weakness of the euro goes a long way in boosting the economy and inflation so positive comments could make 1.0950/1.10 a near term bottom for EUR/USD.
By Peter Bukov Wed, Jul 13, 2016 - 06:53 AM
The pound was trading higher for the third day and the GBP/USD pair jumped toward the $1.33 mark on Wednesday.
London - Sterling was 0.3% stronger on Wednesday during the morning dealing and was trading around the $1.33 mark, with volatility expected to continue, despite no major UK or US news on the agenda today.
Cable surged from its lows since Andrea Leadsom moved aside in the Conservative Party leadership race on Monday to leave Theresa May as the sole candidate to succeed Prime Minster David Cameron.
"The pound had its best day in weeks yesterday as it carved through a load of stops from 1.3020 right through the 1.3300 level as markets revelled in the prospect of some form of certainty at the top of government. This new found stability may also have tempered some of the prospect of an imminent rate cut at tomorrow's Bank of England rate meeting, given that credit conditions are significantly easier than they were three weeks ago,"Michael Hewson, chief market analyst at CMC Markets UK, said on Wednesday.
Yet the official market consensus is for the Bank of England (BoE) to cut the rate by 25 basis points to 25 bps and some form of additional easing seems likely as well. These steps should undermine the pound in the near term.
Should the pair jump beyond $1.3340 the next stop for bulls might be at $1.35, although this scenario only seems likely if the BoE does nothing tomorrow.
The support is located around $1.3210/30, but should the BoE cut rates the decline might be steep, retargeting the $1.30 level.
By Boris & Kathy Mon, Jul 11, 2016 - 1:22 GMT
USD/JPY. Three major U.K. property funds decided to halt redemptions, setting off a course of action by the Bank of England and sparking widespread concern for greater financial stress.
The U.S. dollar was crushed by falling Treasury yields, but its weakness was channelled directly through the Japanese Yen, New Zealand and Australian dollars. The reason for the divergence are yields as U.K. and German yields fell to record lows alongside Treasuries. The following table shows the divergent performance of the dollar versus G10 currencies over the past week and we don’t expect significant changes to these trends in the coming week. There are 2 major monetary policy announcements, Chinese trade and GDP on the calendar along with Australian employment and U.S. retail sales, making for another lively week in the currency markets.
• Change in Nonfarm Payrolls 287k vs. 180k Expected
• Unemployment Rate 4.9% vs. 4.8% Expected
• Average Hourly Earnings MoM 0.1% vs. 0.2% Expected
• ISM Non-Manf. Composite 56.5 vs. 53.3 Expected
• FOMC Minutes – Fed officials wanted to see more data before acting on rates
• Durable Goods Orders -2.3%vs. -2.2% Expected
• Trade Balance -41.1b vs. 40.0b Expected
• Retail Sales and Consumer Prices – Potential downside surprise given Johnson Redbook survey shows retail sales dropped more than expected in June. Gas prices plunged in June and weaker wage growth
• University of Michigan Consumer Confidence – Potential for downside surprise likely given Sharp drop in IBD/TIPP index
• Six Fed Presidents Scheduled to Speak
Key Levels - USD/JPY
• Support 100.00
• Resistance 103.00
The big story for the U.S. last week aside from falling Treasury rates was the non-farm payrolls report. The U.S. economy added 287k jobs in the month of June but the markets were not impressed. Judging from the performance of the dollar post payrolls, most Commodities & FX traders share our views. When the report was first released, USD/JPY jumped to a high of 101.28 but it reversed quickly hitting a low of 99.99. However the pullback to 100 was short-lived with the currency pair bouncing back to its pre-NFP levels within minutes. Part of this was due to the rise in U.S. stocks and general improvement in risk appetite but 100 is also a very important technical level and it is clear that there were a lot of bids at that rate. Although job growth rebounded strongly in the month of June, the unemployment rate rose more than expected and average hourly earnings growth slowed. Job growth was incredibly weak in May but instead of an upward revision, the report was revised down by another 27k. This leaves the 2-month average at less than 150k. Jon Hilsenrath of the Wall Street Journal argues that this may be enough for the Fed to raise interest in September – a view we completely disagree with.
While it’s true that Fed Fund futures have gone from pricing in an 11% chance of tightening in 2016 to 22% chance post payrolls, there’s no reasonable case for a rate hike before the end of the year especially since we don’t expect any of next week’s economic reports to provide upside momentum for the dollar. The most important piece of U.S. data scheduled for release next week will be U.S. retail sales and between the decline in wage growth, the sharp drop in gas prices in June and lower spending reported by the Johnson Redbook survey, all signs point to lower consumer spending and a more restrained increase in consumer prices. Six Federal Reserve Presidents are scheduled to speak but only two (George and Bullard) are FOMC voters. Both have hawkish leanings but given the deterioration in U.S. data and Brexit uncertainty, they could indicate that more caution is needed on raising rates.
• Bank of England Lowers Capital Requirements for Banks
• 3 Major Property Funds Halt Redemptions
• PMI Services 52.3 vs.52.8 Expected
• PMI Composite 52.4 vs. 52.0 Expected
• Visible Trade Balance -£9879 vs. -£10700 Expected
• Industrial Production MoM -0.5% vs. -1.0% Expected
• Manufacturing Production MoM -0.5% vs. -1.2% Expected
• Bank of England Rate Decision - Likely to be dovish post Brexit
Key Levels - GBP/USD
• Support 1.2800
• Resistance 1.3000
Although sterling hit a 31 year low this past week, the spike low on Wednesday followed by the consolidation Thursday and Friday suggests that there could be a near term bottom in GBP/USD. While technically that may be true, fundamentally, there’s significant downside risk for GBP next week. The Bank of England has a monetary policy announcement and we know how Governor Carney feels about the consequences of Brexit. In the 2 weeks since Britain voted to leave the European Union, he’s spoken at least 3 and hasn’t been shy about sharing his concerns. He’s long felt that Brexit poses a significant risk to the economy and they haven’t missed a beat in providing support to the economy. This week after 3 major property funds halted redemptions, the BoE cut capital requirements for banks freeing up 150 billion pounds to encourage lending. Carney previously said their forecasts would be updated in August to account for Brexit so that’s when we expect the next major round of easing to occur. However he won’t miss the chance to prepare the market for additional stimulus when they meet next week so even though GBP/USD appears to be forming a base, this is far from a bottom.
• ECB Minutes - Ready to provide more stimulus if inflation continued to miss the -2% target.
• German PMI Services 53.7 vs. 53.2 Expected
• German PMI Composite 54.4 vs. 54.1 Expected
• Eurozone Retail Sales MoM 0.4% vs. 0.4% Expected
• German Industrial Production MoM -1.3% vs. 0.0% Expected
• German Trade Balance 21.0b vs. 23.5b Expected
• German Current Account Balance 17.5b vs. 28.4b Previous
• Eurozone Industrial Production MoM- Potential downside surprise given drop in German and France Industrial Production
• Eurozone Trade Balance- Potential downside surprise given smaller French and German trade deficit
Key Levels - EUR/USD
• Support 1.1000
• Resistance 1.1200
The euro could finally be buckling under the weight of the region’s troubles. The currency traded as low as 1.002 versus the U.S. dollar on NFPs, then reversed to hit a high of 1.1120 before settling back well below 1.1100. The 1.10 to 1.12 range for EUR/USD is well established but eventually we expect 1.10 to give. Not only was the latest round of Eurozone data weaker than expected with Germany reporting a smaller trade surplus and France reporting a drop in industrial production but the regions problems continue to grow. Euro has been a major beneficiary of anti-U.K. flows and we can see that through the strong gains in EUR/GBP. The Eurozone is not sheltered from the U.K.’s troubles and there could be a banking sector crisis brewing in Italy. Italian bank stocks have fallen 30% in the last 2 weeks and according to a recent report from the WSJ, 17% of bank loans in Italy are bad debt, which is 3 times more than what the U.S. had during the financial crisis. It’s a ticking time bomb ready to go off. We’ve been done this road before with other countries and know how things can end very badly. In order to avoid this scenario or shore up the economy when it happens, the Italian government will either have to inject money into the financial system or the ECB will need to ease monetary conditions. Italy’s troubles along with Brexit prompted the IMF to lower its forecasts for Eurozone GDP growth. They now expect the economy to grow by 1.4% in 2016 instead of 1.6% with even slower growth if risk aversion intensifies. There are no major Eurozone economic reports scheduled for release in the coming week leaving the focus on the Eurozone area Finance Ministers meeting in Brussels, Italian bank stocks and risk appetite.
By Karen Ochotnicka Tue, Sep 01, 2015 - 1:43 GMT
The Federal Reserve will hold a two-day meeting of its monetary policy committee on September 16 and 17, and markets have largely discounted a rate hike. So what are policymakers thinking these days?
Washington - Recent economic data out of the US have been encouraging, especially the second quarter GDP at 3.7%, but these have all been tracking the US economy pre yuan devaluation and the recent Chinese market crash.
The Kansas City Federal Reserve (Fed) sponsored economic symposium in Jackson Hole offered a chance to hear from the Fed before the meeting and to assess their thinking ahead of the coming meeting in light of recent events, including the China-induced turmoil.
Governors Janet L. Yellen and Daniel Tarullo did not attend the Wyoming huddle, but three other Fed governors, Lael Brainard, Jerome Powell and the Fed Vice Chair Stanley Fischer were in attendance.
Stanley Fischer gave a speech that was anything but committal. He said that while declining energy prices should be a one-off phenomenon, still there hadn't been straightforward evidence of increasing core inflation for the past few years. He said that a large effect was the result of the dollar exchange rate, and also prices of non-energy commodities.
He argued that since inflation expectations are apparently stable, there was reason to believe that inflation would move higher as those forces holding inflation back dissipate. Yet, he left as an open question how much confidence the Fed could have in those expectations, and suggested that inflation expectations would carry more weight than data that has been seen.
"In making our monetary policy decisions, we are interested more in where the US economy is heading than in knowing whence it has come. That is why we need to consider the overall state of the US economy as well as the influence of foreign economies on the U.S. economy as we reach our judgment on whether and how to change monetary policy," Fischer explained.
When summing up, he recognized that the Fed's actions will have an effect on the global economy, but felt that it would be favorable for the rest of the world for the Fed to act to best serve the interests of the US economy.
Regional FOMC voting members
William Dudley, Charles Evans, and John Williams were not in Jackson Hole.
However, William Dudley, who is the committee's vice chairman impacted markets last Wednesday before the meeting when he said that the argument for a rate hike was less compelling than it had been a few weeks earlier, but also said it was important not to overreact to short-term market developments Jeffrey Lacker was in the house at Jackson Hole, and will potentially affect markets this Friday when he gives a speech entitled "The Case Against Further Delay".
Dennis Lockhart told Bloomberg TV that the Fed is eager to begin tightening its monetary policy, but acknowledged that new risks have emerged.
"We are sort of anxious to get going, but given the events of the last several weeks, a risk factor has arisen," Mr. Lockhart said in the interview. "It has to be considered an open question whether we move now or wait a little while."
He believes that not raising rates because of market conditions would doubtless bring criticism that the Fed is beholden to the financial sector, but said that was not the case, and confirmed that October is still a possibility.
Other regional heads
James Bullard, Esther George, Loretta Mester, Eric Rosengren and Narayana Kocherlakota were all present at the symposium and all had something to say. Bullard, who will become a voter next year, gave an interview to Bloomberg TV in which he said that the US outlook still looked very good. He downplayed events in China, saying that the US economy has much more happening than its trade with China, but admitted that the Fed would have to look through the effect on inflation from low oil prices - which took yet another trip downward last week before rebounding later in the week and this Monday.
"The key question for the committee is how much would you want to change the outlook based on the volatility we've seen over the last 10 days. And I think the answer to that is going to be not very much," Bullard claimed.
Yet, after the interview, when cameras where no longer rolling, Bullard said that the committee does not like to move when there is volatility, according to a tweet from Matthew Boes of Bloomberg. Esther George, who will also start voting in 2016, said that she thought a rate increase could have been considered earlier, and as of last Thursday, had not seen anything that would change her own view of the US economy.
"We should expect volatility, I think, from time to time, we are in a period of some uncertainty -- questions about China, questions about global growth," George explained. "What it means for monetary policy I think is not yet clear. It’s a complication, it’s something we watch."
Loretta Mester, another 2016 voting incumbent, said the economy could sustain an increase in rates, but feels that the inflation target might be reached later, which could change the path of interest rates.
Eric Rosengren will join the voting committee next year as well and was also in Jackson Hole. Market will have the opportunity to hear his stance when he speaks at the Forecasters Club of New York on Tuesday.
Minneapolis’s Narayana Kocherlakota brought the strongest words in the dovish direction. He said that not only should the Fed not be thinking of raising rates, but instead should think about cutting them, since he does not expect the US to reach the inflation target until late in the decade, in 2018. He also emphasized that market participants are sophisticated enough to know that he was not speaking for the Fed as a body, but individually.
By Lubica Schulczova Fri, Aug 28, 2015 - 2:01 GMT
Athens - The Greek economy unexpectedly escaped technical recession during the second quarter of the year, final GDP data for the second quarter showed on Friday as falling business morale, staggering unemployment, deep deflation and political uncertainty were expected to take a toll on the troubled country's economy. At the very end of the second quarter, on June 28, the government was forced to close banks and impose capital controls as the cash outflows were unsustainable. In a sign of the desperate conditions, Athens also missed a payment to the International Monetary Fund, becoming the first developed economy to do so.
The Greek economy expanded both on an annual and quarterly basis, the country's national statistic office ELSTAT showed in the final reading.
It rose 0.9% on a quarter-on-quarter basis, following a revised flat 0.0% result in the first three months of the year.
The GDP added 1.7% annually, following the 0.2% uptick seen previously.
One reason why GDP figures surprised was a sharp fall in imports which boosted the numbers, as imports are the production of another country, bought with the importer's money, so they weigh against GDP.
High retail sales figures and stronger household spending were also behind the surprise bounce in GDP growth as consumers forwarded purchases of big ticket items and durable goods, especially cars, before the introduction of capital controls.
Tough times ahead
The Greek economy is expected to shrink 2.3% in 2015 as the third quarter has been especially harsh due to bank closures and capital controls. Officials expect a 1.3% contraction next year, citing the latest estimates from the creditor institutions that have been negotiating Greece's new bailout program, including the European Commission, the European Central Bank and the International Monetary Fund.
Only in 2017 is the country is forecast to return to growth, adding 2.7% that year followed by a hefty 3.1% expansion a year later.
Greece is heading towards fresh elections as former Prime Minister Tsipras resigned last week after his coalition government lost its parliamentary majority and the new bailout program was approved with support from opposition parties.
Vassiliki Thanou was installed on Thursday as Greece’s caretaker prime minister. She will guide the country to snap elections on September 20.
The caretaker government is due to be sworn in at noon on Friday.
Thu, Aug 13 2015, 12:50 GMT | FXStreet
FXStreet (New York) - The British Pound is currently falling against the US Dollar as the Greenback is trading higher following the latest set of economic indicators in the US. After falling 35 pips from 1.5635 in the last few minutes, the GBP/USD is now testing lows at 1.5600.
The US retail sales rose 0.6% in July, slightly better than the +0.5% expected. Ex-autos reported an increase of 0.4%, less than 0.5% expected but the Census Bureau reported a huge revision in ex-autos for June: from -0.1% informed initially to +0.4% informed now.
Jobless claims reported 274 initial claims were requested in the August 7 week. Previous week was revised 1K down to 269K.
The US Dollar index is trading higher today for the first time in seven days as the DXY is extending its recovery from 96.00 area to current 96.50. As previously reported, the US Dollar index is performing an inside day as the EUR/USD is in pullback mode.
Currently, GBP/USD is trading at 1.5603, down -0.06% on the day, having posted a daily high at 1.5639 and low at 1.5600. The hourly FXStreet OB/OS Index is showing neutral conditions, alongside the FXStreet Trend Index which is slightly bullish.
As for the short term, if the pair breaks down the 1.5600 level, it will find supports at 1.5560 and 1.5530. To the upside, resistances are at 1.5635, 1.5660 and 1.5680.
Thu,Aug 13 2015, 01:24 | FXStreet
FXStreet (Mumbai) - The latest Reuters poll on Thursday showed economists see a 60% probability of Fed hiking rates in September.
The poll also showed a 85% chance of a Fed rate hike by year end and a 555 chance of two rate hikes by year end.
Meanwhile, the economists see a 53% chance of the Bank of England rate hike by the end of Q1 2016, compared to 60% in a July 20 poll.
By lubica schulczova Thu, Aug 13 2015, 01:24 PST |wbponline.com
Greece has reached a deal. A third one, worth some €86 billion in exchange for more reforms and more austerity. Even so, many European officials remain cautious, and Germany and some smaller euro zone countries are not satisfied.
Brussels - One fact is certain at the moment: Greece desperately needs a new bailout program in place by August 20, when Athens is due to make a bond payment of €3.5 billion to the European Central Bank (ECB).
But what kind of bailout program? History shows that the previous two bailouts may have done more harm than good. The reasons are definitely not simple and point back to times before Greece joined the single European currency.
Despite optimism in Greece and cautious optimism elsewhere, Germany prefers offering another bridge loan to Greece to cover upcoming dues, in order to give Athens and its creditors enough time needed for completing talks on a third bailout for the debt-ridden country. "A program that should last three years and be worth over €86 billion needs a really solid basis," a German Finance Ministry official recently said. "A further bridge loan is better than just a half-finished program."
On the other hand, it was a small group of states led by Germany which forced the harsh terms of the new bailout plan during the July summit of euro area member countries.
Euro design flaw
Actually, it is quite possible, or probable, that Greece didn't really qualify for entering the euro zone, as the 2004 financial audit showed that the 1999 government budget deficit was above the 3% limit for joining the bloc. It is now well known that Greece was helped by Goldman Sachs in fudging the data with the help of complicated swap schemes.
Some of the reasons for Greece's failure -- and similar troubles that occurred in other euro zone member countries in Europe's periphery, including Italy, Spain, Portugal and Ireland -- are the result of a flawed design of the euro area, which has perfectly benefitted export oriented economies like Germany and some other euro area peers, but which has caused serious or even tragic problems for others.
Also, the euro design has left budget and tax policies in the hands of individual countries, something that many experts believe was sure to fail.
Actually, everything looked wonderful at the beginning. During the initial years of the euro zone, Greece's economy seemingly flourished: with foreign investment flowing into the country and -- backed by the euro -- borrowing rates for successive governments, businesses, and households were very affordable.
However, cheap money is not so cheap when there is a time to pay or when the the borrowing goes through the roof. As there is oversight within the currency zone, at least in theory, and Greece had to deliver the numbers, successive governments used some dodgy economic statistics and figures.
Another problem: there was never enough money in the treasury. Greece's persistent deficits have been definitely caused also by rampant tax avoidance by - perhaps almost everybody - but mainly businesses and middle-class professionals.
1st and 2nd bailout
In 2009, at the height of the euro zone's sovereign debt crisis, it was discovered once again that Greece's figures had been cooked: an official 6% budget deficit was actually about twice as big and later revised to above 15%. During those trying times no country had to go through more heat than Greece, as there were of worries of the euro zone breaking up or at least of a new financial crisis.
Upon the discovery of truth, or at least partial truth, bond yields and therefore borrowing rates surged, and the country was unable to cover its debt obligations. The country was shut out of financial markets.
As a result, Greece had to first agree to a €110 billion bailout program, which has proved to be insufficient, and the second rescue package in 2012 worth €130 billion, together totaling a massive €240 billion.
Some argue, that the bailout actually saved Greek lenders, especially German and French banks, which would otherwise have faced massive losses. Therefore, through the bailouts, private debts became public.
The troika of creditors - the European Commission (EC), ECB and International Monetary Fund (IMF) - insisted on a program of harsh austerity, including severe budget cuts, steep tax increases, and profound economic reforms.
Since then, the Greek economy has virtually collapsed. It has shrunk by 25% in five years, and the unemployment rate is more than 25% even now, after more than five years.
Former IMF chief Dominique Strauss Kahn has already admitted that the Fund should have insisted that other euro zone member countries do more to help Greece and should also have fought against the harsh austerity. Moreover, he said that the IMF also miscalculated the impact of such "pro-cyclical adjustment."
The IMF now also insists that any rescue program for Greece will not work without some form of debt relief. International creditors will have to accept some sort of "significant" easing of the terms for Greece, IMF Managing Director Christine Lagarde has warned.
"It's inevitable that there is an element of debt restructuring," she said. “For any program to fly, a significant debt restructuring should take place," Lagarde stressed.
However, while Germany appears willing to consider some relief measures, like extending maturities or lowering the interest, it is staunchly against any nominal haircut.
Also, the bailout funds, as many people mistakenly believe, don't benefit Greece directly. The money mostly goes toward honoring Greece’s international debts, rather than into the country's economy. About €200 billion is owed to the euro zone bailout fund or other euro zone countries, the rest to the IMF or other lenders.
By michal darila Thu, Aug 13 2015, 01:24 PST |wbponline.com
Following the 1.5% surge on EUR/USD in the previous session, the pair consolidated on the downside on the back of dollar correction. The dollar, however, remains under pressure as the chances of a Fed rate hike have been pushed back due to CNY devaluations.
Frankfurt - The US dollar has taken a 2.7% hit since the beginning of the week versus the euro, but the currency pair consolidated on the downside on Thursday morning in Europe. The euro rallied as high as $1.1212 in the previous session, its highest in a month, after the US dollar was heavily offered following the CNY devaluation. Although the dollar correction dragged the euro lower, the EUR/USD remains near its highest since early July. The euro declined 0.29% to $1.1121 at the European morning session.
The People's Bank of China (PBoC) intervened again and officially fixed the yuan 1.1% lower on Thursday. China's currency has depreciated some 3.5% so far this week. China's central bank stated that based on their inflation-based real exchange rate calculations, the CNY is 17% overvalued. Leaving the door open to a 10% or more devaluation.
"The US dollar weakened sharply yesterday caught up in the fall out from heightened investor concerns over the devaluation of the renminbi," Lee hardman from Bank of Tokyo-Mitsubishi noted on Thursday adding that "the temporary setback for the US dollar is further evidence that it is now trading more like a pro-growth currency."
The general market view is that the logic behind the PBoC's action is about boosting exports and stimulating the slowing economy. "While this no doubt will help, the primary concern for the government is deflation. The driving force behind China’s devaluation is to halt deflation and ease monetary conditions," Angus Nicholson from IG wrote on Thursday.
Nicholson further says that this is the beginning of a major deflationary impulse that will be felt worldwide, possibly pushing back the Fed and Bank of England rate hikes and leading to stepped up easing by the European Central Bank and the Bank of Japan.
Following the US non-farm payrolls for July, expectations for a Federal Reserve (Fed) September rate hike surged. Things changed after China begun to "export its deflation". While one week ago the chance of rate hike in September was 50%, current development suggests the strongest chance of liftoff in 2015 not coming until December, which now has a 66% chance.
By Yohay Elam - Sep 4, 2014 6:05 GMT
The ECB convenes for its monthly rate decision and expectations are higher after Mario Draghi’s Jackson Hole speech.
Will the ECB act now or just hint of QE in the future? Will the event allow the pair to recover or further push it down? Here is a preview:
First, what’s going on with EUR/USD recently? In three words: monetary policy divergence. The Fed is set to tighten within less than a year and the ECB is expected to leave low rates or even announce more monetary stimulus soon.
And finally, this monetary divergence is having an impact, with the pair falling steadily.
Recent European issues
No growth: Euro-zone growth was flat in Q2. The German economy contracted by 0.2% and the French economy remained unchanged for quite a while. And while Spain managed to grow nicely, Italy entered a recession. The European stagnation comes in contrast to strong US growth.
Russian clouds: The tensions around Ukraine have intensified since the downing of MH17. The recent incursion / invasion of Russian troops into Ukrainian territory complicated matters, as well as Putin’s rumblings about taking Kiev in two weeks (denied later). The EZ and especially Germany, depend on Russian gas and have significant trade with the country. The Russian ban on food imports from the EU could push prices even lower. The tensions have an impact on German business confidence. Europe has more to lose from the worsening relations with Russia.
Low inflation: Headline inflation fell to 0.3% in August, while core inflation rose to 0.9%. The ECB is expected to deliver a 2% or a “bit below”, and this is getting out of hand. Despite the fall of the euro, price developments are weak. A dream level would be 1.20 to 1.25, but this is far away.
Draghi explains: In the previous press conference, Draghi explained how the fundamentals of a weaker EUR/USD are in place (monetary divergence, change in flows and June’s measures) and EUR/USD fell since then. His more recent words are more important: In Jackson Hole, not only did Draghi call on governments to do more, but he also admitted that low inflation is not only due to temporary factors, but also that inflation expectations are changing. This is a big change from Draghi.
All this leads to higher expectations for the ECB. What can happen?
Even lower rates: The current lending rate is at 0.15% while the deposit rate is a negative 0.10%. There is speculation that the ECB will cut the rate to 0.05% and the deposit rate to -0.20%. The probability is low, especially as Draghi said in June that rates have “reached their lower bound“. In addition, the real impact on the economies would be minimal and the impact of the message is also problematic: will it show that the ECB is acting and will act more? If so, it’s euro negative. Or is it a substitute for QE? In this case, it is euro positive. We will know about the rates already at 11:45 GMT.
Lower inflation forecasts: The ECB publishes inflation and growth forecasts every three months, and this is the time to lower forecasts. It has a very high probability as it would reflect the Jackson Hole speech. It would also enhance the message that QE is coming – to battle this low inflation. This is basically priced in, and impact depends on the forecasts.
Stronger rhetoric on QE: Draghi can still raise the rhetoric before markets will stop listening. Why? QE in the euro-zone is complicated: what bonds do you buy? If you buy Asset Backed Securities (ABS), what is the size? What assets and from what banks? The ECB recently hired Blackrock and Draghi could certainly argue that more time is needed. Draghi probably has another two months or so to deliver before he will be seen as “crying wolf”.While this is expected, it would still put pressure on the euro. The message needs to be strong. Without a strong determined message, the euro could rise.
QE Announcement: This has a small chance, but if it happens, the effect will likely be negative on the euro. Here is why it will probably not happen now. June’s moves are too close, including the TLTRO’s which come into effect this month. Bank lending is already changing in the euro-zone, with banks more willing to lend out money. As aforementioned, markets probably give Draghi more time and perhaps most importantly, the Germans are probably not behind such a move, not yet.
To sum it up:
Rate cuts: low probability, impact depends on the message.
Lower forecasts: quite certain, mostly priced in, impact depends on the numbers.
QE hints: high probability – message needs to be strong to weigh on the euro.
QE announcement: low probability, huge impact.
By Yohay Elam - Sep 4, 2014 6:54 GMT
EUR/USD is trading slightly higher, enjoying a strong German figure towards the really big event: the decision by the ECB and the subsequent press conference by Mario Draghi. Will we see another cut? QE? Or only the same rhetoric? Also in the US, we have quite a few significant hints towards tomorrow’s Non-Farm Payrolls.
Here’s a quick update on technicals, fundamentals and sentiment moving the pair.
EUR/USD traded steadily around 1.3150
Current range: 1.31 to 1.3150.
Further levels in both directions:
Below: 1.31 1.3050, 1.30 and 1.2940.
Above: 1.3150, 1.3175, 1.3220 and 1.3295.
1.3150 switches to resistance after the downfall on Friday.
1.3108 is the new low, but real support is at the round number of 1.31.
6:00 German Factory Orders. Exp. 1.6%, actual 4.6%.
8:10 Euro-zone Retail PMI.
11:45 ECB rate decision. See the full preview: 4 options – lower forecasts but probably no action.
12:15 US ADP Non-Farm Payrolls. Exp. 218K.
12:30 ECB Press Conference.
12:30 US jobless claims. Exp. Exp. 298K.
12:30 US trade balance. Exp. 42.5 billion.
12:30 US Revised non-farm productivity. Exp. 2.5%.
12:30 US revised unit labor costs. Exp. +0.6%.
13:45 US Markit final services PMI. Exp. 58.5 points.
14:00 US ISM Non-Manufacturing PMI. Exp. 57.3 points.
*All times are GMT.
For more events and lines, see the Euro to dollar forecast.
What will the ECB do?: Since Draghi’s Jackson Hole speech, expectations are sky high for more monetary stimulus and the euro is lower. Some expect the central bank to cut rates even further, while others expect him to announce outright QE, although that might wait. There is also a high probability of seeing lower forecasts. The reaction depends on not only on the action but on the message. See the preview: 4 options – lower forecasts but probably no action.
Ceasefire or conflict?: The breaking news about a permanent ceasefire came out of Kiev and were followed by a denial from Moscow. While the presidents talked, nothing is really changing on the ground. Analysis: 5 Reasons to fade the Ukraine-Russia ceasefire. However, later on Russian president Vladimir Putin laid out a 7 point peace plan, that will be on the table in a meeting between him and Ukrainian president Poroshenko on Friday.
Big hints towards the NFP: While the US events are currently on the back-burner, the first hint was positive: the ISM manufacturing PMI came out better than expected. Join the webinar for a preparation for the NFP and the ECB. Today we get the ADP, jobless claims and perhaps most importantly, the employment component of the ISM Non-Manufacturing PMI. Stay tuned for a preview on how to trade the event with EUR/USD.
By FXPRO - Sep 4, 2014 7:56 GMT
All eyes of the ECB today and one can’t help thinking “we’ve been here before”. It seems that in the run up every ECB meeting in the past few years, in fact ever since Mario Draghi said famously that he would do “whatever it takes”, there’s been a build-up of expectation that something major will be announced in a bid to halt the deflationary spiral. Many are saying this time is different now as Eurozone inflation teeters on the brink of deflation, but investors have to be prepared for disappointment. Needless to say the tone of the press conference today is likely to be very dovish and what will be closely watched is the ECB’s inflation projections to see how much they will lower them. This is important as at some point, as projections get lower and lower, Draghi will have to start to walk the walk as he continually talks about having all available instruments at his disposal to ensure euro stability.
There’s a small possibility we will see further cuts to the deposit and refi rate, but full blown QE is unlikely to be announced, rather the chances of some sort of ABS program are higher. The reason markets could be disappointed is because the ECB is about to undertake its TLTRO program in a couple of weeks, with the second round in December and the effects of that have not been felt yet. Regardless of what is done and said, come the decision today and proceeding press conference there is likely to be considerable volatility in the euro.
There’s also the Bank of England rate decision today ahead of the ECB but nothing exciting is expected from them and of course we will not see the vote determining today’s action until the minutes are released on 17th September. GBPUSD is holding the 1.6450 level and has now corrected 4% from its July highs. Despite having been oversold on some technical indicators for some time now the near term trend doesn’t look bright for cable and bears will be targeting 1.6250.
By Scott Hamilton & Jennifer Ryan - Oct 3, 2013 1:23 PM GMT+0500
Bank of England Governor Mark Carney said policy makers must make sure the housing market recovers in a sustainable way as the government accelerates its program to aid homebuyers.
“We will take those responsibilities very deliberately, very prudently and act in a proportionate fashion in a way that is consistent, that intends to be consistent, with a sustainable housing market,” Carney said in an interview with ITV Anglia broadcast yesterday on its website. The BOE has tools to ensure the housing market “isn’t in a boom and then a bust phase.”
Britain’s property market has strengthened in recent months, prompting concerns that the government’s Help to Buy housing plan may fuel a bubble. Data today showed house prices climbed to their highest level in five years last month. While BOE Markets Director Paul Fisher yesterday played down fears, the central bank has said it will be “vigilant” to risks and the Chancellor of the Exchequer George Osborne has requested it carry out an annual review of his program.
“We have a range of tools we could potentially use and we need to use them in the context of other programs,” Carney said. They include an “affordability test, so individuals who are taking out mortgages today will be able to pay it down the road when interest rates eventually rise, as they will eventually as the recovery really takes hold.”
With the government’s Help to Buy program prompting a warning from the International Monetary Fund that it could over-inflate house prices, Prime Minister David Cameron has defied critics and said the second phase of the program will start now, three months earlier than planned.
House values increased 0.3 percent in September from August, an eighth consecutive gain, mortgage lender Halifax said today. That takes the average house price to its highest level since September 2008, it said.
The Halifax data follows a report from Hometrack Ltd. that showed values rose the most in more than six years in September, and comments from Nationwide Building Society that homebuilding is “well below” the pace needed to keep up with demand.
In the ITV Anglia interview, Carney also said the central bank won’t tighten monetary policy until the U.K. economy is growing at a sustainable rate as he took his message to executives outside London.
“We’re not going to begin to think about raising interest rates or tightening monetary policy until we see the conditions in the economy where the economy is really growing -- and growing at a sustained pace,” he said.
BOE policy makers have said they’ll keep their key interest rate at a record low of 0.5 percent at least until the unemployment rate, now at 7.7 percent, drops to 7 percent. Carney is pushing the message to consumers and executives and his tour of East Anglia follows a similar visit to the north of England last week.
Carney said the aim of guidance is “to provide business in this region and across the country with that greater degree of certainty” about monetary policy.
“This recovery, to gain traction, to be sustainable, to really move forward, is going to turn on regions like East Anglia, it’s going to turn on regions outside of London,” he told ITV Anglia. Carney also said an increase in business sentiment should help get businesses “greater confidence to start to hire and invest.”
By Joseph Ciolli - Oct 3, 2013 11:00 AM GMT+0500
he pound’s rally has pushed the currency to about its highest valuation this year relative to strategists’ forecasts, suggesting its world-beating gains may prove unsustainable given the state of the U.K. economy.
Britain’s currency has surged 7 percent since April 3 to $1.6229, erasing its losses for 2013 amid bets that the Bank of England may tighten monetary policy sooner than anticipated. The price of sterling exceeds the $1.55 year-end median estimate of more than 70 strategists in a Bloomberg poll by 7 cents, or about 3 cents above this year’s average.
“Sterling is starting to look a little more over-extended,” Ian Stannard, the head of European foreign-exchange strategy at Morgan Stanley in London, said in a Sept. 26 phone interview. “There are some longer-term risk factors that could come back and put sterling back under some pressure,” said Stannard, whose firm predicts the pound will tumble more than 7 percent by the end of this year to $1.50.
While the economy is starting to gain momentum, second-quarter gross domestic product missed analysts’ forecasts last week, and was more than 3 percentage points below its 2007 highs. The pound is becoming more important as a gauge of the U.K. recovery as politicians start the long campaign for the next general election in May 2015.
Britain’s “road to recovery continues to look potholed,” David Tinsley, the chief U.K. economist at BNP Paribas SA, which has a year-end pound forecast of $1.43, wrote in a Sept. 26 report. “Structural underpinnings remain a cause for fretfulness.”
The pound, which has risen from $1.5130 on April 3, is the best-performer among the 16 most-traded currencies tracked by Bloomberg in the past six months, gaining 7.5 percent against a basket of nine major peers, Bloomberg Correlation-Weighted Indexes show. It reached a nine-month high of $1.6260 on Oct. 1.
Sterling’s rally gathered pace after a decline in U.K. unemployment fueled speculation the Bank of England would raise interest rates before the U.S.
Those bets have since diminished, with the premium investors get to hold 10-year U.K. gilts instead of Treasuries narrowing to 10 basis points, from an almost two-year high of 32 on Sept. 18, the day the U.S. Federal Reserve refrained from paring monetary stimulus. A basis point is 0.01 percentage point.
“If the financial markets are pricing in a sharp rise because they think in the past, every time the economy’s growing quickly the bank’s raised interest rates, I think they should think again,” BOE Chief Economist Spencer Dale said at an event in London this week. “Our forward guidance says clearly that’s not the case.”
A drop in real earnings, or wages adjusted for inflation, will weigh on the U.K. recovery and the pound, according to HSBC Holdings Plc, which sees the currency at $1.45 by year-end.
Britain’s biggest bank said its measure of average weekly earnings, less inflation, has been negative since mid-2010 and fell further in 2013. Consumer-price inflation slowed to 2.7 percent in August, still outpacing the 1 percent wages growth in the three months through July, official data show.
Real earnings are “going to be a headwind,” Daragh Maher, a London-based currency strategist at HSBC, said in a Sept. 26 phone interview. “The only thing that could change that would be if we saw a swifter improvement in the U.K. labor market.”
Prime Minister David Cameron told the Conservatives’ annual gathering in Manchester, England, yesterday that living standards can’t be improved without growth, which requires fiscal austerity to maintain. He was responding to a Sept. 24 pledge by Labour Party leader Ed Miliband to temporarily freeze gas and electricity prices should he gain power at the election in 2015.
Both leaders have encouraged the idea that the two main parties have the biggest policy differences in a generation.
The latest leg of the pound’s rally started after BOE Governor Mark Carney said Aug. 7 that policy makers plan to hold the benchmark interest rate at a record-low 0.5 percent until unemployment falls to 7 percent, which the central bank didn’t see happening until the fourth quarter of 2016. When the jobless rate slid to 7.7 percent in the three months through July, investors became more optimistic about sterling.
Futures traders are betting the pound will keep rising for the first time since February, reversing earlier wagers on a decline, figures from the Washington-based Commodity Futures Trading Commission show.
The difference in the number of wagers by hedge funds and other large speculators on a gain in the pound compared with those on a decline, or net longs, totaled 1,174 contracts on Sept. 24, compared with net shorts of 6,310 a week earlier, according to CFTC data.
The reduction in short-pound positions was “brought about mainly by U.S. dollar weakness,” Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG in London, wrote in a Sept. 27 note to clients.
Commerzbank is the second-most bullish of more than 70 firms surveyed by Bloomberg, predicting the pound will advance to $1.63 by the end of 2013. Ahmedabad, India-based Vadilal Commodities & FX and Consultancy Services Ltd. is the most optimistic, with a forecast of $1.65.
Strategists have been slow to embrace the pound’s rally, raising the median estimate for its year-end value by less than 3 percent from $1.51 on April 3, Bloomberg data show. As recently as July 9, forecasts exceeded the currency’s value as sterling touched $1.4814, the lowest level since June 2010.
A string of less positive economic reports are starting to change analysts’ minds about the pound’s prospects.
Britain’s economy grew an annualized 1.3 percent in the second quarter, the government said Sept. 26, falling short of a 1.5 percent forecast in a Bloomberg survey of 26 strategists.
Europe’s third-biggest economy, will grow 1.3 percent this year and 2 percent in 2014, compared with 1.6 percent and 2.65 percent for the U.S., Bloomberg surveys of economists suggest.
“The market has dismissed the forward guidance” on rates “and stayed with the data,” Adnan Akant, the New York-based chief investment officer for foreign-exchange at Fischer Francis Trees & Watts Inc., which oversees $56 billion, said in a Sept. 26 phone interview. “It’s quite possible the data might not be as supportive of sterling anymore.”
By Stefan Riecher & Jana Randow - Sep 5, 2013 11:30 AM GMT+0500
Mario Draghi is trying to prevent investors from overestimating the economy’s resilience.
Having predicted a recovery at every European Central Bank policy meeting since December 2011, the month after he took office, the ECB president has finally seen the 17-nation euro area exit recession. The central bank will today present new growth and inflation forecasts for the currency bloc, reflecting an expansion in the three months through June that beat forecasts and snapped six quarters of contraction.
Draghi’s dilemma is that the strength of the rebound has helped boost interest-rate expectations to levels he described last month as “unwarranted.” That’s a signal some investors are questioning his commitment made in July to keep rates low for an extended period. Higher borrowing costs risk undermining what has so far proved to be a jobless recovery.
“At a time when this recovery is in its early stages, it is important for the ECB president to limit any abrupt upward reaction in yields,” said Alan Clarke, an economist at Scotiabank in London. “Draghi will highlight growing optimism on the growth outlook, though he is likely to maintain a dovish bias on many aspects.”
The overnight rate that banks expect to charge each other by the ECB’s August 2014 rate meeting, as measured by Eonia forward contracts, was at 0.29 percent today. That’s near the level in late June that triggered Draghi’s July 4 pledge to keep rates low for an extended period. It fell as low as 0.09 percent on July 8.
Policy makers meeting in Frankfurt today will keep the ECB’s benchmark interest rate unchanged at a record low of 0.5 percent, according to all 56 economists in a Bloomberg News survey. The central bank will announce its interest-rate decision at 1:45 p.m. and Draghi will hold a press conference 45 minutes later.
The Bank of England will keep its quantitative-easing program at 375 billion pounds ($585 billion) and hold the benchmark rate at a record low of 0.5 percent, according to separate surveys of economists. That decision is due at noon in London.
The euro-area economy expanded 0.3 percent in the three months through June, led by faster-than-expected growth in its biggest economies, Germany and France. Recent economic indicators point to a further recovery in the second half as an index of services and factory output climbed to the highest level since June 2011 and economic confidence soared to a two-year high.
The ECB’s July introduction of forward guidance followed signs that the U.S. Federal Reserve will start unwinding its $85 billion a month bond-buying program this year. That had sparked a global sell-off in bonds, driving yields higher in stressed economies including Spain (GSPG10YR) and Portugal. (GSPT10YR)
The U.S. economy maintained a “modest to moderate” pace of expansion from early July through late August, the Fed said in its Beige Book report yesterday. The bank will start to slow its bond purchases at its Sept. 17-18 meeting according to 65 percent of economists in a Bloomberg News survey last month. The survey also indicated policy makers will end the program, known as quantitative easing, by June 2014.
Draghi has so far fought rising market rates with words. His pledge to keep rates low has been accompanied by his outlook for subdued inflation extending into the medium term and broad-based weakness in the euro-area economy. The region’s unemployment rate held at a record 12.1 percent in July.
“The risks surrounding the economic outlook for the euro area continue to be on the downside,” Draghi reiterated last month.
Economists from Nomura International Plc to Royal Bank of Scotland Group Plc predict that even with the euro area’s recession over, the ECB will make only minor changes to its forecasts today.
The bank predicted in June that the economy will shrink 0.6 percent this year before growing 1.1 percent in 2014. It forecast inflation at 1.4 percent in 2013 and 1.3 percent next year, well below its target of just under 2 percent.
“Despite incoming business-cycle data continuing to surprise to the upside, we do not expect the ECB to be building a case for strong endorsement of the recovery,” said Nick Matthews, senior European economist at Nomura in London. “Draghi will judge the short-term data as evolving in line with expectations and only revise the 2013 growth forecast up slightly.”
“We do not see any revision to the projection for inflation in 2014, which is the key number in terms of the rate discussion and the guidance, and we have left our estimate of the 2013 figure unchanged,” said Richard Barwell, an economist at RBS in London. The economic expansion “should be sufficient to deliver modest upwards revisions to the output for growth in 2013 and 2014,” he said.
The return to growth has led to investors getting mixed messages from some ECB Governing Council members on whether scope remains for further interest-rate cuts.
There aren’t “many arguments now for a rate cut,” the Austrian National Bank Governor Ewald Nowotny told Bloomberg News on Aug. 22, before saying a week later that a rate cut is still possible. The option to reduce borrowing costs “is still on the cards,” Bank of Cyprus Governor Panicos Demetriades told Bloomberg News on Aug. 24.
“The ECB is surely leaning toward waiting and observing,” said Stefan Schilbe, an economist at HSBC Trinkaus & Burkhardt AG (TUB) in Dusseldorf. “Draghi will be very careful not to be too optimistic. He won’t stress the topic of a rate cut as much as last month, but it’s too soon to scrap it altogether.”
By Jason Lange - Thu, Jul 11 11:20 AM EDT
WASHINGTON (Reuters) - The number of Americans filing new claims for unemployment benefits rose last week, although the level still pointed to further healing in the labor market.
Other data on Thursday showed prices for U.S. imports and exports fell in June for the fourth straight month, hit by cooler economic growth worldwide.
Initial claims for state unemployment benefits increased by 16,000 to a seasonally adjusted 360,000, the Labor Department said.
Analysts had expected a small decline in new claims. The reading, however, was likely clouded by seasonal factors.
The Labor Department can have a tough time seasonally adjusting claims in early July because many factories shut down during the summer for retooling, but the scheduling for the shutdowns varies from year to year.
"Claims will be wild for the next couple of weeks," said Ian Shepherdson, an economist at Pantheon Macroeconomics.
The four-week moving average of new claims, which smooths out some seasonal volatility, increased by a more modest 6,000 to 351,750.
Even with the increase, the number of layoffs remains in the range of levels seen over the last year and is consistent with a continued drop in the unemployment rate, which has fallen more than half a percentage point since June 2012.
At the same time, measures of economic output are pointing to much more lackluster growth. The economy expanded at a 1.8 percent annual rate in the first quarter and many economists think a wave of federal budget cuts could slow growth to roughly half that pace in the April-June period.
If jobless claims keep rising in July, that might signal a slowdown in hiring during the month, said Joshua Dennerlein, an economist at Bank of America Merrill Lynch in New York.
"The labor market has been doing pretty well, but ... growth has slowed so the two have to converge," Dennerlein said.
The Labor Department said last week the U.S. economy added a 195,000 jobs in June, which was stronger than analysts had expected.
Investors appeared largely unmoved by the data. Prices for U.S. stocks and government debt rose a day after comments by U.S. Federal Reserve Chairman Ben Bernanke indicated the central bank was unlikely to scale back its stimulus measures earlier than expected.
The Labor Department said in a separate report that export prices fell 0.1 percent last month, matching the median forecast of a Reuters poll.
The drop probably reflects weakness in global demand, which has been hit by Europe's debt crisis and slowing growth in China.
Import prices slipped 0.2 percent last month, dragged down by another month of declining costs outside of the fuels category. Petroleum prices rose 0.2 percent. Economists polled by Reuters had expected overall import prices to be unchanged last month.
Prices for both imports and exports have fallen every month since March, the longest such streak since 2008 when the world was mired in a financial crisis.
The drop in prices last month for imported cars and other consumer goods could help some U.S. consumers.
However, some economists are worried that weak demand could raise the risk of deflation, which entails a spiral of falling prices and wages that is difficult for central banks to fight.
Gennadiy Goldberg, an interest rate strategist at TD Securities in New York, said a low rate of inflation will be a factor pushing the Fed to keep interest rates low.
"There is nothing in the international price data that will offset what will remain a disinflationary backdrop," Goldberg said.
By Pedro da Costa and Alister Bull - Wed, Jul 10 15:08 PM EDT
WASHINGTON (Reuters) - Even as consensus built within the Federal Reserve in June about the likely need to begin pulling back on economic stimulus measures soon, many officials wanted more reassurance the employment recovery was on solid ground before a policy retreat.
Financial markets have largely converged on September as the probable start of a reduction in the pace of the U.S. central bank's $85 billion in monthly bond purchases, but minutes of the Fed's June meeting released on Wednesday suggested that might not be a sure bet.
"Several members judged that a reduction in asset purchases would likely soon be warranted," the minutes said. But they added that "many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases."
Wall Street welcomed the Fed's reticence about the end of asset buys, with stock prices briefly moving into positive territory after the minutes were released. U.S. Treasury bond prices also moved higher.
"Everybody seems to have their own opinion on when tapering should start. I think it's maybe more uncertain than before. Most had expected September might be a good starting point. This throws a lot more doubt on that timeframe," said Kim Rupert, managing director of fixed income analysis at Action Economics in San Francisco.
Global investors have recently recovered from a mild bout of panic sparked when Fed Chairman Ben Bernanke laid out a roadmap after the June meeting for an end to so-called quantitative easing. He said the central bank would likely curtail bond purchases later this year and bring them to a halt by the middle of next year.
Financial market fears have been allayed in part by a chorus of Fed officials who have sought to reassure traders that the end of asset buys will not lead to imminent interest rate hikes.
"Many members indicated that decisions about the pace and composition of asset purchases were distinct from decisions about the appropriate level of the federal funds rate," the minutes said.
Whether the markets have fully gotten the message is not entirely clear; the yield on the 10-year U.S. Treasury note has risen a full percentage point in just two months and stands close to its highest levels since 2011.
This has already slowed activity in the mortgage market, which had been key to the recent economic rebound.
The Fed's June 18-19 meeting came before the latest government report on U.S. employment, which showed a robust gain of 195,000 jobs in June and upward revisions to prior months. The jobless rate was steady at 7.6 percent.
At the meeting, some Fed officials worried not only about the outlook for employment, but the pace of economic growth as well, the minutes showed. Many economists believe the economy grew at less than a 1 percent annual rate in the second quarter, although most look for a pick-up in the second half of the year.
"Some (officials) added that they would ... need to see more evidence that the projected acceleration in economic activity would occur, before reducing the pace of asset purchases," the minutes said.
Of the Fed policymakers who argued it would be wise to curtail bond purchases soon, two thought it should be done "to prevent the potential negative consequences of the program from exceeding its anticipated benefits."
The minutes indicated Bernanke was tasked with providing a roadmap on monetary policy at his post-meeting news conference, but they provided few of the details that the chairman offered.
A summary of economic projections provided alongside the minutes said about half of the Fed's 19 policymakers wanted to bring the bond-buying program to a halt by the end of this year.
But many others thought it would be appropriate to continue the purchases into next year.
The summary did not distinguish between the view of the 12 voting members of the Fed's policy panel and the other seven officials.
By Richard Hubbard - Fri Jun 28, 2013 9:07am EDT
(Reuters) - World shares hit their highest level in a week on Friday and bonds and oil rose, as a volatile quarter drew to a close with fears of an early withdrawal of U.S. monetary stimulus waning. Better economic data from Japan and efforts by China's central bank to ease credit concerns added to the positive tone, lifting MSCI's world equity index 0.5 percent and putting it on course to snap five weeks of losses.
U.S. stock index futures were higher as well, pointing to a firmer start on Wall Street where the benchmark S&P 500 index could see its first four-day gain since early April.
Market moves were likely to be limited, however, as investors avoid any large bets on the final trading day of the second quarter, and ponder the impact of an end to the era of cheap money which drove returns in the first half of 2013.
"It's been a tough quarter, the easy game is up and markets have to revaluate where they stand," said Wouter Sturkenboom, Investment Strategist at Russell Investments.
Global stock, bond and commodity markets have been highly volatile since Federal Reserve Chairman Ben Bernanke signaled last week that the U.S. central bank would soon cut the pace of its bond buying unless the economic recovery slows.
Two Fed policymakers came out on Thursday to reassure investors that any winding down of stimulus was still some way off, though its ultimate course was set.
"The market is going to have to base its views about equities and currencies on actual economic growth rather than simply the fact that there's cheap money there," said Simon Derrick, chief currency strategist at Bank of New York Mellon.
"I think that's a fundamental shift."
A survey of 53 investors across the United States, Europe and Japan by Reuters, released on Friday, found that funds had already cut their average equity holdings in June to a nine-month low due to the recent volatility, and had held more cash.
Meanwhile, gold, which had soared in value as a hedge against higher inflation from all the cheap Fed money, has suffered heavily. The metal dropped to a three-year low near $1,200 an ounce on Friday, putting it on course for its worst quarterly performance in over half a century.
The end-of-quarter maneuvering was cited behind a rise in the euro off a four-week low against the dollar to $1.3080, and helped the dollar rise against the yen by 0.6 percent at 98.90 yen.
The broad FTSE Eurofirst 300 index, which had opened higher in line with other world markets, pared its gains as end of quarter positioning took hold. It slid 0.5 percent and was on course to end June lower after a record 12 monthly rises.
Earlier, MSCI's broadest index of Asia-Pacific shares outside Japan climbed 1.5 percent, pulling further away from an 11-month low and wiping out this week's losses. It was still down around 7 percent for the year.
Asia's rise followed Wall Street's rally on the Fed comments and Japanese data showing consumer prices stopped falling in May and labor demand reached a five-year high.
China's stock markets had also seen their biggest gains in two months after its central bank, which had let short-term borrowing costs spike to record highs, said it would ensure its policy supported a slowing economy.
European bonds shared in the more positive tone, with yields falling on core German debt and riskier Spanish and Italian paper.
But Patrick Jacq, European rate strategist at BNP Paribas, said investors would require higher yields in future in light of the Fed's policy shift. "Liquidity and credit risk assessment has changed since the Fed spoke about tapering off," he said.
Brent crude oil futures climbed 29 cents to $103.11, on course for their first monthly rise in five months. Copper was flat but facing its biggest quarterly loss in almost two years, reflecting global growth concerns.
By James Doran - Jun 28, 2013
There is not enough space on airlines flying in to Dubai to meet the rapidly rising demand for physical gold in the emirate since the price plunged to record lows this week.
The price drop led to a rush of buyers for Dubai gold from the Middle East, South East Asia, the Balkans, Turkey and parts of Europe according to Tarek El Mdaka, the managing director of Kaloti Gold in Dubai.
"I cannot find a place for transporting gold on Emirates, on BA on Swiss Airlines this weekend," Mr El Mdaka said. "I am shipping in one-and-a-half to two tonnes of gold every day and it is going straight out."
Mr El Mdaka added that gold is in such short supply in Dubai that he is able to charge a US$3 premium per ounce. "In the last week or so that has gone up from $1.25, $1.50 to $1.75. But now it is $3. We are really squeezed."
Physical gold from Dubai has been selling strongly since the price of the yellow metal first plunged in April. But this week it has taken another historic tumble, creating a buying opportunity for small- time investors looking for gold bars, coins and bullion.
Yesterday the price edged up a little with the spot price rising 0.5 per cent in early trading to $1,232 an ounce. On Wednesday, however, it fell 4 per cent to $1,221.80, the lowest price in three years, capping a 12 per cent decline in the past eight trading sessions.
Some parts of the Dubai market are not so buoyant as those in which Kaloti operates, however.
Gerhard Schubert, the head of precious metals trading at Emirates NBD said that grades of gold known as 995, which would ordinarily be sold into the Indian market, are currently stuck in Dubai.
The Indian government has implemented import restrictions that have been backed up by the All India Gems and Jewellery Trade Federation in an effort to shore up the tumbling rupee.
"A lot of India's gold comes in from Dubai and all of that is stuck here right now," Mr Schubert said.
Mr El Mdaka, who does not sell into the Indian market, agreed. "The squeeze on physical gold in India would have a big effect on Dubai. Luckily though, there is a lot of demand coming from the rest of the world to soak it up," he said.
By Nicholas Larkin - Jun 14, 2013 4:16 PM GMT+0500
Gold traders turned bearish for the first time in a month as investors reduced holdings in exchange-traded products for an unprecedented 17th consecutive week and India, the biggest buyer, announced curbs on imports.
Eighteen analysts surveyed by Bloomberg expect prices to fall next week, with 14 bullish and four neutral, the largest proportion of bears since May 17. Investors sold 497.2 metric tons valued at about $22 billion through ETPs since Feb. 8 and the 2,117.96 tons left is the least they have held since March 2011, data compiled by Bloomberg show.
Bullion is on track for the first annual drop since 2000 as some investors lose faith in it as a store of value. While the slump into a bear market in April hurt billionaire hedge fund manager John Paulson and producer Newcrest Mining Ltd. (NCM), it spurred purchases of coins and jewelry worldwide. That demand may be threatened in India after the nation raised gold import taxes to contain a record current-account deficit.
“Sentiment is very bleak,” said Andrey Kryuchenkov, a commodity strategist in London at VTB Capital, a unit of Russia’s second-largest lender. “The Indian import tax hike is concerning and it’s obviously not helping sentiment. Investors are basically on the sidelines. They don’t want to do anything and are still spooked.”
The metal fell 18 percent this year to $1,381.24 an ounce and is trading 28 percent below the record $1,921.15 set in September 2011. The Standard & Poor’s GSCI gauge of 24 commodities dropped 2.8 percent since January started and the MSCI All-Country World Index of equities rose 7.1 percent. Treasuries lost 1.4 percent, a Bank of America Corp. index shows.
India raised the import duty to 8 percent from 6 percent on June 5 and the central bank also further restricted shipments. Overseas purchases slid to an average of $36 million a day in the 14 business days through June 7, compared with an average $135 million a day in the 13 days through May 20, Raghuram Rajan, chief economic adviser in the Finance Ministry, said June 11. The All India Gems & Jewellery Trade Association has asked the government for a discussion on reversing the tax increase.
The move to slow demand comes amid the worst drop in ETP holdings since the first product was listed in 2003. Assets fell for 17 weeks through June 7 and are down 17.9 tons so far this week. Paulson, the largest investor in the SPDR Gold Trust, the biggest ETP, had a 13 percent loss in his Gold Fund last month. That takes the decline since the start of the year to 54 percent, according to a copy of a letter to investors obtained by Bloomberg News.
Gold’s plunge is also hurting producers already contending with rising costs. Newcrest, Australia’s largest gold producer, said last week it will write down the value of its assets by as much as A$6 billion ($5.9 billion) after the slump. The 30-member Philadelphia Stock Exchange Gold and Silver Index slid 37 percent this year.
Data released last week showed U.S. payrolls increased more than forecast in May and Federal Reserve Chairman Ben S. Bernanke said last month that the central bank could curtail its $85 billion monthly bond purchases if the economy improves. The World Bank raised its 2013 U.S. growth forecast on June 12 to 2 percent, from 1.9 percent in January, even as it cut its estimate for the global economy to 2.2 percent, from 2.4 percent.
Bullion rose 57 percent since 2008 as the Fed led a global surge in money printing to boost growth. While the U.S. central bank will slow purchases, it will still buy $65 billion a month by October, the median of 59 economist estimates compiled by Bloomberg this month shows. The Bank of Japan restated its April pledge this week to increase the monetary base by 60 trillion to 70 trillion yen ($742 billion) a year, and refrained from adding extra policy tools to counter bond-market volatility.
“Global fundamentals, including accommodative monetary policy, remain positive for gold,” said Adrian Day, who manages about $135 million of assets as the president of Adrian Day Asset Management in Annapolis, Maryland. “The market is slowly realizing that despite all the talk about tapering of bond buying by the Fed, there will be no meaningful global tightening any time soon.”
The surge in equities over the past three quarters, which also damped demand for gold, is now partially reversing. The MSCI All-Country World Index reached a seven-week low yesterday. The U.S. Dollar Index, a measure against six currencies, slipped to the weakest in almost four months.
Hedge funds and other large speculators got more positive in the past two weeks after reducing bullish bets to the lowest in almost six years, U.S. Commodity Futures Trading Commission data show. They increased their net-long position by 60 percent to 57,113 contracts in the two weeks to June 4.
There are still signs that lower prices are boosting physical buying. The U.K.’s Royal Mint, which saw its gold-coin sales triple in April, said last week the “steep increase” in demand continued in the past several weeks. The U.S. Mint predicted last week that its gold and silver coin sales may reach a record in 2013, and the Austrian Mint said it expects “quite good business” in the next couple of months.
Gold’s 60-day historical volatility reached 28.9 percent yesterday, the highest since December 2011, data compiled by Bloomberg show. That compares with an average of 20.6 percent in the past five years.
By Simon Kennedy - Jun 13, 2013 2:17 PM GMT+0500
he world economy should brace itself for a slowing of stimulus by the Federal Reserve if history is any guide.
Any tapering in the Fed’s $85 billion-a-month asset-purchasing program will hurt economies in Europe and Asia, where the focus remains on loose monetary policy, Stephen L. Jen and Joana Freire of London-based hedge fund SLJ Macro Partners LLP wrote in a June 10 report. This decoupling would particularly strike emerging markets, which previously served as magnets for capital as the Fed kept monetary policy looser than their central banks did.
U.S. equities have outperformed those in the rest of the world since May 22, when Fed Chairman Ben S. Bernanke said the Fed “could” scale back stimulus efforts if the employment outlook shows “sustainable improvement.”
While the Standard & Poor’s 500 Index (SPX) is down 1.1 percent so far this month, the Nikkei 225 Stock Average has dropped 9.7 percent and the Euro Stoxx 50 Index has fallen 5.3 percent. The MSCI Emerging Markets Index (MXEF) has declined 6.9 percent.
“The Fed devises policies for the sole benefit of the U.S.,” according to Freire and Jen, a former International Monetary Fund economist who also has worked at the Fed. “Just as it did not show much care about the possible negative side effects of its quantitative easing operations, when the time comes for the Fed to start tapering, it will not likely care about the negative side effects on the rest of the world.”
The SLJ report is one of a spate of studies in recent days from Deutsche Bank AG (DBK) to Citigroup Inc. (C) aimed at examining the potential international impact of any decision by the Fed to pull back its bond-buying. About $2.7 trillion has been wiped from the value of global equities since Bernanke’s testimony, even though he also said ending stimulus prematurely would endanger the economic recovery.
Just as the Fed’s stimulus reinforced upswings in economies such as Brazil’s and drew talk of a “currency war,” any reeling-in of it will augment their slowdowns, said Jen and Freire. They pointed to South Africa, India and Turkey as the most at risk of “sudden stops” in capital.
“If we see U.S. bond yields rising further and more and more people thinking about the Fed’s tapering, you’re going to see some further reaction in many, many emerging markets where there’s current-account deficits,” Jim O’Neill, former chairman of Goldman Sachs Asset Management, told Bloomberg Television on June 11.
The Washington-based World Bank said in a report released yesterday that the withdrawal of accommodative policies may have longer-run consequences as rates in developing nations rise more than in their industrial counterparts, slowing investment and growth. Countries with high debt levels such as Egypt and Pakistan could be in particular jeopardy.
Global stocks tumbled today following the release of the report. Emerging markets from Brazil to India and Indonesia have already acted this week to stem outflows of capital.
Not all are worried. Bank of Israel Governor Stanley Fischer told reporters in London late yesterday that he was “happy to see” higher U.S. bond yields because they helped diminish the allure of assets in emerging markets and reduce the temptation for central banks to engage in competitive devaluations.
It would not be the first time such money flows have been thrown into reverse by changes in U.S. monetary policy or a rising dollar, according to SLJ.
The Latin American turmoil of the 1980s followed an increase in that region’s foreign debt to $150 billion in 1978 from $29 billion in 1970 as U.S. banks expanded internationally and higher oil prices then fueled further investment in emerging markets. A combination of a rising dollar and higher U.S. interest rates under Fed Chairman Paul Volcker then triggered a balance of payments crisis: Capital inflows fell to $1.5 billion in 1985 from $58 billion in 1981, leading 27 countries to restructure their debts.
The Fed’s rate hikes of 1994 also surprised markets and hurt Mexico, which received inflows totaling 7 percent of gross domestic product in 1993 alone. Later that decade, a surge in the dollar after 1995 hit Asian economies such as South Korea’s whose currencies were effectively pegged to the dollar.
The risk is of a ripple effect as investors decide even a slowing of monetary aid paves the way to an eventual increase in the benchmark U.S. interest rate from near zero. That is already prompting investors to re-price risk and adjust their portfolios.
The effect may be greater outside the U.S. than within it. A report published yesterday by Citigroup currency strategist Steven Englander showed 10-year bond yields have gained about 83 basis points on average in emerging markets since May 1 and 29 basis points in developed economies. The interest rate on the 10-year Treasury note has risen about 30 basis points, he said.
“The paradox is that the run-up in U.S. interest rates, which is arguably the primary driver of these global rate increases, is well below the average and median globally,” said Englander in New York.
That suggests to him that while improvements in the U.S. economy may eventually justify stricter credit, about 80 percent of the world has already experienced a tightening in market interest rates that was “neither expected nor desired.”
Still, Jim Reid, head of fundamental strategy at Deutsche Bank in London, told clients yesterday that the Fed may be more of a global citizen than it was in the past.
“The recent bout of emerging-market weakness will force the Fed to be very careful about tapering,” Reid said in a note to clients. “The Fed has assumed responsibilities beyond the U.S. economy over recent years and they will surely have to consider the impact their actions will have on the global economy and asset prices.”
Credit Suisse Group AG (CSGN) equity strategists led by Andrew Garthwaite in London also say there is too much pessimism over tapering. They raised their year-end target for the S&P 500 to 1,730 on June 5 from their previous estimate of 1,640 and yesterday’s 1,612.52. They predict it will climb to 1,900 by the end of next year.
Among their reasons: Even if the Fed slows its support, central banks globally will have expanded their balance sheets by 27 percent from the end of March 2012 through 2014.
Markets didn’t peak until six to seven weeks after the Fed ended its first two rounds of quantitative easing, in March 2010 and June 2011. That means a monetary policy-related correction in equities isn’t likely until the second half of 2014, the strategists said.
By Wes Goodman - May 16, 2013 4:58 AM GMT+0500
Australia’s growing economy will put a floor under the nation’s currency, sparking a rebound from its steepest decline in a year, trading patterns suggest.
The Australian dollar’s 4.6 percent slide this month cut its 14-day relative strength index to 25, breaching the 30 threshold that signals a currency has fallen too far, too fast. The so-called Aussie also pushed through the lower limit of what traders call the Bollinger band, implying an imminent reversal.
The currency started tumbling amid a slowdown in China, the biggest customer for Australia’s commodity exports, and interest-rate cuts aimed at maintaining the South Pacific nation’s competitiveness. Australia’s above-average growth, its AAA credit rating and relatively high benchmark interest rate of 2.75 percent makes its bonds attractive to international investors, underpinning the currency.
“I expect a rebound,” said Genzo Kimura, a Tokyo-based investor at Sumitomo Mitsui Trust Asset Management Co., which oversees the equivalent of $41.2 billion. “Central banks like buying Aussie dollars. When it becomes too weak, central banks love to buy.”
The Australian dollar’s depreciation this month is the biggest drop since it lost 6.7 percent in May 2012. The following month, it jumped 5.2 percent. Its slide is exceeded only by the yen’s 4.7 percent drop among the 31 most-traded currencies tracked by Bloomberg against the U.S. dollar.
The Aussie weakened to an 11-month low of 98.52 U.S. cents before closing at 98.98 cents yesterday in New York. That was less than the lower Bollinger band of 99.11 U.S. cents. When the currency fell below the lower Bollinger band in March, it strengthened more than 4 percent over the following five weeks.
Bollinger bands, developed by John Bollinger in the 1980s, are used by technical analysts to identify the turning point in an asset’s trajectory. The lower limit of the band represents two standard deviations from the 20-day moving average and typically implies that the likelihood of the currency dropping below the band is about 2.5 percent.
The relative strength index has dropped from this year’s high of 67.7 on Jan. 10, when the Aussie closed at $1.0598. While a reading below 30 indicates a currency is “oversold,” anything above 70 indicates it’s “overbought.”
The premium for one-month options granting the right to sell the Aussie against the U.S. dollar relative to those allowing for purchases was 2.1 percentage points, up from 1 percentage point at the beginning of May, 25-delta risk reversal rates show. A so-called Z-score of 2.1 means the premium is more than two units of standard deviation from the 20-day average.
In these and other forms of technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a currency, security or index.
Australia’s status as a top-rated haven for investors’ money is propping up its currency, Treasurer Wayne Swan told reporters in Canberra yesterday. That was a day after he said the government is willing to run budget deficits to avoid job cuts.
While growth in gross domestic product will probably slow to 2.65 percent this year, that is still above the average of 1.09 percent for the Group of 10 nations, according to surveys of economists by Bloomberg News. At 2.75 percent, the central bank’s key rate compares with a range of 0 to 0.25 percent in the U.S., 0.5 percent in the euro zone and Japan’s 0 to 0.1 percent.
“There’s no problem in the Australian economy,” said Aaron Chen, who trades the Australian dollar in Taipei at Shinkong Life Insurance Co., which has the equivalent of $57.5 billion in assets. “The main purpose of the budget deficit is to strengthen the economy,” and that’s positive for the currency, which “will rebound,” said Chen.
Chen forecasts the Aussie will climb to $1.02 in a month. The average over the past decade is 85.39 U.S. cents.
Australia has stable AAA ratings from Standard & Poor’s, Moody’s Investors Service and Fitch Ratings, along with Canada, Denmark, Finland, Norway, Singapore, Sweden and Switzerland. S&P and Moody’s affirmed Australia’s grade after this week’s budget.
The currency is held by as many as 34 central banks, including those in China, Russia and Singapore, the Reserve Bank said in documents released in February under a Freedom of Information Act request.
China reported April 15 that gross domestic product expanded 7.7 percent in the first quarter from a year earlier, versus 7.9 percent in the fourth quarter of 2012.
Reserve Bank of Australia Governor Glenn Stevens responded by lowering the target for overnight loans from 3 percent. The odds of a reduction to 2.5 percent at the next central bank meeting on June 4 are about 23 percent, rising to 79 percent for a cut by November, swaps data compiled by Bloomberg show.
Ken Veksler, Director, Accumen Management
It’s all about commodities and China as we walk in this morning. The commodity complex has been broadly led lower thanks to sharp falls in the price of both gold and oil. The former has seen a significant fall since it began slipping on Friday afternoon and has, over the Sunday open, printed lows of 1,424 USD/oz. To a small degree, this has taken out the last serious bastion of support anchored at the 1,430 USD/oz level, although for now not convincingly - just like the bounce out of this level, i.e. not convincing.
The move on Friday and late into the evening of the same day was accelerated as stop orders from the Middle East residing at 1,525 USD/oz were taken out and the sheer volume going through further propelled the metal lower. Oil has followed suit and dropped equally dramatically.
Chinese data over the weekend did little to improve this overall picture as the GDP print was softer than anticipated and weighed heavily on the overall commodity space. Making a poor situation for commodity bulls even worse.
This week is predominantly political rather economic in terms of data, with the G20 and IMF summits beginning on Thursday and dragging us headline watchers into the weekend. Tier 1 data comes mainly from the US as does the reporting season, which kicks into full tilt this week.
Overall, the whipsaw price action in FX markets continues and seems unlikely to rescind in the near term. With this in mind, I maintain that FX options are the best forward for now, in that they perhaps offer the better risk/reward paradigm than does spot presently. As far as levels are concerned, a very short one today given the developing picture, I will be taking a closer look at things in the coming day or so.
EURUSD: 1.3030 still holds as the intermediate (and closest) line in the sand. Stops have built up nicely under this level and bids of any real note will begin to appear sub the 1.3000 handle into 1.2980. On the topside, offers line up into 1.3100 and further into 1.3130 if we can get there. All in all, giving us a relatively tight day.
GBPUSD: Betty (from what I’m told) has few friends on the street this morning as buyers are hard to come by. A big week (inflation report and BoE minutes on tap in the coming days) will give the Cable a negative slant to start the week, but the forest of wood to chop between 1.5280 and 1.5330 remains and could keep things in check before data tomorrow. The topside has first offers into 1.5370/80 with some small sellers/stops around the 1.5350 area.
AUDUSD: A solid fall from grace thanks to the above stories on commodities and China, the little battler has run into some bids around the 1.0430 area. But even these for now have failed to hold and we trade back into the 1.0400 handle with some more serious buyers heard to be around the 1.0375 area.
USDJPY: Thanks in large part to bits of rhetoric from Jack Lew and the upcoming G20 meeting, it would almost be rude of the JPY not to consolidate recent moves and for now reclaims some strength. However, bids do come into play around the 97.80 and 97.50 areas. But to be perfectly honest, if you’re attempting to catch this falling knife, I personally would be looking for 96.80/97.30 as areas to get involved for another topside attempt.
By Zoe Schneeweiss - Dec 13, 2012 3:59 PM GMT+0500
he Swiss central bank pledged to uphold its 15-month defense of the franc to protect the economy, with President Thomas Jordan signaling the possibility of further “substantial” currency interventions.
The Swiss National Bank (SNBN) maintained the currency ceiling at 1.20 francs per euro today and reiterated that it will uphold the measure “with the utmost determination.” The Zurich-based central bank also kept its benchmark interest rate at zero percent, as forecast by all 18 economists in a Bloomberg News survey, and said consumer prices will continue to drop in 2013.
The SNB’s foreign-currency reserves have surged almost 70 percent over the past year to 424.8 billion francs ($459 billion) at the end of November as policy makers stepped up euro purchases to curb flows sparked by the region’s debt crisis. While the franc has weakened 0.8 percent since the European Central Bank pledged to purchase government bonds in August, Jordan said today the central bank doesn’t exclude any measure, when asked about possible negative interest rates.
“Global uncertainty will persist for the foreseeable future and drive demand for secure investments,” he said at a briefing in Bern. “As a result, the exchange-rate situation will remain fragile, despite the calmer environment that has come about as a result of the measures taken by the ECB. We cannot exclude the possibility that we will have to intervene substantially again.”
European leaders are struggling to contain the region’s fiscal crisis, which has pushed the economy back into recession and prompted concerns over a breakup. In Spain, Prime Minister Mariano Rajoy is resisting a request for a bailout, while Italy is facing an election early next year after Prime Minister Mario Monti announced his resignation.
“The primary reason for franc strength was safe-haven flows out of the euro area,” said Raghav Subbarao, a currency strategist at Barclays Plc in London. “While these tail risks have gone down, they have not yet disappeared.”
The SNB today maintained its growth estimate for this year of about 1 percent, while forecasting gross domestic product to increase between 1 percent and 1.5 percent in 2013. Consumer prices may drop 0.7 percent this year and 0.1 percent in 2013, before rising 0.4 percent in 2014, it said. In September, the central bank forecast prices would fall 0.6 percent this year, followed by an increase of 0.2 percent in 2013.
Jordan called the impact of the franc’s past appreciation on prices “rather stronger than had originally been expected.” The economy will probably show a “significant weakening” in the current quarter, with the franc’s strength weighing on exports and spending in 2013, he said.
“The downside risks for the Swiss economy remain considerable,” he said. “Production capacity in Switzerland will probably remain underutilized in 2013. The rate of unemployment is likely to rise further.”
The SNB introduced the franc ceiling on Sept. 6, 2011, after the currency’s surge to near parity with the euro sparked deflation threats. While the franc breached the ceiling just once in April, consumer prices prices in November extended the longest slump in at least four decades.
Pressure on the franc eased after Switzerland’s two biggest banks earlier this month announced plans to implement charges on some currency holdings. Credit Suisse Group AG and UBS AG (UBSN) said separately that they will charge financial institutional clients for cash balances held in francs.
Jordan said liquidity in the franc market remains “high” and it’s “natural” that banks are taking measures to reduce their balance sheets. He declined to comment when asked whether the SNB had encouraged the move.
The SNB has “always clearly said that we don’t rule out any instruments or measures,” he said, when asked about negative interest rates. “All possible measures that are important to pursue our monetary policy are potentially possible and that includes all those instruments.”
While the Swiss central bank has focused on controlling the franc, it has also raised concerns about risks in the property market. The so-called UBS Real Estate Bubble Index entered the “risk zone” for the first time since 1991 in the third quarter, partly fueled by record-low interest rates.
Switzerland introduced rules in July to cut mortgage- lending risks, including measures that will give the government the discretion to raise capital requirements for banks to target specific parts of the credit market. The SNB would have to request activation of the countercyclical capital buffer.
“Momentum in the domestic residential mortgage and real estate markets remains exceptionally strong,” Jordan said. “Mortgage lending continues to grow briskly compared to the economy as a whole,” while “real estate prices, already at a high level, continued to rise. As a result, risks for financial stability increased further” over the past months, he said.
By Caroline Salas Gage & Craig Torres - Dec 13, 2012 2:24 PM GMT+0500
Chairman Ben S. Bernanke moved the Federal Reserve further into uncharted policy territory in combating joblessness by tying the bank’s interest-rate outlook to unemployment and inflation, while committing to an even faster expansion of the central bank’s balance sheet.
The actions on the eve of the Fed’s centenary year underscore Bernanke’s hallmark commitment to experimentation and forceful action, derived in part from his research showing too little monetary stimulus produced large economic costs for the U.S. in the 1930s and for Japan in the 1990s. He called the current state of the labor market, with unemployment at 7.7 percent, “an enormous waste of human and economic potential” and said the benefits of more bond buying outweigh the potential risks.
Bernanke is pulling out all the stops to kick this economy back into a higher gear,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “They are buying everything in sight -- Treasuries, mortgage-backed securities -- and will keep rates low until everyone who wants a job has one.”
Bonds fell yesterday on the prospect of higher inflation after policy makers boosted their main stimulus tool by adding $45 billion of monthly Treasury purchases to an existing program to buy $40 billion in mortgage debt a month. That decision puts the Fed’s $2.86 trillion balance sheet on track to reach almost $4 trillion by the end of next year.
The yield on the 10-year note was little changed today, and traded at 1.69 percent at 9:13 a.m. in London. The yield on the 30-year Treasury bond rose one basis point to 2.896 percent.
Central bankers for the first time linked their interest- rate outlook to economic thresholds, saying rates will stay low “at least as long” as unemployment remains above 6.5 percent and if the Fed projects inflation of no more than 2.5 percent one or two years in the future. Fed officials don’t see joblessness falling near that goal until 2015.
The adoption of thresholds was urged in September 2011 by Charles Evans, president of the Chicago Fed, who said the central bank should “add very significant amounts of policy accommodation” to bring down unemployment, even at the risk of a temporary increase in inflation.
A year later, the idea was backed by President Narayana Kocherlakota of Minneapolis, who had earlier criticized the Fed’s easing policies. Fed Vice Chairman Janet Yellen and the Boston Fed’s Eric Rosengren last month backed the concept. In a Nov. 27 speech, Evans spelled out the numerical benchmarks that were adopted yesterday.
“The Fed is all in,” said Diane Swonk, chief economist for Mesirow Financial Holdings Inc. in Chicago. “They are absolutely committed to averting the mistakes of the Japanese and of the Great Depression. They will not stop too soon. He is willing to take the risk of unintended consequences.”
U.S. stocks erased gains as optimism about the Fed’s additional asset purchases faded and investors focused on the budget deadlock in Washington. The Standard & Poor’s 500 Index closed up less than 0.1 percent at 1,428.48 in New York, after earlier climbing as much as 0.8 percent.
The additional Treasury purchases will follow the expiration at the end of this year of Operation Twist, in which the central bank each month has swapped about $45 billion of short-term Treasuries for an equal amount of long-term debt.
Bernanke, who lowered the benchmark interest rate almost to zero four years ago, yesterday said the Fed’s “ability to provide additional accommodation is not unlimited,” which is “an argument for being a little bit more aggressive now.”
When he was a Princeton University professor, Bernanke presented a paper in January 2000 with the title “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” In it, he criticized monetary authorities’ unwillingness to experiment, “to try anything that isn’t absolutely guaranteed to work.”
In slumps, policy makers need “Rooseveltian resolve,” he wrote, which he described as a “willingness to be aggressive and to experiment -- in short, to do whatever was necessary to get the country moving again.”
Bernanke, who turns 59 today, shunned orthodoxy as the global credit crisis unfolded, giving out more than $2 trillion in emergency aid through six loan programs, currency swaps with other central banks and the rescues of Bear Stearns Cos. and American International Group Inc. (AIG)
The Fed has more than tripled the size of its balance sheet with three rounds of large-scale asset purchases intended to bring down long-term borrowing costs and stimulate purchases of homes and cars. Bernanke broke new ground with the latest round of so-called quantitative easing by setting no limit on the size or duration of the program.
The economic parameters for policy tightening replaced the Fed’s previous calendar-based guidance that rates would stay “exceptionally low” at least through the middle of 2015.
“From a communications perspective, it is absolutely paradigm changing,” said Carl Tannenbaum, chief economist at Northern Trust Corp. (NTRS) in Chicago, where he worked at the central bank until July this year. “The Fed has put itself very squarely in the search for better economic growth.”
FOMC participants yesterday lowered their forecasts for growth next year. They now see the economy expanding 2.3 percent to 3 percent, compared with 2.5 percent to 3 percent in September. The average pace of growth for the decade through 2007 was 3 percent.
“A return to broad-based prosperity will require sustained improvement in the job market, which in turn requires stronger economic growth,” Bernanke said yesterday.
More than three years into the recovery, the 7.7 percent jobless rate remains higher than Fed officials’ estimates for full employment, which range from 5.2 percent to 6 percent. Employers added 146,000 workers to payrolls in November, less than the monthly average of 151,000 this year and the 153,000 in 2011.
The search for stronger growth comes with an indication of some tolerance for inflation to exceed the Fed’s 2 percent goal after year-over-year readings have come in below that level past seven months through October.
Inflation expectations climbed after the Fed’s announcement. The break-even rate for five-year Treasury Inflation Protected Securities -- a yield differential between the inflation-linked debt and Treasuries -- rose to 2.1 percentage points from 2.07 points on Dec. 11. That’s a measure of the outlook for annual consumer prices over the life of the securities.
“There’s reason to be concerned” about inflation, said Marvin Goodfriend, a former adviser at the Richmond Fed. The Fed’s 6.5 percent unemployment objective is “aggressive,” while using a projection for price acceleration over one to two years may not lead to policy tightening before inflation “becomes a problem,” he said.
“It’s likely that the Fed will have a balance sheet $2 trillion higher before it tries to reverse” its stimulus, said Goodfriend, a professor at Carnegie Mellon University’s Tepper School of Business in Pittsburgh.
Inflation has “remained tame and appears likely to run at or below” the Fed’s 2 percent goal, Bernanke said.
Bernanke said tying the outlook for interest rates to economic variables is a better way to communicate the policy outlook than using a time horizon because markets can “infer how our policy’s likely to evolve.”
“If information comes in which says the economy is stronger or weaker than we expected, that would in principle require a change in the date, but it doesn’t necessarily require a change in the thresholds, because that data adjustment can be made by markets just simply by looking at their own forecasts,” Bernanke said.
The thresholds will act as an “automatic stabilizer,” he said. If there is a “shock” to the economy, investors will push interest rates down on expectations it will take longer for the Fed to tighten policy, Bernanke said.
One such shock is already on the horizon as lawmakers and the Obama administration continue talks to avert more than $600 billion of automatic spending cuts and tax increases that threaten to throw the country into a recession.
The so-called fiscal cliff is a “major risk factor” that is harming investment and hiring decisions by causing “uncertainty” or “pessimism,” Bernanke said. The Fed “doesn’t have the tools” to offset that event, he said.
Bernanke “is really on guard” against criticism that “he had done too little,” said Stephen Oliner, a resident scholar at the American Enterprise Institute in Washington and a former senior adviser at the Fed Board in Washington.
“The way the economy has evolved and inflation has evolved suggests that there is really nothing here that says the Fed has been too aggressive,” he said. “They are getting feedback that says, ‘Keep going.’”
By Jan Strupczewski and Annika Breidthardt
BRUSSELS | Tue Nov 27, 2012 3:47am EST
(Reuters) - Euro zone finance ministers and the International Monetary Fund clinched agreement on reducing Greece's debt on Monday in a breakthrough to release urgently needed loans to keep the near-bankrupt economy afloat.
After 12 hours of talks at their third meeting in as many weeks, Greece's international lenders agreed on a package of measures to reduce Greek debt by 40 billion euros, cutting it to 124 percent of gross domestic product by 2020.
In a significant new pledge, ministers committed to taking further steps to lower Greece's debt to "significantly below 110 percent" in 2022 -- the most explicit recognition so far that some write-off of loans may be necessary from 2016, the point when Greece is forecast to reach a primary budget surplus.
To reduce the debt pile, they agreed to cut the interest rate on official loans, extend their maturity by 15 years to 30 years, and grant Athens a 10-year interest repayment deferral.
"When Greece has achieved, or is about to achieve, a primary surplus and fulfilled all of its conditions, we will, if need be, consider further measures for the reduction of the total debt," German Finance Minister Wolfgang Schaeuble said.
Eurogroup Chairman Jean-Claude Juncker said ministers would formally approve the release of a major aid installment needed to recapitalize Greece's teetering banks and enable the government to pay wages, pensions and suppliers on December 13.
Greece will receive up to 43.7 billion euros in stages as it fulfills the conditions. The December installment will comprise 23.8 billion for banks and 10.6 billion in budget assistance.
The IMF's share, less than a third of the total, will only be paid out once a buy-back of Greek debt has occurred in the coming weeks, but IMF Managing Director Christine Lagarde said the Fund had no intention of pulling out of the program.
They promised to hand back 11 billion euros in profits accruing to their national central banks from European Central Bank purchases of discounted Greek government bonds in the secondary market.
They also agreed to finance Greece to buy back its own bonds from private investors at what officials said was a target cost of around 35 cents in the euro.
European Central Bank President Mario Draghi said on leaving the talks: "I very much welcome the decisions taken by the ministers of finance. They will certainly reduce the uncertainty and strengthen confidence in Europe and in Greece."
Greek Prime Minister Antonis Samaras welcomed the deal.
"Everything went well," he told reporters outside his mansion at about 3 a.m. in the morning.
"Tomorrow, a new day starts for all Greeks."
However, the biggest opposition party, Syriza, dismissed the deal and said it fell short of what was needed to make the country's debt sustainable.
The euro strengthened against the dollar after news of the deal and commodities and Asian shares also rose.
Greece, where the euro zone's debt crisis erupted in late 2009, is the currency area's most heavily indebted country, despite a big "haircut" this year on privately-held bonds. Its economy has shrunk by nearly 25 percent in five years.
Negotiations had been stalled over how Greece's debt, forecast to peak at 190-200 percent of GDP in the coming two years, could be cut to a more sustainable 120 percent by 2020.
The agreed figure fell slightly short of that goal, and the IMF was still insisting that euro zone ministers should make a firm commitment to further steps to reduce the debt stock if Athens implements its adjustment program faithfully.
The key question remains whether Greek debt can become sustainable without euro zone governments having to write off some of the loans they have made to Athens.
Germany and its northern European allies have hitherto rejected any idea of forgiving official loans to Athens, but EU officials believe that line may soften after next year's German general election.
DEBT RELIEF "NOT ON TABLE"
Schaeuble told reporters earlier that debt forgiveness was legally impossible, not just for Germany but for other euro zone countries, if it was linked to a new guarantee of loans.
"You cannot guarantee something if you're cutting debt at the same time," he said. That did not preclude possible debt relief at a later stage if Greece completed its adjustment program and no longer needs new loans.
At Germany's insistence, earmarked revenue and aid payments will go into a strengthened "segregated account" to ensure that Greece services its debts.
A source familiar with IMF thinking said a loan write-off once Greece has fulfilled its adjustment program would be the simplest way to make its debt viable, but other methods such as forgoing interest payments, or lending at below market rates and extending maturities could all help.
The German banking association (BDB) said a fresh "haircut" or forced reduction in the value of Greek sovereign debt, must only happen as a last resort.
The ministers agreed to reduce interest on already extended bilateral loans from the current 150 basis points above financing costs to 50 bps.
No figures were announced for the debt buy-back in an effort to avoid triggering a rise in market prices in anticipation of a buyer. But before the meetings, officials had spoken of a 10 billion euro buy-back, that would achieve a net reduction of about 20 billion euros in the debt stock.
German central bank governor Jens Weidmann has suggested that Greece could "earn" a reduction in debt it owes to euro zone governments in a few years if it diligently implements all the agreed reforms. The European Commission backs that view.
An opinion poll published on Monday showed the Syriza party with a four-percent lead over the Conservatives who won election in June, adding to uncertainty over the future of reforms.
Wednesday June 13, 2012
By Hamza Shivani
The agreement was done on 15 October 2008. Swiss franc funding needs of banks with no direct access to Swiss National Bank operations was increased, notably in the euro area. Therefore, the Swiss National Bank (SNB) and the European Central Bank (ECB) jointly announced measures to improve liquidity in short-term Swiss franc money markets.
Each Monday, starting on 20 October 2008, the Euro system and the SNB will conduct EUR/CHF foreign exchange swaps providing Swiss francs against euro with a term of 7 days at a fixed price. The fixed price and the maximum amounts allotted by ECB and SNB will be announced before the operation. If the total amount of bids exceeds the maximum amounts, the allocation is carried out on a pro rata basis. The ECB and SNB have entered into a temporary swap arrangement through which the ECB can access Swiss franc liquidity to provide the Swiss franc funding that is allotted to banks in its authority. This measure will be in place as long as needed, at least until January 2009.
The foreign exchange swap transaction is conducted as follows: the Euro system and the SNB will buy EUR against CHF in the near leg of the transaction and will simultaneously sell EUR against CHF in the far leg. The price will be calculated by using the rate applied in main refinancing operations of the ECB (currently 3.75%) and the SNB 1-week repo rate plus 25 basis points. This corresponds to an interest rate for the additional Swiss franc funding of 25 basis points above the SNB's 1-week repo rate.
On August 2011, Swiss national bank and European central bank has done pegging over 1.2 which means that the rate of EUR against CHF will not go below 1.20. The rate of EUR/CHF has not gone below 1.20 since mid of August 2011 and on this day, the rate of EUR/CHF went down till 1.0067 and after this the rate was always above 1.20.
Wednesday, March 28 2012
By Shamim Adam and Andy Sharp
European leaders signaled rising confidence that their region’s crisis is near an end, while Federal Reserve Chairman Ben S. Bernanke warned that a U.S. recovery isn’t assured. The euro area’s woes are “almost over” after a slow initial response by policy makers, Italian Prime Minister Mario Monti said in Tokyo today. German Chancellor Angela Merkel said yesterday that the crisis is ebbing and her country’s borrowing costs will probably rise as its status as a haven wanes. Bernanke, who cited “green shoots” of recovery in the U.S. in March 2009 only to see his nation’s jobless rate climb to 10 percent seven months later, said in remarks published yesterday “it’s far too early to declare victory.” The jobless rate remains too high and policy makers don’t rule out further options to boost growth, he said in a transcript of an interview with ABC News anchor Diane Sawyer provided by the network. Bernanke’s comments contrasted with a series of declarations by Monti during a visit to Japan, with the Italian leader saying a solution to Greece’s challenges is almost accomplished, Spain is employing discipline and Italian actions have helped stop deterioration in Europe’s woes. Monti predicted a continued rally in Italian bonds. The country sold 3.82 billion euros ($5 billion) of zero-coupon and inflation-linked securities yesterday as borrowing costs fell to a four-month low.
“Anyone who pretends to know if we are out of the woods yet is clearly kidding themselves or misleading their audience,” said Glenn Levine, a senior economist at Moody’s Analytics in Sydney. “Things have stabilized in Europe and it’s in their interest to be optimistic but the muddle-through is still on.” Bank of England Governor Mervyn King said late yesterday that while the European Central Bank’s long-year loans created a “window of opportunity,” it remains to be seen whether euro- area officials will use the time to tackle their problems. “The difficulty is that windows of opportunity have been created regularly for over two years, and nothing seems to have gone through the window,” he said. “But hope springs eternal. I don’t know whether they will take advantage of it or not.”
Conclusions to Europe’s turmoil have been called prematurely before. In March 2010, former European Commission President Romano Prodi said the worst of Greece’s financial crisis was over and other European nations wouldn’t follow in its path. Since then, Portugal and Ireland needed bailouts. “The euro zone has gone through a huge crisis,” Monti said in a speech today. “I believe that this crisis is now almost over.” Stocks have risen on optimism the global recovery will be sustained, with the U.S. jobless rate dropping, the ECB stepping up liquidity support and euro-region leaders sealing a second Greek bailout package. The MSCI Asia Pacific Index (MXAP) gained 12 percent from the start of the year through yesterday, and is headed for the biggest quarterly gain since the three months through September 2009. Equities surrendered some of the advance today, with the measure dropping 0.4 percent, undermined by the emergence of China’s slowdown as a new element for the global economy to contend with.
Chinese Premier Wen Jiabao has pledged to maintain curbs on his nation’s property market, and set the lowest growth target since 2004 for this year in a speech this month. Chinese corporate profits won’t grow at all this year, according to Societe Generale SA. The latest industrial profit figures suggest 2012 consensus earnings estimates for Hong Kong- listed Chinese companies are “far too optimistic,” Societe Generale strategists Guy Stear and Anthony Lee wrote in a note to clients dated yesterday. In the U.S., while the best six months of job gains since 2006 have boosted consumer confidence toward a one-year high, Fed officials have said more monetary accommodation may still be needed to fuel the economic expansion. “Bernanke is right to be more cautious,” said Tohru Nishihama, an economist at Dai-ichi Life Research Institute Inc. in Tokyo. “Most of the investors think the situation will not deteriorate but we are still far from saying the crisis is over.”
German Finance Minister Wolfgang Schaeuble said yesterday that he sees no scenario under which the current euro-area rescue fund, the European Financial Stability Facility, will have to issue new bailouts in the next three months. Schaeuble and Merkel spoke to lawmakers from their Christian Democratic Union, according to officials who spoke on condition of anonymity because the briefing was private. “The world economy is recovering and though there obviously are risks, on balance we’re through the worst in Europe,” said Tim Condon, chief Asia economist at ING Financial Markets in Singapore. Bernanke may be more cautious because “the Fed has a dual mandate of inflation and unemployment and while they’re doing OK on the inflation metric, they’re failing dismally on the other,” he said. The U.S. jobless rate is at 8.3 percent and Bernanke said in the interview that “it could still be a few more years” before unemployment returns to normal levels, and “until we get faster growth than we’ve been seeing, it is probably gonna take a while still.” The Federal Open Market Committee in a March 13 meeting decided to leave policy unchanged and keep the main interest rate close to zero at least through late 2014.
Debate on Easing
Policy makers including Boston Fed President Eric Rosengren and Chicago Fed President Charles Evans have argued for more monetary accommodation if unemployment remains high. In contrast, James Bullard, president of the St. Louis Fed, and Atlanta’s Dennis Lockhart said last week that the improving U.S. economy is reducing the need for additional easing. Bullard said today in Beijing that while the chance of a major financial meltdown in Europe is going down, risks haven’t completely disappeared. The U.S. economy is looking better this year than last year, and inflation is moderating while remaining a little above target, Bullard said to reporters. Euro-area finance ministers are weighing options on the EFSF, which manages rescue programs for Ireland, Portugal and Greece, and its successor, the European Stability Mechanism. They may decide to increase the fund to a total capacity of 692 billion euros from a current limit of 500 billion euros when they meet March 30, a euro-area official said. Bank of Japan (8301) board member Ryuzo Miyao warned today that Europe’s fiscal woes aren’t over and continue to warrant close attention. “Europe’s debt problems haven’t been resolved,” Miyao said at a speech in Chiba, outside of Tokyo. “We need to continue to pay close attention to the risk that economic stagnation will become chronic and prolonged.”
Wednesday, March 21 2012
By John Kicklighter, Currency Strategist
Gold was struggling to post progress against the dollar’s weakness and modest risk trends, so it comes as no surprise that the metal was quick to suffer when those winds reversed. That said, we haven’t taken out any meaningful levels of progress. Chop between 1670 and 1635 defines indecision over whether the commodity will take guidance from investor sentiment, stimulus expectations, the dollar, etc when a definable trend returns. In the meantime, we know that net long speculative gold futures holdings have dropped 20 percent over the past two weeks.
Wednesday, March 07, 2012
By David Song, Currency Analyst
The Euro tumbled to an overnight low of 1.3112 as the Institute of International Finance, the group representing Greek bondholders, warned that a disorderly Greek default could cost well over EUR 1T for the region. The group warned that such an event would require ‘substantial support to Spain and Italy to stem contagion there,’ and we may see the single currency face additional headwinds in the days ahead should Greece struggle to strike a deal ahead of the deadline on Thursday.
At the same time, a report from Finance Times Deutschland said the Troika – the European Union, European Central Bank and the International Monetary Fund – is preparing for an involuntary debt restructuring, and we will be closely watching the headlines coming out of the euro-area as the Greek PSI talks take center stage. As the ECB is schedule to announce their interest rate decision later this week, we may see central bank President Mario Draghi try to talk down the risks surrounding the region, but the Governing Council may look to expand monetary policy further in the coming months in order to dampen the risks surrounding ailing economy. As the EURUSD comes up against the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100, we may see the key figure provide short-term support, but the reversal in the exchange rate may gather pace in the coming days as the pair breaks out of the upward trending channel from earlier this year.
Wednesday, March 07, 2012
By David Song, Currency Analyst
The British Pound came up against the 38.2% Fibonacci retracement from the 2009 low to high around 1.5730-50 as it searches for support, and we may see the GBPUSD track sideways in the days ahead as market participants weigh the fundamental outlook for the U.K. Indeed, we’re expecting to see positive developments coming out of the British economy later this week, and a more robust recovery could push the exchange rate back towards 1.6000 as it dampens speculation for additional monetary support. However, the downward trend in the relative strength index instills a bearish outlook for the GBPUSD, and the reversal from 1.5991 may gather pace over the next 24-hours of trading as the shift away from risk-taking behavior gathers pace. In turn, we may see the pair threaten the range carried over from the previous month, and the exchange rate may make another run at the 50-Day SMA (1.5661) as it appears to have carved out a lower high just below 1.60000.
Tuesday, March 06, 2012
By John Kicklighter, Currency Strategist
If we break down the US dollar’s performance against its most liquid counterparts, a clear fundamental split arises. Against the high-yield, investment currencies, the greenback gained traction; while its European counterparts were slightly higher on balance.
The fundamental interpretation in this mix is relatively straightforward: traditional investor sentiment weakened to leverage the greenbacks’ liquidity appeal and Euro-area financial headlines spoke to slow steps towards stabilizing the region.
For dollar bulls, the exacerbation of Europe’s financial crisis and a rebalancing of the risk / reward equilibrium carry the greatest potential for the single currency – though it is easy to argue that risk trends carry the greatest influence over time. Speaking of the dollar’s safe haven appeal, the opening 24 hours of trade this week was defined by a notable correction in equities and carry interest.
In fact, technical traders can note that the channel that has defined the S&P 500’s steady bull trend from December 21st was breached with the session’s close. Avoiding the long-term evaluation arguments for why a correction can turn into a true reversal, an immediate catalyst for the soft start for the week was the Chinese Premier’s downgraded the 2012 growth forecast (to 7.5 percent) for the first time in eight years. And, since the market was already in a bearish mindset, Dallas Fed President Fisher’s suggestion that Wall Street was ‘addicted’ to cheap Fed money and needed to prepare for a withdrawal offers a much-needed dose of reality. But will it last?
Tuesday, March 06, 2012
By John Kicklighter, Currency Strategist
The euro wouldn’t put in for a strong performance of its own Monday, but it sure did take advantage of a weak showing amongst the carry currency crowd. Pairs like EURAUD, EURNZD and EURCAD are excellent fundamental barometers at the moment as they help us to gauge which is the more influential theme: basic risk trends or the more convoluted Euro-region crisis. There are a few critical deadlines this week for the Euro and the financial system that it represents. Two events that should be in every traders’ calendar are the Thursday deadline for private sector investor (PSI) participation in Greece’s bond swap and the EU Finance Ministers’ call on Friday. The drama continues for Greece as we find both the IIF (the group that represents the private bond holders) and Greek Finance Minister Venizelos splashing headlines with individual warnings about how bad things can go – of course if their respective plans are not pursued. This public jawboning will no doubt continue, but it won’t like carry weight until it comes to the actual bond swap. In the meantime, we take note of two developments that leapfrog us past Greece. Moody’s warned that Italy may need a second bailout while Portuguese Prime Minister Coelho said he wouldn’t revise his raised deficit target.
Tuesday, March 06, 2012
By John Kicklighter, Currency Strategist
Gold can’t seem to find traction (bullish or bearish). Still spinning from the massive sell off last week, the precious metal found itself in another consolidating range this past session. Without the dollar on the move or the European financial situation driving capital away from fiat (promissory assets), there is little active impetus for the metal. That said, we have plenty of scheduled event risk ahead of us. The best bet for a bullish move is renewed fret surrounding Greece, while bears should keep a close eye on the dollar possibly gaining traction.
Tuesday, March 06, 2012
By David Song, Currency Analyst
The Euro bounced back from an overnight low 1.3159 as Germany pledged to resume talks on increasing the scope of the European Stability Mechanism, but the rebound in the EURUSD may be short-lived as Greece struggles to strike a deal with private creditors. DSW, an investor protection group in Germany, spoke out against the debt deal and argued that investors should reject the agreement, and the heightening risk of a Greek default could spark another selloff in the exchange rate as the fundamental outlook for the region turns increasingly bleak. As the euro-area slips back into recession, the European Central Bank is likely to maintain a dovish outlook for monetary policy, but we may see President Mario Draghi strike a more balanced tone for the region following the second Long Term Refinancing Operation. However, it seems as though the LTRO may not be having the desired effect as overnight deposits to the ECB surged to a record-high of EUR 820.8B, and the Governing Council may have little choice but to expand policy further in 2012 as the region remains vulnerable to future shocks. Nevertheless, as the EURUSD holds above the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100, we may see the exchange rate make another run at the 50.0% Fib (1.3500) ahead of the ECB rate decision, but dovish comments coming out of the ECB could sink the single currency as market participants see the central bank pushing the benchmark interest rate below 1.00% over the coming months.
Tuesday, March 06, 2012
By David Song, Currency Analyst
The British Pound pared the decline to 1.5784 to maintain the range carried over from the previous month, and the sterling may continue to track sideways over the near-term as market participants weigh the fundamental outlook for the U.K. Indeed, currency traders may turn a blind eye to the Bank of England rate decision as the central bank is widely anticipated to revert back to a wait-and-see approach, but the slew of even risk on tap for later this week may push the GBPUSD as the data is expected to highlight a more robust recovery for the U.K. In turn, a round of positive developments could push the British Pound back towards 1.6000, and the GBPUSD may continue to retrace the decline from the previous year should we see the BoE look to conclude its easing cycle in 2012.
Thursday, January 12, 2012
The European economy may be winning some respite from its sovereign debt crisis. With the euro area teetering on the brink of a second recession in three years, data this week showed rebounds in German exports and French business confidence, suggesting the slowdown may be limited. The euro’s 10 percent drop against the dollar since late October and an easing of financial conditions may also provide support as leaders fight to restore investor faith in their region’s bond markets. The signs of resilience hand European Central Bank President Mario Draghi room to keep the benchmark interest rate at 1 percent today after cutting it twice in the past two months and flooding the banking system with a record amount of cash. The pause may be brief if looming budget cuts and a credit shortage prove too powerful for the economy to withstand. “The sense that the economy is in freefall is abating but it’s too early to talk of a turning point,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London. “The picture in the core countries has improved a bit and a weaker euro will help, but further austerity measures in the periphery countries will drag on growth, and the specter of a credit crunch has not been banished.”
Only six of 53 economists in a Bloomberg News survey expect the ECB’s 23-strong Governing Council to cut its key rate today to what would be a new record low. Officials meeting in Frankfurt will announce their decision at 1:45 p.m. and Draghi will explain it to reporters 45 minutes later. “We’ve had a couple of indications that things may not be as bad in 2012 as people expected them to be,” said Tobias Blattner, an economist at Daiwa Capital Markets who previously worked at the ECB. “The ECB has factored in this downturn that we’re seeing, which reflects the view that the recession won’t be a very deep one.” German exports rose 2.5 percent in November from October and business confidence in Europe’s largest economy unexpectedly rose for a second month in December. A report last week also showed that euro-area services and manufacturing output contracted less than initially estimated last month, led by Germany. In France, the second-largest economy in the 17-nation euro region, business sentiment climbed from a two-year low in December and industrial output increased in November. German Recession? The economy is far from out of the woods. German gross domestic product probably dropped 0.25 percent in the fourth quarter of last year from the third, the Federal Statistics Office said yesterday. Some economists predict another contraction this quarter, putting Germany into a technical recession. Italian unemployment rose to 8.6 percent in November and consumer confidence fell to a 16-year low in December, while Spanish joblessness rose to a record 22.9 percent in November and industrial production recorded its biggest drop in two years. Greece is entering a fifth year of recession. “The data we’re getting at the moment is mixed,” said Jens Sondergaard, an economist at Nomura International Plc in London. “The ECB wants some time to assess what it has done and what the effects are.” The central bank last month cut its 2012 growth forecast for the euro region to 0.3 percent from 1.3 percent. While the median forecast in a survey of 21 economists is for the ECB to keep its key rate at 1 percent through mid 2013, Citigroup, JPMorgan Chase & Co. and Morgan Stanley all expect the benchmark to be cut to 0.5 percent by the middle of this year as recession bites.
“Beyond this week’s meeting, it will be a big year for the ECB,” said Greg Fuzesi, an economist at JPMorgan in London. Concerned its ability to deliver price stability is under threat, the ECB has cut its key rate twice since Draghi took office on Nov. 1. It has also bolstered efforts to grease markets by lending banks an unprecedented 489 billion euros ($620 billion) for three years and making it easier for them to borrow. It continues to buy the bonds of stressed sovereigns such as Italy. The provision of liquidity may be helping, handing governments breathing space to restore fiscal order and complete an overhaul of budget rules. The Bloomberg Euro-Area Financial Conditions Index has risen to minus 4 percent from a low of minus 5.4 percent in September.
Borrowing costs have also eased. Italian two-year bond yields have dropped back below 10-year rates, while Belgium’s yield curve has steepened in a sign of increased investor confidence. Italy sold 9 billion euros of bills on Dec. 28 at about half the rate of the previous sale in November and Belgium raised more money than planned at a Jan. 3 debt sale. The economy may also receive a fillip from a weaker euro. The single currency has fallen almost 5 percent against nine developed-nation currencies in the past three months, according to Bloomberg Correlation-Weighted Currency Indices. ECB research shows a decline in trade-weighted terms of 10 percent adds 0.7 percent to growth in the first year and 1.2 percent in the second. “The ECB will be happy to acquiesce in an orderly and contained depreciation of the euro,” said Huw Pill, chief European economist at Goldman Sachs Group Inc. who used to work at the ECB.
Stuttgart-based Daimler AG’s (DAI) Mercedes-Benz is targeting higher car deliveries in 2012 after selling a record number of vehicles last year, Chief Executive Officer Dieter Zetsche said Jan. 5. Rival Porsche SE anticipates U.S. sales to rise to more than 30,000 cars next year on demand for the revamped 911 sports car. Risks remain as governments impose a fiscal squeeze that JPMorgan estimates could reach 2 percent of GDP. Greece has yet to seal a deal with bondholders over a proposed debt write-off on which fresh aid is contingent, and politicians are still wrangling over a revamp of budget limits. Meanwhile, the ECB’s injections of cash are not finding their way to companies and households. Banks are instead hoarding the money and parking it back at the ECB. Overnight deposits at the central bank jumped to a record 486 billion euros this week. The ECB should step up its government bond purchases to combat the debt turmoil, David Riley, head of the sovereign-debt unit at Fitch Ratings, said yesterday. The ratings company said Jan. 10 that it’s likely to make a decision on credit grades for euro-area nations that are under review by the end of this month. “Europe is still in dangerous territory,” said Elga Bartsch, chief European economist at Morgan Stanley, who expects the ECB to eventually engage in more aggressive asset purchases known as quantitative easing. “But 2012 should also be the year in which the economy turns around.”
Tue, Feb 07 16:42 PM EST
By Ryan Vlastelica
NEW YORK (Reuters) - Stocks rose slightly on Tuesday, but with the outcome of discussions on a bailout package for Greece uncertain, investors are unlikely to make big bets in coming days.
Friday, Apr 15 2011
By Finbarr Flynn
Ireland’s credit rating was cut two levels by Moody’s Investors Service to the lowest investment grade rating as the government struggles to plug the budget deficit and restore economic growth.
Moody’s lowered the country’s rating to Baa3 from Baa1, leaving the country’s outlook on negative, according to an e- mailed statement today. That’s the same rating as Iceland, Tunisia, Romania and Brazil. Standard & Poor’s on April 1 cut Ireland’s rating one level to BBB+ with a stable outlook.
Europe’s worst banking crisis may end up costing Irish taxpayers as much as 100 billion euros ($145 billion) as the country draws down funds from last year’s bailout. Ireland is trying to convince investors at home and abroad it has finally plugged the hole in its lenders after four failed attempts following the collapse of the country’s property boom in 2007.
Ireland is now in the “most uncomfortable of places to be on the ratings scale, one false step from junk,” Gary Jenkins, head of credit strategy at Evolution Securities Ltd. in London, said in an e-mailed note.
The extra yield investors demand to hold Irish rather than German 10-year bonds has narrowed to 592 basis points from 687 basis points since central bank Governor Patrick Honohan detailed the capital needs of the banks on March 31.
Ireland’s central bank yesterday cut its economic growth forecast for this year and next, saying consumer demand remains “subdued.” Gross domestic product will rise 0.9 percent this year instead of 1 percent forecast in January, the bank said, forecasting 2.2 percent growth in 2012.
“The country’s weak economic growth prospects are driven by the fiscal consolidation process, the ongoing contraction in private-sector credit, and a more adverse interest rate environment,” Moody’s said. “The Irish government’s financial strength could decline further if economic growth were to be weaker than currently projected, or if fiscal adjustment were to fall short of the government’s planned consolidation path.”
S&P cut Portugal for the second time in a week last month to the lowest investment-grade rating of BBB-. Greece’s rating was lowered two grades to BB-, three levels below investment grade. New rules on European Union bailout loans, which take effect in 2013, mean sovereign-debt restructuring is a “potential precondition to borrowing” from the future rescue fund, the rating company said.
Ireland’s government has injected about 46 billion euros into banks and taken majority stakes in four of them. Honohan said on March 31 it is realistic to expect Bank of Ireland Plc and Irish Life & Permanent Plc, the two lenders not already owned by the government, to fall under state control.
Finance Minister Michael Noonan said last month Ireland can sustain mounting debt levels if it fixes its lenders and maintains economic growth.
Friday, Apr 15 2011
By Svenja O’Donnell and Jennifer Ryan
Bank of England policy maker Andrew Sentance said a slowdown in inflation may prove short-lived as the pound’s weakness threatens to push it above 5 percent, bolstering the need for higher interest rates.
“There’s still quite a bit of evidence that there’s some further upward pressure on inflation to come,” Sentance, who has voted to increase interest rates every month since June, said in an interview yesterday in London. The U.K. is seeing “more imported inflation than we would have if the pound was a bit stronger and therefore that’s reinforcing the squeeze on consumer spending.”
Sentance, 52, said a boost to the pound from a rate increase wouldn’t be an “unwelcome development” in the fight against inflation. While consumer-price growth unexpectedly slowed to 4 percent in March, it’s still double the central bank’s target. The nine-member Monetary Policy Committee voted to keep its benchmark interest rate at a record low of 0.5 percent this month to aid the economic recovery.
“We’re going to see a further upward move in inflation through the summer” and “there’s clearly a risk that inflation goes up to 5 percent or a bit above,” Sentance said. He also said it’s not surprising to see “uneven” growth as the economy recovers.
He said the MPC may have underestimated the role of the weak pound as a conduit of monetary policy. The British currency has lost about a quarter of its value on a trade-weighted basis since the start of 2007, and Sentance said a boost from an interest-rate increase may help contain price growth.
The pound erased its loss against the dollar after the comments were published, and traded at $1.6357 as of 8:18 a.m. in London, little changed on the day. It was at 88.56 pence per euro, from 88.60 pence yesterday.
“My concern is that the pound has weakened beyond what is really necessary for the rebalancing of the economy and it’s actually contributing to inflation and making the macroeconomic management of the economy more difficult,” he said. “If a rise in interest rates began to counter some of that weakness of the pound, I wouldn’t see that as an unwelcome development in terms of controlling inflation.”
While the Bank of England and the Federal Reserve remain reluctant to increase interest rates, other central banks have started tightening policy to fight inflation. The European Central Bank on April 7 raised its key rate by a quarter percentage point to 1.25 percent, joining policy makers in China, India, Poland and Sweden.
“If we wait until all the signals on inflation are flashing amber and red, then I think that is too late to move interest rates away from what has been a very accommodative policy,” Sentance said. “So if we wait until wage growth is threatening the inflation target and we’ve got strong inflation coming from the world economy and the pound remains weak, that is a very worrying cocktail.”
The central bank’s committee has split four ways on policy. Sentance, who steps down at the end of May, has upped his call to a 50 basis-point increase from 25 basis points previously. Spencer Dale and Martin Weale voted for a quarter percentage point move last month, Adam Posen wanted more bond purchases, while the majority voted for no change. Minutes of this month’s decision will be released on April 20.
Sentance said the benchmark rate may not increase in the current cycle to as high a level as it was before the credit crisis, when they peaked at 5.75 percent in July 2007.
“I don’t think we can judge” what would be a normal level at this stage, he said in a separate interview with Bloomberg Television. “I don’t think it’s necessarily the sort of rates that we saw before the financial crisis. We have to take into account all the dislocation in the financial sector.”
U.K. gross domestic product fell 0.5 percent in the fourth quarter and data since then point to continued weakness in consumer spending. Sentance said GDP figures should be considered as one element of a broader picture rather than an “authoritative guide” to growth.
“We should not be surprised that growth is uneven and that there are fluctuations,” he said. “If you look at the broad picture from business surveys, the labor market, alongside GDP it looks like the recovery is continuing.”
Unemployment measured by International Labour Organization methods declined to 7.8 percent in the quarter through February from 7.9 percent in the previous three months.
Sentance, who will be replaced on the MPC by Goldman Sachs Group Inc. Senior European Economist Ben Broadbent, said policy makers now faces a more difficult environment than when he joined the committee in 2006. Rate-setters must remain focused on the inflation target, he said.
“The job of the MPC is not to steer the recovery, the job of the MPC is to keep inflation on target,” he said. “I do think the committee is in a more exposed position than it needs to be by not having taken earlier action and that will be something for the committee as a whole to debate and consider.”
Thursday, Aug 04 2011
By Shamim Adam
Just eight months ago, Brazilian Finance Minister Guido Mantega declared a “truce” in competitive currency devaluations. Now, Japanese and Swiss moves to weaken the yen and the franc show reviving tension in foreign-exchange markets as the deteriorating U.S. economy weighs on the dollar.
Japan sold yen today, causing the currency to weaken as much as 3.8 percent against the dollar after rising 5 percent last month. “Ongoing one-sided moves” would hurt the recovery from a March earthquake, Finance Minister Yoshihiko Noda said. Yesterday, the Swiss National Bank cut interest rates to rein in the franc after a gain of about 36 percent in the past 12 months.
Europe’s sovereign debt crisis and the battle between Republican leaders and U.S.
President Barack Obama over the budget and borrowing limits drove investors to the perceived safety of yen and francs. The risk of a U.S. return to recession, forcing the Federal Reserve to another round of monetary easing, has exacerbated dollar weakness. The currency’s drop last year left all of Asia’s 10 biggest economies seeking to influence their own exchange rates to aid exporters and growth.
“We seem to be entering a new stage of the currency wars where it’s not just the emerging markets that are responding to broad dollar weakness,” said Callum Henderson, global head of currency research at Standard Chartered Plc in Singapore, who has written books on currency markets. “Expect much more intervention in the future and further acrimony in terms of how the U.S. dollar is doing.”
Turkey’s lira fell 1.1 percent to 1.7129 per dollar at 12:08 p.m. in Istanbul today after the central bank cut a key interest rate.
In the U.S., the economy shows signs of slowing, say five of nine economists on the academic panel that dates recessions. Harvard University economics professor Martin Feldstein, a member of the Business Cycle Dating Committee of the National Bureau of Economic Research, sees a 50 percent chance of another recession.
A government report tomorrow may show the unemployment rate held at 9.2 percent in July, according to the median forecast in a Bloomberg survey, up from 8.8 percent in March. Barclays Capital economists cited “QE3 speculation picking up” ahead of the Fed’s Aug. 9 policy meeting, referring to a third round of quantitative easing, where the Fed mounts asset purchases.
Among the 16 major currencies, the Swiss franc, New Zealand dollar, yen, Brazil’s real and the Singaporean dollar have gained the most against the U.S. currency in the past three months, according to data compiled by Bloomberg. The euro has tumbled more than 3 percent against the greenback.
The yen fell 3.5 percent to 79.84 per dollar as of 5:44 p.m. local time, close to the 80 level that Toyota Motor Corp. (7203) used for forecasting profit this fiscal year. The Swiss franc fell 1.1 percent against the dollar to 77.87 centimes as of 9:03 a.m. in London.
Brazil’s Mantega said Nov. 30 that his nation’s currency was trading at a reasonable level as Europe’s worsening crisis brought a “temporary truce” to a currency war. Since then, the real has gained about 10 percent against the dollar, and Mantega said last month that the so-called war was still on.
Brazil buys dollars to limit gains in the real and has also introduced rules aimed at discouraging bets on dollar weakness. The South American nation said on Aug. 2 that it will provide $16 billion in tax breaks and toughen trade barriers to protect manufacturers hurt by a currency rally that’s fueling a surge in imports from China.
Latin American finance officials plan to gather this month in Buenos Aires to discuss ways to protect their currencies and economies from the turmoil in the U.S. and Europe.
The Bank of Japan today expanded an asset-purchase fund that includes government bonds, real-estate investment trusts and corporate debt to 15 trillion yen ($189 billion) from 10 trillion yen. It also boosted a program aimed at encouraging banks to lend by 5 trillion yen, bringing it to 35 trillion yen.
In New Zealand, Finance Minister Bill English said today that the government can do little to alter the currency’s course after it rose to 88.43 U.S. cents on Aug. 1, the most since exchange-rate controls were removed in 1985. New Zealand’s central bank doesn’t comment on currency intervention, spokesman Mike Hannah said when asked if Japan’s move has affected the Reserve Bank of New Zealand’s currency actions.
Case for Intervention
The central bank should seriously consider intervention should the New Zealand dollar remain in the high 80s over “coming weeks” while export commodity prices slide, Roger Kerr, who advises on currencies as owner of Asia-Pacific Risk Management, wrote in acolumn this week on interest.co.nz, an online financial news and information provider.
Currency gains may mean that central banks in nations including New Zealand, Canada and Australia tighten monetary policy at a slower pace than they otherwise would, said Sue Trinh, a senior currency strategist in Hong Kong at Royal Bank of Canada.
“It manifests itself by more pushing back or delaying of any planned rate hikes as opposed to outright intervention to weaken their respective currencies,” Trinh said. “You’re seeing that already. The Bank of Canada has been pushing out its tightening campaign, the Reserve Bank of Australia is taking on a protracted pause in its tightening cycle and there are question marks on how aggressively the Reserve Bank of New Zealand is able to hike as well.”
South Korea’s Stance
South Korea’s government is reviewing “all possibilities” on curbing capital inflows, Finance Minister Bahk Jae Wan told reporters in Seoul today, adding that he’s “closely monitoring” the situation. The won fell 0.1 percent to 1,061.70 per dollar at the 3 p.m. close in Seoul after touching a three- year high on July 27.
The Philippines is prepared to impose controls to cap volatility after the peso rose to a three-year high this week, central bank Governor Amando Tetangco said in an e-mail late yesterday. The bank “will not go against the fundamental currency trend but will not hesitate to use tools, including imposing prudential limits on certain transactions of banks,” he said.
The peso fell 0.2 percent to 42.333 per dollar at the 4 p.m. close of trading in Manila, completing its third day of declines, according to Tullett Prebon Plc.
In Japan, Mazda Motor Corp. called today’s intervention “minimal” and “positive” after the Hiroshima-based company reported a bigger-than-forecast loss for the three months through June.
At Standard Chartered, Henderson highlighted that Japan and Switzerland were both members of the Group of 10 nations, signaling a shift from the early 2000s when the G-10 countries didn’t intervene, with the exception of Japan. “The currency wars will continue to bubble along and get worse.”
Wednesday, Aug 03 2011
By Gertrude Chavez-Dreyfuss and Burton Frierson
(Reuters) - A downgrade to the U.S. sovereign credit rating could open up a new world of pain for the dollar.
Already reeling from low interest rates, slow economic growth, and foreign investors eager to diversify away from U.S. assets, the loss of AAA status could cement the view the dollar is no longer the safest harbor in a troubled world.
The risk of a downgrade remains real even after Washington's $2.1 trillion budget savings deal, since it fell well short of the $4 trillion Standard & Poor's said would be enough to support the AAA rating with a stable outlook.
That it took so much drama to produce such a limited round of cuts has disappointed investors who had grown weary of fiscal weakness during budget crises in the euro zone countries.
"A debt ceiling raised plus downgrade equals weak dollar," said Jonathan Lewis, founding principal of Samson Capital Advisors in New York, which manages assets of $7 billion.
"Not only would a double AA rating be a concern for international investors, but the fiscal imbalances would not be a good reason to buy the dollar."
For years, the dollar has acted as the world's reserve currency, an international store of value for central banks.
However, the fact the other safe-haven currencies are gaining at the expense of the dollar suggests investors' views may already be changing, perhaps in anticipation of a downgrade or at least a tough fight to hang on to AAA.
Over the last month, the dollar plummeted 6 percent against the Swiss franc and about 4 percent against the yen.
"Being the world's reserve currency seems incongruous with a double-A rating," said Barclays Capital in a research note.
The only consolation, perhaps, is that the dollar has risen more than 1 percent over the past month against the euro, though only because the euro zone itself is under the gun over fiscal problems of Greece and Italy.
THE JAPAN EXPERIENCE
The fact that the yen has retained much of its value in the face of a Japanese downgrade over the past decade, including the most recent action by S&P earlier this year, does not suggest the dollar would be similarly immune, analysts said.
The yen is not the world's primary reserve currency, representing just under 4 percent of global reserves. The dollar is, with its share of global reserves at 60.7 percent.
"With dollar holdings so much larger than the yen and every other currency...the risk stemming from a downgrade or other negative shocks is potentially larger," said Bob Lynch, global head of G10 currency strategy at HSBC in New York.
In addition, the bulk of Japanese government debt is held locally in Japan, which cushioned the country's bonds and yen from foreign selling. By contrast, roughly half of U.S. Treasuries are held overseas, leaving the dollar far more exposed to selling by foreign investors.
But the dollar's fall from grace -- which some argue has been underway for several years already -- may come in fits and starts. The immediate outlook is a volatile one.
Indeed, if investors were suddenly faced with a downgrade to the U.S. sovereign credit rating, they might do what they've always done in times of market angst -- buy dollars.
"If a downgrade is accompanied by a risk-off environment, that would be a case where the dollar would rally," said Aston Chan, portfolio manager, at $1-billion global macro hedge fund GLC in London. "People would always want dollar liquidity when times are tough."
The dollar rallied sharply at the height of the global financial crisis in the second half of 2008 as global investors dumped their own currencies and sought refuge in the greenback.
A top concern about a downgrade is a possible liquidity squeeze that produces turmoil in money markets because lenders suddenly demand more collateral.
Borrowers often use Treasuries as collateral, especially in the $1.6 trillion repurchase market, a key source of short-term funding for banks and Wall Street. As a result, they could be forced to post more, creating a sudden demand for U.S. bonds.
Whether it's about fears of a ratings cut or concerns about global growth, investors are already witnessing some stress in the money market.
"Treasuries remain the benchmark for global yields and as well are a key source of funding and collateral in the money market. The Treasury market also remains the deepest and most liquid fixed income market in the world," said HSBC's Lynch.
This may be the one factor that could help limit the dollar's fall, although probably not for long. The challenges facing the dollar are far too formidable and investors who have long supported the currency are fast running out of reasons to own it.
(Editing by Andrew Hay)