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- Central bankers rule the FX world (as well as all others)
- Greece – tourists coming back, bringing a current account surplus with them
- China removes floor on lending rate – more details
- General Electric orderbook “surges” – life in the global economy yet?
- $16 billion gold deposit discovered in China
- ForexLive Americas wrap: Hope you traded this one from the beach
- CFTC: US dollar bets rise to six week high
- SEC accuses City of Miami of municipal bond fraud
- Bank of Canada hikes settlement balances because of `friction`in the system
- Best trade this week: long NZD/JPY
- What the collapse in the Brent-WTI spread could mean
- Holding my breath for peace in the Middle East
- Japanese election results will be out before markets re-open
- It AUD/USD was going to bounce, it would have happened by now
- Brent-WTI spread hits parity for first time since Oct 2010
- One thing about trading in summer markets
- Krugman sounding the alarm bells on China
- European stocks flat on the day
- Deutsche Bank says to stay long USD/JPY
- More legal troubles for Berlusconi
| Central bankers rule the FX world (as well as all others) Posted: 19 Jul 2013 11:59 PM PDT It is the central bankers who have become all powerful in this crisis. Politicians lack the ability to do much with fiscal policy, and the need to appease voters makes structural reform difficult. Thus it has been largely left to monetary policy to prop up the financial system, avoid economic chaos and hopefully eventually stimulate growth. But this has caused an over reliance on central banker's actions and words. And the FX market is just one of many that are now dominated by Central Banks. So are traditional currency valuation tools and models becoming obsolete? The old rules governing a currency's value ignored? So one of the most surprising FX facts over the recent crisis has been the relative resilience of the euro (especially given the market has adopted a short euro position). Since mid 2009, the Euro has been range bound against sterling despite poor EZ economic data, fears of a currency breakup, Greek default etc. And also its been relatively strong against the Dollar too. But why? Clearly the key here is the term relative. One of the biggest reasons for euro resilience has been the policies pursued by the Federal Reserve in the US and the Bank of England, namely Quantitative Easing. Money Printing has contributed particularly to Sterling and USD weakness / debasement. In terms of the pound relative to the euro, sterling is significantly weaker than its long term average. However, at some parts of the crisis, sterling strengthened as it was perceived as a "non euro safe haven" but what little strength there was has never lasted. Why? Because of QE – aggressively loose monetary policy weakens support for the Pound. At the beginning of this year when UK economic data was weak and a triple dip expected, Sterling fell dramatically from buying $1.62 at the beginning of January to just $1.49 by mid March. However since then, better economic data and the mid May optimism from Governor King on the UK economy helped Sterling to strengthen back to over $1.57. Carney's arrival and his dovish speech four days into the job, caused sterling to fall again back down to below $1.49 (from which it has recovered). All moves dominated by expectations of Bank of England policy. The US entered the crisis before all else and has emerged out of the crisis earlier. The economy last year grew by 2.2%, the strongest in the G7. And yet in 2012 the Dollar was the second weakest currency in the G10 after the Yen. It is no coincidence that QE "infinity" of $85bn a month started in Autumn 2012. When the US financial disaster first hit in late 2007 / 2008, the Dollar hit an all time low, and yet despite its safe haven status and a US recovery, the Dollar has since remained in a fairly weak position. It is becoming apparent that the introduction of QE by the Fed in 2008 has had a remarkable depressive long term effect on the USD. Let's take a look at one of the biggest trades of the nine months – yen devaluation. Up to the arrival of Prime Minister Abe, the main theme throughout the crisis had been Yen strength thanks to its safe haven status (irrespective of the low yield on the yen). However Abenomics has changed all that. The Yen has fallen from 78 yen per dollar to around 100 Yen to the Dollar in the last three quarters. In fact the USD/JPY level hit 99 in April- the lowest level since since 2007. This rapid weakness is mainly due to the expectation of a much more aggressive monetary policy from the BoJ (as well as global investors turning risk on). On April 4 the BoJ pledged to double its government bond holdings in just two years. This didn't weaken the Yen further, partly because an aggressive BoJ move had been anticipated but also because of Dollar weakness thanks to weak US 2Q data. The FX markets are overly dominated by what Central Bankers say and do. In some ways this is not a surprise – trillions have been spent on QE and interest rates are at record lows, seriously affecting how investors and traders act. Monetary policy is an almighty force and of course it is controlled by Central Bankers. Secondly the US, Eurozone, UK and Japan are all fighting similar wars (the after effects of an asset price bubble, a damaged financial industry and excessive debt) with similar weapons (ZIRP and QE). Therefore close examination of those in charge of these very similar policies is needed to try and differentiate between different currency blocks. But even given the dominance of Central Bankers, there is also some evidence that old fashioned currency models are still relevant. For example one of the reasons why the Euro may have been strong is that the EuroZone as a whole has a large current account surplus (albeit mainly thanks to German exports). And although the BofE is happy to ignore inflation in setting its monetary policy, maybe the recent years of high inflation has contributed to Sterling weakness. And there is plenty of evidence that differences in interest rates are still driving some currency pairs (the main economic model for currency valuation uses differences in real interest rates). So looking at the following chart, it shows (orange line) the USD/JPY exchange rate. The blue line is the 2 year yield spread between Japan and US (difference in two year borrowing costs between the two countries). Quite clearly the two were highly correlated – higher American interest rates ensured Dollar strength by attracting money into Dollars. However as the chart shows, the relationship broke down once Abenomics arrived.
The following chart is the 2 year German US yield spread (in orange) and the EUR/USD exchange rate (in blue). Again clearly interest rates differentials dominate this currency pair.
Currently Germany is borrowing around 0.25% cheaper than the US for two year money and so the orange line is below zero at -25bp (scale on left). This coincides with a EUR/USD ex rate of 1.30 (scale on right). When German rates were 1.25% higher than the US in 2011 though, the Euro was much higher, at around EUR/USD 1.50. However although there are fundamental reasons why interest rates affect currencies, these charts may just show that central bankers are dominating the bond and FX markets as much as each other! The problem is that markets are highly complex and what drives them day to day, minute by minute is not easy to determine. Correlation and causality are always problematic. That may be why so many forex traders rely on technical strategies and not fundamentals (more on technical trading strategies in a future column). The recent market shake up has been caused by the Fed's talk of potential "tapering" and not outright tightening (which is not expected for another few years). This just shows just how manipulated and distorted markets have become that they react so wildly at just the threat of slowing down of US QE. It highlights that the reversal of QE and ZIRP globally will be the greatest challenge that markets (and economies) face over the medium term. Central Banker's domination will continue for the foreseeable future.. Way back in the 80s I also had a haircut like Curt Smith, lead singer of Tears for Fears – curly on top and short on the sides. I thought it was a great idea at the time. QE clearly also appeared to also be a great idea at the time (when the financial world was in meltdown post Lehman). But just like my haircut, the passage of time can change a previously strongly held view (and no I am not posting a photo of me with my 80s haircut). If anyone has any subjects, explanations etc they wish me to write about in future columns please just ask. |
| Greece – tourists coming back, bringing a current account surplus with them Posted: 19 Jul 2013 11:58 PM PDT
More details: Tourism receipts bring account surplus |
| China removes floor on lending rate – more details Posted: 19 Jul 2013 11:57 PM PDT Ryan posted this on Friday: China removes floor on lending rate Aussie bolts after Chinese interest rate policy change Here’s more details from the South China Morning Post: Chinese banks given freedom to set lending rates And from two (non-gated) Wall Street Journal articles: Free to Lend: What China's Interest Rate Move Means
Economists React: Lending Rate Liberalization
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| General Electric orderbook “surges” – life in the global economy yet? Posted: 19 Jul 2013 11:56 PM PDT A surprise jump in the backlog of industrial products orders for GE on Friday:
More details at Reuters
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| $16 billion gold deposit discovered in China Posted: 19 Jul 2013 11:55 PM PDT Someone had his metal detector cranked up to 11:
Huge $16 billion gold deposit discovered in China |
| ForexLive Americas wrap: Hope you traded this one from the beach Posted: 19 Jul 2013 01:28 PM PDT Forex headlines for July 19, 2013:
The euro traded in a 50 pip range in North American trading from 1.3100 to 1.3150. Several attempts around 1.3150, and up to 1.3155, were rebuffed but there was a general lack of conviction in the market. USDJPY ranged from 100.20 to 100.45 with traders either heading out to enjoy the sunshine or await the results of Sunday`s Japanese Upper House elections. The perky pound continued to chop higher closes near the Asian highs at 1.5276. Again, it was a tight range with 1.5242 as the low. AUDUSD was the start early as it climbed higher on the PBOC news but talk that China might be done sapped the gains and it was a slow ride down to 0.9189 from 0.9233 when US traders were arriving. Gold was on the strong side but couldn`t mount a serious challenge of $1300 which is an important line in the same. High of $1297.50 and last at $1295. Oil was in the spotlight and touched $109 with analysts weighing in on what Brent-WTI parity might mean (answer: tough to say). Have a great weekend. |
| CFTC: US dollar bets rise to six week high Posted: 19 Jul 2013 01:04 PM PDT Futures market speculative positioning data from the CFTC Commitments of Traders report as of the close on Tuesday, July 16:
Nothing really leaps out. Dollar shorts were hammered by the squeeze last week but they hung in there or were re-established. Overall, it`s a continue slow shift in dollar longs and suggests they`re longer term positions and strong hands. That`s not something you want to bet against. |
| SEC accuses City of Miami of municipal bond fraud Posted: 19 Jul 2013 01:02 PM PDT Detroit and new Miami. Tough couple days if you`re a musical American city. |
| Bank of Canada hikes settlement balances because of `friction`in the system Posted: 19 Jul 2013 12:47 PM PDT This is a tough one to understand. The Bank of Canada is struggling to keep the overnight rate below target so it`s increasing the target for the minimum daily level of settlement balances to $250 million, from its current level of $25 million.
Banks should be lending to each other at the target rate but they`re demanding higher rates. It`s probably nothing but it could mean someone is in trouble. |
| Best trade this week: long NZD/JPY Posted: 19 Jul 2013 11:58 AM PDT NZD/JPY gained 3% this week, or 226 pips, which was the most of any pair and included gains in all five days this week. There’s two ways to look at it:
 NZDJPY daily chart I lean toward declines because AUD is slumping and the kiwi can’t stay disconnected. On the other hand, there is no better place for carry than NZD/JPY and in an environment where stocks are hitting fresh highs that’s a powerful asset. I prefer when the fundamentals and technicals align so I’m sidelined on this one until the 100-day moving average (80.23) or the 200-day (75.75) break.
What do you think will be the best trade in the week ahead? |
| What the collapse in the Brent-WTI spread could mean Posted: 19 Jul 2013 11:30 AM PDT US and UK oil benchmarks traded at parity today for the first time in three years after trading apart by as much as $27.
The spread was a transportation issue. New US shale supply, growing Canadian production and years of poor planning led to supply bottlenecks that allowed refineries to buy at discounts. The use of railways and recalibration of pipelines have partially alleviated the problems but more pipelines are needed (Keystone XL for one). What does it mean? Not much. Fast money in spread trades could add to volatility and transportation patterns could change but those decisions aren`t made overnight. Given the supply dynamics, it`s natural for Brent to be a bit higher than WTI but either way, it doesn`t send a signal about broad oil price trends. My guess is that, if anything, it`s added to the run up and WTI over the last month because global growth certainly isn`t pointing to an extended run for crude. |
| Holding my breath for peace in the Middle East Posted: 19 Jul 2013 11:15 AM PDT Bloomberg is reporting that peace talks between Israelis and Palestinians will restart. I would bet on a trifecta of the Chicago Cubs winning the World Series, the Toronto Maple Leafs winning the Stanley Cup and Blackberry shares hitting $100 before making a bet on peace in the Middle East.
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| Japanese election results will be out before markets re-open Posted: 19 Jul 2013 10:59 AM PDT Weekend elections always make Friday trading a bit more interesting. The Japanese Upper House election is on Sunday but the results will be clear before markets re-open. Eamonn has been all over the election coverage and what it means for the yen. Unless there is a shock, either the LDP failing to win a majority or winning a super-majority, the yen probably won`t react. The offshoot might be a bounce in Japanese equities because some risk was pared on jitters today. From there, it`s all about what Abe says after the win. More bold steps and bold talk will boost USDJPY. |
| It AUD/USD was going to bounce, it would have happened by now Posted: 19 Jul 2013 10:25 AM PDT The Australian dollar is poised to post its first weekly gain in 5 weeks but it’s awfully difficult to be optimistic. Where is the bounce? Reasons AUD/USD should have bounced by now:
Yet here we are with AUD/USD barely 2 cents above the 33-month low.
Technically, AUD/USD doesn’t look great either. The highs and lows have both been lower and the sideways move over the last month has relieved oversold conditions. The Aug 7 RBA decision looms and that will be the best chance for AUD/USD to bounce and the OIS market is pricing in a 63% chance of a cut. If they don’t cut, it’s still not great news for AUD so long as they keep a dovish bias. Expectations for the coming year are only about 38 basis points of easing and the risk of more easing will remain higher than less. |
| Brent-WTI spread hits parity for first time since Oct 2010 Posted: 19 Jul 2013 10:08 AM PDT Now I can safely say, without specifics, that oil is trading at $107.54. Okay, there are many other benchmarks, including Western Canada Select, which is trading at a $17.50 discount, something that constantly weighs on CAD. |
| One thing about trading in summer markets Posted: 19 Jul 2013 09:21 AM PDT In my estimation, ‘summer markets’ officially begin today and they will last about 5 weeks. There will be busy times, like the first week of August but otherwise it’s going to be the same kind of chop/drift we’re seeing today. One way to adjust is to worry less about the 20-30 pip moves. There is some extra volatility in a sleepy market so keeps the stops a bit wider and let the trades run a bit longer. |
| Krugman sounding the alarm bells on China Posted: 19 Jul 2013 08:48 AM PDT Nobody likes Paul Krugman but he makes some good points sometimes. The latest Chinese GDP data was particularly eyebrow raising because it came in right on the official target despite some terrible trade numbers. Krugman argues that China’s model has hit its Great Wall and predicts a crash.
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| European stocks flat on the day Posted: 19 Jul 2013 08:35 AM PDT
Italy led the way this week, with a whopping 4.5% gain. Other indexes climbed a respectable 1.5% compared to the S&P 500 which is up 0.5%. |
| Deutsche Bank says to stay long USD/JPY Posted: 19 Jul 2013 08:11 AM PDT Elections this weekend will refocus markets on the government’s plans to overhaul the country and boost USD/JPY, Deutsche Bank says. They target 103.74 in the coming months. Separately, Morgan Stanley warns of a risk of a US dollar decline following Bernanke but warns against shorting USD/JPY. |
| More legal troubles for Berlusconi Posted: 19 Jul 2013 08:07 AM PDT An Italian court has asked prosecutors to investigate whether Berlusconi gave false testimony in a trial of his associates who were just convicted of underage prostitution. |
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