What does the US bailout fund mean for currency markets?
Since Friday’s US announcement of an extraordinary fund to allow financial institutions to cash in bad debts in exchange for taxpayer’s money, the dollar has got it on the chin. The creation of a help-out fund totalling $700 billion comes on top of a government bailout of AIG, which cost a further $85 billion earlier last week. As the US already has a vast current account and budget deficit, the required capital can only be provided through the issuance of government debt and the flooding of the market with dollars. This is not good for the dollar in the long run, because ultimately the more dollars on the market, the less they are worth individually. Even short term sentiment is against the dollar, despite the fact there is a global economic slowdown and investors across the world have been running for cover. Some analysts believe the final bill for the ‘bailout’ will more likely be closer to $2 trillion, an even worse prospect for the dollar. What the dollar does have going for it is the fact that there appears to be little to justify much faith in many of the other major currencies at the moment and because of this, ongoing volatility looks likely while investors weigh up the pros and cons of holding dollars versus other major currencies. The dollar’s strong Rally through July was fuelled by the repatriation of funds back to the US, rather than currency traders laying long positions on the dollar, so if these funds now dry up, given the dollar’s poor yield and rate outlook the currency will struggle and should be sold on any significant rallies. The euro should be able to make it back to 1.50 and only a firm indication of lower interest rates from the ECB is likely to terminally damage the single currency. There is the very real danger that a new commodity price bubble could form over the next couple of months, if the dollar declines too sharply. Speculators willingness to pour back into commodities en masse was evident again late last week, when oil and gold staged massive bull rallies. While Central Banks worldwide have thrown billions at the financial markets in an attempt to calm them, the massive and sudden injection of liquidity could come back to haunt Central Banks in the form of rising inflation and a return to a stagflation environment, which will temporarily put a stop to any consideration of easing in monetary policy. The commodity currencies should outperform in the coming weeks.
EUR/USD
The market is less concerned about economic data at present while traders look more towards safe havens while risk aversion and general market uncertainty persists. The dollar has been abandoned as a safe haven as investors don’t like the thought of an additional $700 billion + being printed and circulated to protect the US banking system. The euro is trading almost 5 cents above the lows from last Friday as currency traders see the euro area financial system as much more secure than that in the US while the relatively flat current account balance in the euro area immediately looks a far more attractive bet than the ballooning one in the US. EUR/USD sold off by 21.5 cents from early July to the middle of September and there is every reason to believe that a 50% retracement of that move could now be underway. That would see the euro rise to 1.4950 and indeed a return to above 1.50 is possible, especially if the deterioration in euro area economic data does not accelerate. Currency markets are a law unto themselves at the moment and one thing we can be certain of is that uncertainty itself will continue to prevail, so big swings will make short-stop trading strategies virtually redundant. Wednesday’s German Ifo survey report is the next economic event that could potentially unhinge the euro. The sharp deterioration in that survey’s index last month caused a major euro sell-off.
GBP
Sterling has gained 5 cents against the dollar since last Friday morning, something of a remarkable feat when one takes into consideration the litany of bad economic data that continues to stream out of the UK. Last week’s surprise increase in retail sales offered some level of comfort but the accuracy and veracity of the retail sales figures have come in for much criticism over recent months and this number may simply be another blip in the series. The UK, along with the US, has a worrying current account deficit and with the British economy seemingly in freefall, there is little reason to buy the pound on fundamental grounds. The pound’s only real chance of appreciation is if risk tolerance levels rise further, thus attracting additional funds into the high-yielding currencies like sterling. Cable should struggle to make it past 1.85, but if the dollar comes under increased selling pressure because of market concerns over the US financing plans, cable could return to 1.90, before the market is forced to take stock of its value once again. If the dollar manages to stage a broader rally across all markets, then cable could quickly fall back to 1.7850 over the next week.
JPY
The yen got hammered last Friday as a surge in global stocks triggered a return to risk tolerance and a resumption of the carry trade. The Japanese currency has lost 10% against both the Aussie and New Zealand dollars in the past week, while it has also ceded major ground to the euro and the pound. The US dollar is the only currency against which it is trading higher against than at the start of last week. The yen will be undermined by the ban on short selling of financial stocks which will limit the downside for global stocks and hence prevent the sort of extreme bouts of risk aversion that were so evident all last week. However, the speed with which traders have returned to carry trades looks to be over-ambitious and with stock markets trading lower thus far on Monday, we could see a forced scaling back of these positions overnight which should help the yen claw back some ground. How markets respond to the US bailout plan for banks will be pivotal for determining direction over the next week, so the reaction of US stock markets needs to be watched very closely in the coming days. Economic data will not have any major significance this week.
CAD
The loonie has broken below key resistance of 103.71 on Monday, meaning the currency has now appreciated by 4 cents against the greenback in the past 3 sessions. Nothing has fundamentally changed in the Canadian economy, but a surge in oil prices over the last few sessions aligned with renewed appetite for risk has sparked a recovery in the Canadian currency. The loonie has been carried along on the wave that has seen a very sharp sell-off of the US dollar on Monday. Canada’s healthy current account balance is also attracting investors as markets look to a huge worsening of the US debt situation with the proposal of a $700 bailout package for US banks. Volatility is likely to remain and while the loonie does now have a chance to send the greenback back as far as 1.02, any sharp up-tick in risk aversion will work against it and could see USD/CAD jump back to 1.07 by the end of the week.
Bob B - Sep 22
Thứ Hai, 22 tháng 9, 2008
Thứ Tư, 17 tháng 9, 2008
Bob's Currency Focus
Is it the end of the world as we know it?
The Fed’s bailout of insurance giant AIG is the latest spectacular episode in what has been one of the most frightening weeks in the history of global financial markets. On Monday Lehman Brothers became the largest (by a street) bankruptcy failure in the history of Corporate America. Also on Monday, Merrill Lynch, Lehman’s closest cousin on Wall Street, was taken over by Bank of America in a rushed deal, executed just before markets opened on Monday, when Merrill was certain to be the next guillotine victim of those shorting financial stocks. Today, we learn that Lloyds TSB and HBOS (the UK’s largest mortgage lender) are on the verge of a merger, forced upon HBOS, as their share price has plummeted so much in recent days that their market capitalisation value has plunged to farcical levels. And today the Russian stock market had to be closed after its index fell 17.5% in an hour. This follows a similar closure on Tuesday, after the index lost 20%. These are scary times and the impact is resonated across currency markets as well as equity markets, with the risk aversion Japanese yen slaying all before it. It is not a market for rational trading based upon the latest economic indicator releases and technical analysis charts, but rather it is a market to best avoid, unless the trader has massive risk tolerance levels. The volatility is resulting in huge swings across most major currencies and in particular any currency pair involving the US dollar, or the Japanese yen. Logic is out the window and wide shifts in sentiment towards what is happening in wider financial markets is forcing currencies in one direction or another. A look at the latest Commitment of Traders Report essentially shows a mediocre volume of open currency trading positions against the norm, which tells us 1) liquidity levels remain dangerously low and 2) currency movements are not being influenced to any great degree by speculative currency trading, but by the repatriation of funds across exchange rate borders, primarily to Japan and the US, resulting in the yen and the dollar appreciating significantly against the other majors. The yen has now appreciated to 2-year highs against the euro and the Aussie dollar and to multi-year highs against the high-yielding pound and Kiwi dollars. The carry trade has essentially been completely liquidated in the past 2 weeks although extreme negative market sentiment could see the yen gain further, particularly against the euro.
The current market is too risky and volatile and short stops are not working. Traders are best advised to avoid the dollar and yen and to stay away from the market until it settles, or else stick to pairs like EUR/GBP, AUD/NZD and EUR/CHF. Those stuck in open positions may need to sit them out or if brave enough, to enter the market at current range extremes, and collapse the two positions at the halfway point.
Bob B
The Fed’s bailout of insurance giant AIG is the latest spectacular episode in what has been one of the most frightening weeks in the history of global financial markets. On Monday Lehman Brothers became the largest (by a street) bankruptcy failure in the history of Corporate America. Also on Monday, Merrill Lynch, Lehman’s closest cousin on Wall Street, was taken over by Bank of America in a rushed deal, executed just before markets opened on Monday, when Merrill was certain to be the next guillotine victim of those shorting financial stocks. Today, we learn that Lloyds TSB and HBOS (the UK’s largest mortgage lender) are on the verge of a merger, forced upon HBOS, as their share price has plummeted so much in recent days that their market capitalisation value has plunged to farcical levels. And today the Russian stock market had to be closed after its index fell 17.5% in an hour. This follows a similar closure on Tuesday, after the index lost 20%. These are scary times and the impact is resonated across currency markets as well as equity markets, with the risk aversion Japanese yen slaying all before it. It is not a market for rational trading based upon the latest economic indicator releases and technical analysis charts, but rather it is a market to best avoid, unless the trader has massive risk tolerance levels. The volatility is resulting in huge swings across most major currencies and in particular any currency pair involving the US dollar, or the Japanese yen. Logic is out the window and wide shifts in sentiment towards what is happening in wider financial markets is forcing currencies in one direction or another. A look at the latest Commitment of Traders Report essentially shows a mediocre volume of open currency trading positions against the norm, which tells us 1) liquidity levels remain dangerously low and 2) currency movements are not being influenced to any great degree by speculative currency trading, but by the repatriation of funds across exchange rate borders, primarily to Japan and the US, resulting in the yen and the dollar appreciating significantly against the other majors. The yen has now appreciated to 2-year highs against the euro and the Aussie dollar and to multi-year highs against the high-yielding pound and Kiwi dollars. The carry trade has essentially been completely liquidated in the past 2 weeks although extreme negative market sentiment could see the yen gain further, particularly against the euro.
The current market is too risky and volatile and short stops are not working. Traders are best advised to avoid the dollar and yen and to stay away from the market until it settles, or else stick to pairs like EUR/GBP, AUD/NZD and EUR/CHF. Those stuck in open positions may need to sit them out or if brave enough, to enter the market at current range extremes, and collapse the two positions at the halfway point.
Bob B
Thứ Năm, 4 tháng 9, 2008
Bob's Currency Focus
EUR/USD
The dollar’s relentless rally continues unabated, sending the euro to a 2008 low on Thursday of 1.4327. This happened after the ECB’s ‘no bias’ monetary policy statement when the Governing Council voted to hold rates steady. The market did go after the euro after that event believing the ECB will be forced to cut rates sooner rather than later but the dollar gained ground against all currencies, excluding the yen, after the IS reported that the US Services Sector expanded in August, with the business PMI coming in at 50.6, moderately above the 49.0 expected. Global stocks have tanked today, but the dollar continues to benefit from an inflow of safe haven flows and today it registered its highest exchange rate of the year against many currencies. The dollar and the yen seem to be the only game in town right now with investors reluctant to load bets on European or commodity currencies. Friday will offer another litmus test for the US economy when the nonfarm payrolls report is released. The omens don’t look good however, after Thursday’s initial jobless claims numbers came in at the worst level in 5 years, while both the ISM services and manufacturing reports record contractions in employment during August. It may well be a case of damage limitation and if the figure is something better than -50,000, then the dollar should not be penalised. The euro is oversold, but with support at 1.4365 taken out on Thursday, there seems little to stop the pair quickly descending to test the 1.40 level. Momentum could take the dollar there over the next week. Caution is needed however as the dollar has now registered a 10% gain against the euro in little more than 6 weeks, while the chance of a US interest rate hike seems more distant now than it did back in July. This dollar rally is not supported by any major shift in the rate outlook, which would tend to suggest it is unjustified and over-extended. Another point worth noting is that the positive economic data seen recently out of the US is nearly exclusively down to a sizeable upturn in exports, but in the past month alone the dollar has wiped out all of its losses for the year and subsequently its competitive advantage in the export market. Be warned! This dollar run is not sustainable, even if the greenback continues to make gains in the short run.
GBP/USD
The nightmare continues for sterling and at one stage today the pound was down 23 cents on the price it was trading at on August 1st. The sell-off is extreme and it is not just a dollar phenomenon because sterling is also trading at a record low against the euro and a multi-year low against the yen. The Bank of England reneged on its duty today by pressing the mute button after they voted to keep interest rates unchanged. It beggars belief that the MPC did not see fit to offer some sort of statement to address the turbulence that has been unleashed in UK financial markets at a time when the Chancellor of the Exchequer states the economy is in the worst economic downturn for 60 years. We will have to wait 2 weeks to get an insight into the MPC’s thinking but given the Bank of England’s lack of foresight and indifference to the sort of creative monetary policy adopted by the Fed, much of the blame for sterling’s sudden collapse can be laid squarely at the door of the MPC. Sterling has had only one meaningful upside day since August 1st last and a depreciation of this magnitude is almost unprecedented, for the currency of a major developing economy. The technical indicators are nearly off the chart, so extreme is the sell off in the pound. One bright spark came today when the pound did at least manage to push the euro back to the 81 pence handle, but that is scant consolation for pound supporters that see GBP/USD record new lows on an almost daily basis. Cable has to rise above 1.80 before it is safe to buy. Another weak close today could se it hit 1.75 before the next shot at a recovery.
Bob B - Sep 4
The dollar’s relentless rally continues unabated, sending the euro to a 2008 low on Thursday of 1.4327. This happened after the ECB’s ‘no bias’ monetary policy statement when the Governing Council voted to hold rates steady. The market did go after the euro after that event believing the ECB will be forced to cut rates sooner rather than later but the dollar gained ground against all currencies, excluding the yen, after the IS reported that the US Services Sector expanded in August, with the business PMI coming in at 50.6, moderately above the 49.0 expected. Global stocks have tanked today, but the dollar continues to benefit from an inflow of safe haven flows and today it registered its highest exchange rate of the year against many currencies. The dollar and the yen seem to be the only game in town right now with investors reluctant to load bets on European or commodity currencies. Friday will offer another litmus test for the US economy when the nonfarm payrolls report is released. The omens don’t look good however, after Thursday’s initial jobless claims numbers came in at the worst level in 5 years, while both the ISM services and manufacturing reports record contractions in employment during August. It may well be a case of damage limitation and if the figure is something better than -50,000, then the dollar should not be penalised. The euro is oversold, but with support at 1.4365 taken out on Thursday, there seems little to stop the pair quickly descending to test the 1.40 level. Momentum could take the dollar there over the next week. Caution is needed however as the dollar has now registered a 10% gain against the euro in little more than 6 weeks, while the chance of a US interest rate hike seems more distant now than it did back in July. This dollar rally is not supported by any major shift in the rate outlook, which would tend to suggest it is unjustified and over-extended. Another point worth noting is that the positive economic data seen recently out of the US is nearly exclusively down to a sizeable upturn in exports, but in the past month alone the dollar has wiped out all of its losses for the year and subsequently its competitive advantage in the export market. Be warned! This dollar run is not sustainable, even if the greenback continues to make gains in the short run.
GBP/USD
The nightmare continues for sterling and at one stage today the pound was down 23 cents on the price it was trading at on August 1st. The sell-off is extreme and it is not just a dollar phenomenon because sterling is also trading at a record low against the euro and a multi-year low against the yen. The Bank of England reneged on its duty today by pressing the mute button after they voted to keep interest rates unchanged. It beggars belief that the MPC did not see fit to offer some sort of statement to address the turbulence that has been unleashed in UK financial markets at a time when the Chancellor of the Exchequer states the economy is in the worst economic downturn for 60 years. We will have to wait 2 weeks to get an insight into the MPC’s thinking but given the Bank of England’s lack of foresight and indifference to the sort of creative monetary policy adopted by the Fed, much of the blame for sterling’s sudden collapse can be laid squarely at the door of the MPC. Sterling has had only one meaningful upside day since August 1st last and a depreciation of this magnitude is almost unprecedented, for the currency of a major developing economy. The technical indicators are nearly off the chart, so extreme is the sell off in the pound. One bright spark came today when the pound did at least manage to push the euro back to the 81 pence handle, but that is scant consolation for pound supporters that see GBP/USD record new lows on an almost daily basis. Cable has to rise above 1.80 before it is safe to buy. Another weak close today could se it hit 1.75 before the next shot at a recovery.
Bob B - Sep 4
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