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Saturday, March 16, 2013

Your forexlive.com ENewsletter

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Louise Cooper: Hey George, be bold and let businesses do the heavy budget lifting

Posted: 16 Mar 2013 12:07 AM PDT

Louise Cooper offers her advice and yours on how George Osborne can cut the UK deficit and salvage the economy.

George Osborne should take note of the lyrics of this 1983 hit. He needs to tempt businesses to take cash out of their pockets and put it to work in the economy. George, lay heavenly financial morsels in front of CEOs that they cannot resist. Because with the trend rate of growth for the UK economy approaching zero, "we can't keep on living like this".

Chancellor Osborne will be putting the finishing touches to his budget this weekend. Ministers will be badgering him for cash, but as the purse keeper of a deeply indebted state, he is never going to win any popularity contests.

Most predict this will be a slightly boring, steady-as-she-goes budget. Last year's fiasco on taxing Cornish pasties (a meat and pastry delicacy from the South West of England for the American readers) will ensure that. But he needs to become a tempter, the male version of temptress.

Osborne budget

"Keep Climbing Higher and Higher" – summaries the debt picture of the UK, which is getting worse as GDP disappoints. Thus the government has few options fiscally.

"It’s just the high cost of living"  Britons are heavily indebted, with wages rising slower than inflation. Therefore relying on consumer spending is misguided. However businesses have cash. Osborne needs to concentrate on inducing them to spend it. Lay out the bait, Chancellor, entrap CEOs into doing your job – boosting the economy.

So what do I think he should do?

  1. Cut National Insurance completely for any new employee in the next 1-2 years for all small and medium sized businesses – tempt them to hire. Make it easier too – get rid of as much red tape as the EU allows.
  2. Secondly entice businesses to buy the new IT system, to expand production, to upgrade their website. Whatever project they have been postponing, make it so attractive to invest, they can't help themselves. For two years, allow all new investments to be written off 100% against tax – that should cause Finance Directors to salivate. It may be costly but it will force firms to spend money jolting the economy off life support. Financial markets will be reassured that it is a short term measure. 

You can take it or leave it

All Chancellors get besieged with budget advice, whether followed or not. I choose to ask Twitterers:

@AndrewDowson "fixing the roads would have many benefits"

Infrastructure spending is a good idea given the state of the UK's road and rail network and produces long term benefits, boosting productivity if well chosen. However UK pension fund restrictions on asset liability matching and liquidity regulations, may prevent them investing in such projects. Risible given many overseas sovereign wealth funds seem keen and pension funds are desperate for yield.

@Shireblogger "re-boot banks, increase real incomes, mass Prozac helicopter drop".

The amount of corporate insolvencies is at exceedingly low levels suggesting zombie companies propped up by zombie banks. Both Mark Carney and Mervyn King have both stressed the need to recapitalise weak banks but this is highly unpopular politically.

@PaddyBriggs ".. the elephant in the room is inflation. Over history governments have inflated their way out of difficulties and deficits.. it must be tempting"

In one of the few leaks ahead of this budget, the Bank of England is expected be given a more flexible inflation target although we are a long way away from helicopter money. Markets and Britons are expecting higher inflation in the years to come.

@connarmcbain "scrap the green agenda, invest in shale and slash taxes"

The desire to make the energy production of this country greener is causing energy bills to increase. Reversing this would put more cash into household budgets and reduce inflation. But given Cameron's promises, such a U-turn is tough politically and bad for the industrial relations. On shale gas, it is becoming increasingly clear that American businesses are benefitting significantly from lower energy costs. We should be doing the same for British business.

@GeorgesJDanton "Stop deluding ourselves that we are actively lowering the deficit and acceptance of fiscal reality please"

Politicians of every hue succumb to the temptation of obfuscating the debt picture during troubled times. Osborne has already started along this path in his December Autumn Statement. Expect more.

Trouble is coming

Patience is needed for the UK's economy to recover from the seismic shock of the financial crisis. The Chancellor is constrained on almost every side; financially thanks to the huge amounts of debt; politically partly because of the coalition, and partly because some of the things that need to be done – like recapitalising banks are deeply unpopular; on supply side reforms thanks to European laws. But more of the same is clearly not working. He lacks a vision of the economy he wishes to create. He needs to be bolder, although I doubt he will be.

There are some nightmare scenarios that can be painted for the UK and Sterling weakness is an indication that some of them are already weighing on investor's minds.

For an economy with a demand problem, Temptation is the ideal song choice.

Come on George lead us into "Temptation".

US ‘cautiously welcomes’ Japan’s request to join TPP talks

Posted: 15 Mar 2013 10:44 PM PDT

The US wants Japan to ‘demonstrate it is able to tackle longstanding barriers to U.S. goods’.

U.S. says Japan has more work to do to join trade pact talks

Before & After (2005 & 2013). These 2 photos will have you smiling.

Posted: 15 Mar 2013 10:33 PM PDT

St. Peter's Square during the announcement of Pope Benedict in 2005 and Pope Francis in 2013:

Source: Singularity Hub

Link to story

WSJ article: Investors Hedge Yen Bets

Posted: 15 Mar 2013 10:31 PM PDT

A Friday-night article from the WSJ discusses the recent stability in USD/JPY, compared to its breakneck rise in recent months. The article reckons investors now want to see action out of Japan in place of the jawboning, and are buying yen calls as a hedge.

(Article is gated, a news search may turn it up)

Some weekend politics and dirty business: Mulling on the ‘unloseable election’

Posted: 15 Mar 2013 10:30 PM PDT

There are 182 days to go until the Australian federal election. That’s half a year, or, as I like to think about it, a footy season. But, if you’re in the mood for some politics here’s an article from veteran Australian political commentator Michelle Grattan looking at some of the problems confronting current poll front-runner, opposition leader Tony Abbott. It mentions the ignominious recent downfall of two of his state-leader colleagues but doesn’t mention at all another’s crushing victory at the polls last weekend. Odd.

Grattan on Friday: fall of Liberal leaders carries warning for Abbott

Japan press: Abe announces Japan to join the Trans-Pacific Partnership free trade talks

Posted: 15 Mar 2013 10:28 PM PDT

Abe has been laying the groundwork for this for some time (there is much opposition to joining, both within his own party, and without). In order to address the problems of deflation in Japan there is urgent need, in addition to action on the monetary front, for structural economic reform within Japan.

Japan agrees to join 11-nation TPP free trade talks

Abe declares Japan will join TPP free-trade process

 

The most dangerous man in Europe

Posted: 15 Mar 2013 10:25 PM PDT

So says German newspaper Der Spiegel: Green Facism: Beppe Grillo Is the Most Dangerous Man in Europe

  • Grillo derives his energy from resentment
  • In his best moments, Grillo talks like a cult leader

I don’t think Der Spiegel likes Grillo.

Software bug sees Bitcoin lose 25% in minutes

Posted: 15 Mar 2013 07:30 PM PDT

Nothing wrong with a bit of good old fashioned volatility! (Though you don’t often see 25% drops in a few minutes in old-fashioned fuddy-duddy fiat currencies, do you?)

Anatomy of a problem – Bitcoin loses 25% in value due to a long-missed bug

March 15, 2013 ForexLive Americas wrap: Consumer sentiment crumbles

Posted: 15 Mar 2013 01:19 PM PDT

Forex headlines from the US trading session:

  • U Mich consumer sentiment falls to lowest since Nov 2011
  • BOE’s King sees case for more asset purchases
  • US CPI 2.0% y/y vs 1.9% exp
  • Empire Fed 9.24 vs 10.0 exp
  • Canada existing home sales -2.1% y/y
  • US Feb industrial production +0.7% vs +0.4% exp
  • BOE’s Dale: headwinds have started to ease

USD/JPY suffered its worst loss since February. A round of profit taking and stop loss selling was at work, knocking the pair as low as 95.08 from 96.10 at the start of US trading.

GBP/USD topped out at 1.5177 at the start of US trading and it was all downhill from there as fresh shorts entered the fray ahead of resistance at 1.5200. Selling accelerated after King mentioned more QE.

USD/CAD touched 1.0180 right at the start of the session but bounced on worries about Canadian housing and then languished around 1.0190.

The Australian dollar flirted with some important levels after breaking 1.04. The close looks to be just below the 100-day moving average at 1.0413.

Gold took a run at $1600 but fell just short and has pared back to unchanged on the day at $1591.

COT report: Yen shorts near five year extreme

Posted: 15 Mar 2013 12:46 PM PDT

Futures market speculative positioning data from the CFTC as of the close on Tuesday:

  • EUR net short 25K vs short 26K prior
  • JPY net short 93K vs short 73K prior
  • GBP net short 50K vs short 44K prior
  • AUD net long 23K vs long 7K prior
  • CAD net short 53K vs short 47K prior
  • NZD net long 19K vs long 19K prior
  • CHF net short 13K vs short 11K prior
  • US Dollar Index longs at 32K vs 26K prior

Not much in the way of movement in this week’s report. The notable changes are in AUD and JPY. The Australian dollar is back in favor after weeks of declines while aggressive speculative selling of the yen continues.

CFTC yen net position March 15, 2013

CFTC yen net position

Maybe currency intervention isn’t such a bad idea

Posted: 15 Mar 2013 12:15 PM PDT

The consensus is that currency intervention is expensive and it doesn’t work — they might want to rethink the second part.

A new paper by former senior U.S. Federal Reserve economist Joseph Gagnon says currency intervention has an impact on other economies several times larger than originally thought, as reported in the WSJ.

Gagnon's paper argues that for every dollar a country spends to lower the value of a its currency, it boosts the trade balance by between 60 cents to a dollar.

The report could pressure the IMF and non-manipulators to act more forcefully to protect the integrity of trade.

Everyone’s Irish on St. Patrick’s Day

Posted: 15 Mar 2013 12:08 PM PDT

Who am I kidding…everyone is drunk, at least here in Montreal where there is a wild, no-holds barred parade every year. Monday could be a long day.

Copper prices continues to languish

Posted: 15 Mar 2013 11:42 AM PDT

Markets easily shook off soft Chinese data released last weekend but a leading indicator of global economic strength continues to flash warning signs. Of course, I’m speaking about copper.

Note how closely the recent fall in copper matches the recent decline in the Canadian dollar (USD/CAD is inverted on this chart):

CAD vs Copper chart

One important caveat is that CAD and copper both may appear weaker because of the broad US dollar strength. Copper prices in yen, for instance, is up 5% since November.

At some point, however, copper prices will need to rebound to confirm a pickup in the global economy.

BOE’s King sees case for more asset purchases to aid UK recovery

Posted: 15 Mar 2013 11:14 AM PDT

Cable breaking below 1.51 on the comment.

It’s a Bloomberg headline but was reported earlier by Reuters, who cited ITV.

GBP/USD is back to unchanged on the day at 1.5086 after rising as high as 1.5177. It’s increasingly likely that cable’s rebound yesterday may have been a one-day event.

The 1.5200/25 zone of resistance attracted enough sellers to wipe out any short covering momentum.

BOE’s King: Not sure there is any call for a major change in the BOE remit

Posted: 15 Mar 2013 10:51 AM PDT

No one is going to ask King for his opinion if they do decide to change the mandate. He also said the most important BOE commitment is to the 2% inflation target.

Cable is at the lows of the US session but there is some demand ahead of 1.5110/00. Beyond that, it could open up toward the Asian low at 1.5069.

Since it’s Friday afternoon, let’s get things hoppin’

Posted: 15 Mar 2013 10:35 AM PDT

There is no one like James Brown to get you excited for the weekend.

The 10 economic trends the White House is watching, and 1 not to worry about

Posted: 15 Mar 2013 10:22 AM PDT

The White House Council of Economic Advisers released a huge report today on the short-term trends and long-term challenges facing the US economy.

The Wall Street Journal (no paywall) breaks down 10 of the most important.

One in particular stands out — labor force participation. Some analysts like to talk about how a artificially low participation in the jobs market masks weak US employment (you’re not unemployed if you’re not looking for a job).

The temptation when looking at this chart is to say workers quit looking for jobs after the financial crisis.

US labor force participation February 2013

That’s partly true, but the real reason lies in demographics. The US population is aging and in the 2004 Economic Report of the President noted.

"The long-term trend of rising participation appears to have come to an end. . . . The decline [in the labor force participation rate] may be greater, however, after 2008, which is the year that the first baby boomers (those born in 1946) reach the early-retirement age of 62."

Changes in the number of women in the workforce are another factor. The good news is that consumer spending is expected to remain strong despite demographic changes.

Bears on the US economy will often point to labor force participation as a sign that the recovery is an illusion — don’t believe them.

America overburdened by healthcare costs

Posted: 15 Mar 2013 09:59 AM PDT

I stumbled onto a pair of stories about health care in the US today.

You may know that a large number of US bankruptcies are due to healthcare (about 62%). What might come as a surprise is that among those 78% of them had health coverage.

“Many of them were bankrupted anyway because there were gaps in their coverage like co-payments and deductibles and uncovered services,” says Harvard Medical School’s Steffie Woolhandler. “Other people had private insurance but got so sick that they lost their job and lost their insurance.”

Another interesting post comes from the Washington Post showing that Americans spend far more per capita or on the same procedures as in Germany, France or Canada.

If we had the per-person costs of any of those countries, America's deficits would vanish. Workers would have much more money in their pockets. Our economy would grow more quickly, as our exports would be more competitive.

What many traders don’t understand is that the United States is an extraordinarily wealthy, productive and innovative country that has incredible potential to grow but is burdened by terrible spending in the wrong places and misguided policies.

I’m not sure what the right policies are but I believe in doing more of what works and trying something different in the areas that are failing.

European equity close: Flat on the week

Posted: 15 Mar 2013 09:34 AM PDT

  • UK FTSE -0.7%
  • German DAX -0.3%
  • French CAC -0.8%
  • Spain IBEX -1.1%
  • Italy MIB -0.4%

On the week, European stocks were flat or fractionally higher after large gains a week ago.

USD/JPY suffers worst loss since February

Posted: 15 Mar 2013 09:06 AM PDT

Losses in USD/JPY are accelerating since the drop below 95.40.

The sell signal for the pair was the inability to rally on the votes to approve Iwata and Kuroda. Although it was mostly expected, the news should have added some upside to USD/JPY. Instead it was flat and that warned the bulls to take profit.

There is support at 95.00 followed by 94.77. The orderboard shows some demand at 95.20 and 95.00/94.95 with stops below. EUR/JPY shows some demand at 124.30 but bigger orders are around yesterday’s low.


at 5:15 PM

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