FXhusar's Xanga

China summit

Wed, 11 Nov 2009 20:01:26 GMT

Interesting news from China today. On the eve of US president’s visit to this country, People’s Bank of China issued a monetary policy report which outlined possible release Yuan from US Dollar peg.The exact wording was “Following the principles of initiative, controllability and gradualism, with reference to international capital flows and changes in major currencies, we will improve the yuan exchange rate formation mechanism,”. OK, so in reality it is a big maybe, kind of like saying “There is a sliver of a chance for possible un-pegging of Yuan, sometime in the future, as measured by cosmic time unit, if you are lucky”. But it is a start, of sorts and something what US counterparts want to hear.

Delighted US officials responded by saying what the Chinese wanted to hear. During his stop over in Japan, U.S. Treasury Secretary Timothy Geithner said during news conference “I believe deeply that it’s very important to the United States, that we maintain a strong dollar.” And, since US deficit is under international scrutiny, he added ““we’re going to bring our fiscal position back to a sustainable balance.” I guess if you say something often enough you start believing in it, irrespective of evidence to the contrary. Now, since the visit already accomplished what it intended to do (win some concessions) does it even has to happen? We can just be telling each other these grossly exaggerated half truths and smile nicely, without spending money on silly meetings.
Yuan to appreciate finally?

Rating risk.

Tue, 10 Nov 2009 17:32:30 GMT

British pound came under pressure last night, after a credit rating agency, Fitch Rating , issued a warning. It stated that UK is at risk of loosing its AAA rating status, more than any other top-rated nation. It has to do with widening budgetary gap and seemingly lack of credible plan to restore fiscal stability. It wouldn’t be the first time that negative comments of this sort were made. In May S&P lowered outlook for UK from stable to negative, move that was largely symbolic, not effecting credit rating. By contrast, though, Moody’s opinion is that ” UK is among resilient Aaa rated countries”, as stated in November. Go figure.

This lack of consensus should be no surprise coming from industry that lost any credibility at the beginning the financial crisis. These are the same people who were rubber stamping highest ratings on securities defaulting just weeks later. Either complete incompetence, or fraud- take your pick, one is as bad as the other. I find it amazing that all three of these agencies were not disbanded by authorities and industry rebuilt from scratch. As is, people are paying attention to them, even though they still have no congruity. For example, if shortfall in UK budget is so disturbing, how should US or Japan rate? In case of America we are talking about trillions of dollars over next decade. No warnings about that?
British credit rating at risk.

Kiwi.

Mon, 09 Nov 2009 18:28:08 GMT

Currencies had an interesting opening to trading week. Kiwi moved sharply against all major currencies. It seems to be a beneficiary of the latest G-20 meeting, which covered more of in The Tobin tax post. While the representatives of participating governments were discussing “exit strategy” for emergency measures implemented by their respective central banks, they also agreed to keep most of it in place for now. Objective is to not harm fragile recovery prematurely. Whatever. Outcome is more bearish pressure on the US Dollar, which is expected to keep flooding markets. That’s the story today. For we know by tomorrow investors will be running to “safety of USD”. Such is trading life.

New Zealand Dollar, Kiwi, became favored currency of the day. NZD opened very strongly. In fact it left large gaps in most crosses which are visible on many trading platform. Even AUD-NZD pair had large jump, or rather drop, something that doesn’t happen very often. For the record, Canadian Dollar, was also very active and strong. This increased interest in Kiwi coincided strangely with my own trade in EUR-NZD, which I started to follow some time ago, to illustrate principles of trading Forex using only price action. Yesterday I adjusted stop on the long trade. Turned out to be just in time for NZD move, which took this pair down, putting an end to my trade.
Kiwi on steroids.

Another G-something meeting.

Mon, 09 Nov 2009 03:19:50 GMT

The dreaded “Tobin tax” came up during yet another G-20 meeting took place over the weekend, this time in Scotland. Seems like every other week “G”-something has a summit here and there, always discussing the same few topics. Current subject of choice appears to be the so called exit strategy, which is a plan of withdrawing excess liquidity from the system. After all the bailouts and stimulus packages some feel it is time to start closing the easy cheap money spigot, while others claim this would kill the just starting recovery. This is something that will be in the spotlight from now on.

Of note was British Prime Minister Gordon Brown’s call for urgent consideration of a global fund to rescue troubled banks, possibly financed by a tax on financial transactions. This is a version of the so called “Tobin tax”, a flat tax on international currency transactions named after the Nobel Prize laureate James Tobin. Details of what and how would be taxed were not announced, but it would most likely include international speculation as well as other banking activities. Proposal received tepid response from other delegations, for now at least. We can understand that Mr. Brown doesn’t want to spend public money on bailouts of bank, but there is another solution to the problem- stop the bailouts. Vast majority of financial institutions got in trouble because of mistakes made by executives, and not external forces. They deserve to fail. Perhaps some of these people should have extended vacation in prisons for mismanagement and breach of fiduciary obligation? Start holding the fat cats responsible for their greed and short sightedness, not levy a punishment on everybody else for excesses of few.
The Tobin tax.

Buy and hold.

Sun, 08 Nov 2009 04:37:31 GMT

Currencies are not financial instruments which typically come to mind when talking about long term investments. Vast majority of financial advisors suggests a mix of bonds and stocks to their clients, with some cash investments, like money market funds or CD’s thrown into the mix. Such is long standing, conventional wisdom regarding regarding allocating money for a long haul and is almost universally practised on “main street”. The only difference is specific split among these asset groups, in most cases related to the age of person. Virtually all other forms of investments are considered “derivatives” and not suitable for most people.

These views have been slowly changing over last few years, if not decades. Explosion of hedge funds have brought alternative forms of investments, other than stocks and bonds, into a vernacular of most individual investors. Today just about everybody with any interest in financial markets knows, at least in principle, what options, futures and commodities are. More and more often these groups of securities are mentioned as separate asset classes with a place of its own in a carefully balanced investment portfolio. Same goes for currencies.

Popularity of spot Forex trading proves that currencies are great trading instruments. Brokers report record numbers of accounts opening every year, trading volumes keep rising and the most liquid markets in the world are becoming even deeper. This is easily noticed when spreads from just few years ago are compared to ones today. In many cases they were cut by half, clearly outcome of increased activity as well as competition for clients among Forex brokers.
Currencies as long term investments.

Unemployment.

Fri, 06 Nov 2009 16:12:51 GMT

For all the talk about recovery and supposedly expanding economy NFP delivered a shock to the system today. Unemployment rate is officially above 10%, at 10.2% to be exact. It is the highest rate since 1983, with nearly 16 million people looking for job, and the number is likely to grow even higher. Counting those who have settled for part-time jobs or stopped looking for work, the unemployment rate would be 17.5 percent, the highest on records dating from 1994. People who insist that recession is over coined a phrase “jobless recovery”, trying to validate their opinions.

To put it in another perspective -October was the 22nd straight month the U.S. economy has shed jobs, the longest on records dating back 70 years. This is even longer than during the recession in early 80’s, when unemployment reached 10.8%, postwar record. When that down turn started in July 1981, official unemployment rate stood at 7.2%, compared to 4.9% at the beginning of current slump. Lesson is very simple- during this recession economy has been shedding jobs at much faster, steeper pace. Number of people officially out of work for a period of 6 months or more set a record at 5.6 million. But the recession is over, right?

It's official- 10%+ unemployment.

Central banks.

Thu, 05 Nov 2009 16:16:07 GMT

With interest rates for Sterling at record low, at 0.5%, there are some speculations floating around that GBP is the currency fueling next wave of the carry trade. By some reports it is replacing Japanese Yen and US Dollar in this role. Currently FED is the source of cheap money, with rates below those Bank of Japan. By some reports speculators are increasingly turning to British Pound, with an idea that any farther quantitative easing would cheapen GBP even more.

While some trades are certainly established shorting the Pound, I seriously doubt it will replace USD or JPY in this role. First of all, these currencies are still cheaper than Sterling, making them better candidates. Second is the money supply. There are far fewer Pounds floating around compared to Dollar or Yen. Any imbalance created by abnormally one sided bets, would become bigger and faster that what happened in Yen last couple of years. We know what happened in Yen pairs when markets corrected this imbalance. It was very painful for many market participants. If this happened with GBP, correction would be even more severe. Also, Pound is expected to have interest rates on the increase again before USD or JPY. Altogether it is not the best option to borrow money for speculation.
Sterling funding currency for carry trade?

US debt.

Wed, 04 Nov 2009 17:41:43 GMT

US Treasury Department works hard trying to raise enough money to cover Federal deficit. Next week alone, agency is expected to bring over $81 billion, in an attempt to finance unprecedented budgetery shortfall, which, this year alone, is expected to reach over $1.4 trillion. Somewhat smaller, yet still huge deficits are projected for the next decade, topping at combined additional $10 trillion, or so. So far Treasury managed to do a good job of raising funds, without pushing interest rates too high, even in difficult climate of ever declining US Dollar. However, new problem is on the horizon- the Federal Statutory Debt Limit.

Federal government debt is limited by act of Congress, which sets a debt ceiling. Currently this figure stands at $12.1 trillion and is expected to be reached by December. Congress must pass a legislation needed to boost that limit and avoid an unprecedented default on the nation’s debt obligations. In theory. Nobody seriously entertains this notion, fully expecting the legislation to pass. Problem is, this will have to be done every year in order to accommodate ever swelling spending. Issue will be brought on the front pages of the media, because it will provide some politicians perfect platform for heated speeches and angry rhetoric. Never mind that the “ceiling” is already largely symbolic. It doesn’t cover some expenses. For example, defense budget can go above this limit, as well as other “emergency” spending needs. Nonetheless, situation will get attention and one could have some influence on the USD.

FED interest rate decision will be announced today, and this is almost guaranteed to play with Dollar pairs. Expectation is for the non-existing interest to remain next to invisible, but that’s not what the markets will be looking for. Attention will go to future “intentions” and ”hints”. Is the tone of announcement “hawkish” enough? This activity reminds me of palm or tarot reading, rather than legit analysis, so I leave it for others. True to fashion, I will not be trading during this time, but currencies have been active all day and so was I.
Federal debt limit.

Rates again.

Tue, 03 Nov 2009 17:48:42 GMT

Reserve Bank of Australia has raised interest rates for the second time during its policy meeting today. Benchmark rate was hiked to 3.5% from 3.25%. No surprise of any kind, this move has been widely anticipated. This makes the Australian Dollar to be the highest interest bearing currency among the established economies. Differences between AUD and other currencies are starting to become significant. With the exception of New Zealand, where current rate stands at 2.5%, interests everywhere else are, well, symbolic, marginal at best. Having this in mind, it could be surprising that Aussie sold off on the news. not in a dramatic fashion, but 100+ pips in AUD-USD in a few hours makes for a good trading day. By now large portion of these losses was recovered.

Comparison table of the interest rates among major central banks. RBA stands out with the highest percentage. Dates of policy meetings for other CB’s are also indicated here. Notice that we have more of these events scheduled for this week. FED is next followed by European Central Bank and Bank of England on November the 5th. Nobody expects surprises, but you never know.
RBA does it again.

Reversal?

Mon, 02 Nov 2009 15:34:33 GMT

Recently media has been very focused on the US Dollar. Remarks about its behavior are becoming ubiquitous if predictable. Same for the Japanese Yen, which also earned a title of being a “safe haven”. This pushed the commodity currencies into a background. They have been the attention magnets for better part of the year. As we know the commodity currencies belong to countries which export huge amounts of raw materials. Their economies largely depend on prices on physical commodities and general economic health of global economy. These are Australia, New Zealand and Canada. Some would add South Africa, Russia and , to a smaller degree, Brazil, into this camp. One could say that very simple, yet accurate, barometer of world economic climate is Australian Dollar-Japanese Yen cross. If this pair is moving up things are good or on the rebound, while falling AUD-JPY indicates either existing or coming problems.

This pair, and all others in this camp, like NZD-JPY, CAD-JPY as well as their crosses with USD, CHF and so on, have been rising most of this year. Recently these strong moves have been developing signs of resistance and maybe even possible reversal. Here is a weekly chart of NZD-JPY, very representative of how most of how most of crosses look like right now. Price advanced from a low of about 44 early in a year to above 69 recently. This is a huge move, which only looks small on this chart because of severity and historic nature of preceding drop. If FIB retracement tool is overlaid on this graph, we can see that the price is between 38 and 62 levels, an area where reversals are very common.
Commodity currencies turning.