Your forexlive.com ENewsletter

High Frequency Trading algorithms are not exotically advanced machine learning techniques, they’re shockingly simple
Japan’s PM Abe facing resistance over third arrow medical reforms from doctors’ lobby
Jackson Hole: More from BOJ’s Kuroda
Jacksone Hole: Fed’s Kocherlakota: Says the weak economy is to ‘be with us for some time’
US bulls running rampant
Tip from a billionaire: going to the bathroom wastes too much time
Jackson Hole: Emerging countries must be able to control capital flows -study
Italy politics: Berlusconi’s party says his removal from parliament is ‘unthinkable’
ECB’s Asmussen: Greece must press on with reforms despite pain
Jackson Hole: Kuroda says Bank of Japan’s policy measures are working
Jackson Hole: Federal Reserve’s Lockhart says he is ‘comfortable’ with cautious September taper
Jackson Hole – debate on the risks of withdrawing global liquidity
Jackson Hole: Bank of England Deputy Governor Bean says jobless threshold should temper yield tightening
Australia election: 2 weeks to go and polls swinging more towards the current opposition
Forward guidance: The latest fall fashion from your central bank
ForexLive Americas wrap: New home sales plunge
CAD or NZD, which commodity currency will bottom first?
NZD/CHF was the worst performing trade this week
Bank of Italy sees first signs of a slow economic recovery
Caption contest: Bernanke after finding out QE has been ineffective

High Frequency Trading algorithms are not exotically advanced machine learning techniques, they’re shockingly simple

Posted: 24 Aug 2013 08:28 PM PDT

Here’s an interesting little weekend item on High Frequency Trading algorithms, in which the writer says that the best HFT firms now trade in around 2 microseconds (“context: sound takes about 150ish microseconds to travel from the back of your throat to your mouth”) in signal to trade time, and that doing advanced calculation work on a computer takes a lot longer than that… and thus

The strategies employed by the most advanced HFT firms are shockingly simple in terms of Maths or Stats: think exponential moving averages, with a handful of if statements and safety checks…

when faced with the decision to produce a reliable, stable strategy that provides good liquidity, or simply the fastest adequate one possible, speed wins every time.

More here

Japan’s PM Abe facing resistance over third arrow medical reforms from doctors’ lobby

Posted: 24 Aug 2013 07:46 PM PDT

Not surprisingly, the most difficult of Abe’s three arrows is proving to be reform of the Japanese economy. This time its resistance to medical sector reforms from within Abe’s constituency, in this case Japan’s doctors:

The reform plans include changes to Japan’s universal health insurance system.

Says Reuters:

On one side of the argument is the 165,000-member JMA and health ministry officials, who say they want to protect the cherished principle of universality in a system that has been the envy of much of the developed world.

Lined up against them, and pushing Abe to go further, are advocates of more radical reform who accuse the small family doctors who make up the bulk of the JMA’s membership of wanting protection from competition from larger clinics and hospitals.

The JMA also worries that Abe’s push for Tokyo to join the U.S.-led Trans-Pacific Partnership (TPP) free trade pact would give impetus to such changes if Washington pushes in negotiations for market-oriented reforms to healthcare

Jackson Hole: More from BOJ’s Kuroda

Posted: 24 Aug 2013 07:38 PM PDT

Bank of Japan Governor Haruhiko Kuroda said monetary easing by a central bank does not necessarily lead to cross-border capital outflows from that country, saying:

“Almost all base money provided through monetary policy will be accumulated in the form of deposits with a central bank”
“Even if a country eases monetary conditions, this does not necessarily mean that money being provided directly ‘spills over overseas’”

There is (a little) more here at Reuters.

Kuroda’s comments are interesting in light of the falling markets and currencies in emerging markets, which has blamed on imminent winding-back of Federal reserve asset purchases

Jacksone Hole: Fed’s Kocherlakota: Says the weak economy is to ‘be with us for some time’

Posted: 24 Aug 2013 07:09 PM PDT

Minneapolis Federal Reserve Bank President Naryana Kocherlakota said:

it is “really a stretch to think” that the Fed has lowered rates too much
Given the high rates of unemployment and low levels of inflation, “I think what we’re seeing is that we have not been able to lower rates as much as we’d like to”
Says the Fed will need to maintain a highly stimulative monetary policy for some time to come

More at MNI

US bulls running rampant

Posted: 24 Aug 2013 06:59 PM PDT

4,000 people have taken part in a US version of Spain’s running of the bulls in Pamplona.

Its part of a 10-city bull-running tour
It cost $30 to take part in the run ($30 is really cheap to dodge the bulls, just ask all the stockmarket bears over the past 4 years )
The run is over a quarter mile dirt track

More here: Four thousand run from the bulls in Virginia event

Tip from a billionaire: going to the bathroom wastes too much time

Posted: 24 Aug 2013 06:53 PM PDT

Michael Bloomberg has handed out some tips on his formula for success:

You make your own luck
The harder you work, the luckier you get
Try to be the first one in in the morning and the last one to leave at night
Take the fewest vacations
Take the least time away from the desk to go to the bathroom or have lunch

More: Mayor Bloomberg: Bladder Control Helped Me Become A Billionaire

Jackson Hole: Emerging countries must be able to control capital flows -study

Posted: 24 Aug 2013 06:49 PM PDT

A paper presented at the Jackson Hole central banks symposium on August 24 2013says emerging market nations “can be adversely affected by large swings in investment, and must therefore develop tools to control credit flows or risk relinquishing any independent monetary policy”.

Quite a timely paper given the fall in emerging markets and their currencies since the imminent Fed ‘taper’ has come to broad market acceptance.

More here at Reuters

Italy politics: Berlusconi’s party says his removal from parliament is ‘unthinkable’

Posted: 24 Aug 2013 06:44 PM PDT

Angelino Alfano, secretary of Berlusconi’s People of Freedom (PDL) warned Prime Minister Enrico Letta this week that the party could bring down the government if the center-left Democratic Party (PD) voted to throw Berlusconi out
There is a vote due in September on whether to expel Berlusconi from parliament

More threats and intimidation here

ECB’s Asmussen: Greece must press on with reforms despite pain

Posted: 24 Aug 2013 06:40 PM PDT

European Central Bank Executive Board member Joerg Asmussen has told Greek newspaper To Vima that Greece can achieve a primary budget surplus this year and growth in 2014 if it sticks to economic reforms.

Asmussen was in Athens this week to meet senior government officials.

Jackson Hole: Kuroda says Bank of Japan’s policy measures are working

Posted: 24 Aug 2013 06:35 PM PDT

Bank of Japan Governor Haruhiko Kuroda, speaking during a panel discussion on unconventional monetary policy at Jackson Hole said:

Bank of Japan’s policy measures have already started to exert their intended effects

The BOJ embarked on a policy of "Quantitative and Qualitative Monetary Easing" back in early April, part of which involves buying around 7 trillion yen ($US70.9 billion) in bonds each month to expand the monetary base by 60 trillion yen to 70 trillion yen per year.

Jackson Hole: Federal Reserve’s Lockhart says he is ‘comfortable’ with cautious September taper

Posted: 24 Aug 2013 06:34 PM PDT

Atlanta Federal Reserve Bank President Dennis Lockhart, speaking on the sidelines of the annual monetary policy symposium in Jackson Hole said:

“I can get comfortable with September, providing we don’t get any really worrisome signals out of the economy between now and the 18th of September”

“The data are essentially a way of testing a basic set of assumptions. And I can get comfortable with an initial step in terms of tapering, as long as I am comfortable that we are on that basic flight path for the economy,”

There’s that data-dependency talk again.

The next FOMC meeting is September 17-18. Primary dealers expect the Fed to slow the pace of asset purchases by $15 billion in an announcement after this meeting.

Jackson Hole – debate on the risks of withdrawing global liquidity

Posted: 24 Aug 2013 06:33 PM PDT

The second day of the two-day Jackson Hole symposium was devoted to central bankers debating the threats posed by global liquidity.

Reuters have an interesting article covering some of the points made, with much focus on the flood of money into emerging markets courtesy of ultra-cheap liquidity, a flood that is now receding and triggering slides in emerging markets their currencies.

Jackson Hole: Bank of England Deputy Governor Bean says jobless threshold should temper yield tightening

Posted: 24 Aug 2013 06:32 PM PDT

Plenty of comments out of Jackson Hole this weekend:

Bank of England Deputy Governor Charlie Bean said a tightening in U.K. gilt yields should be restrained by its pledge not to consider raising interest rates before unemployment falls to 7 percent.

Also:

The knowledge that monetary policy will not be tightened until the U.K.'s fledgling recovery is secured should boost confidence

The Bank of England gave forward guidance by projecting it will keep its benchmark rate at 0.5 percent until late 2016 as it waits for the jobless rate to fall from 7.8 percent.

Bloomberg, and Reuters

Australia election: 2 weeks to go and polls swinging more towards the current opposition

Posted: 24 Aug 2013 06:31 PM PDT

Australia's opposition Liberal-National coalition has been in front for all of the campaign so far, and is widening its lead, according to a Herald-Nielsen poll published in the Sydney Morning Herald newspaper Saturday:

Support for the coalition rose to 53 percent on a two-party preferred basis (from 52 percent two weeks earlier), putting the ruling Labour party down one point to 47 percent

As I’ve said before, market perceptions are that a win for the current opposition will give a sentiment boost, which should be a positive for the economy (at least in the short-term), and that the market also wants to see a clear win for a majority government. The current Australian government is a minority government, and has run a full 3 year term in government with support from a handful of independents

Forward guidance: The latest fall fashion from your central bank

Posted: 24 Aug 2013 12:36 AM PDT

for·ward [pronounced: fawr-werd]

adverb Also, forwards.

1. toward or at a place, point, or time in advance; onward; ahead: to move forward; from this day forward; to look forward.

2. toward the front: Let’s move forward so we can hear better.

3. into view or consideration; out; forth: He brought forward several good suggestions.

4. toward the bow or front of a vessel or aircraft.

5. ahead

guid·ance [pronounced: gahyd-ns]

noun

1. the act or function of guiding; leadership; direction.

2. advice or counseling, especially that provided for students choosing a course of study or preparing for a vocation.

3. supervised care or assistance, especially therapeutic help in the treatment of minor emotional disturbances.

4. something that guides.

5. the process by which the flight of a missile or rocket may be altered in speed and direction in response to controls situated either wholly in the projectile or partly at a base.

Forward Guidance is this season's must have accessory. Adopted by central bankers all over the world, FG (let's call it by an acronym as finance is full of them), is all the rage.

And yet like so many fashions (harem pants, ponchos, juicy tracksuits, UGG boots, jeggings) in retrospect it will be dammed. History has been unkind to many must-have-it-fads, FG is likely to experience the same.

: harem pants

: The must have item of the fall

So what do I have against FG?

In my opinion:

It does not work to bring down long rates.

Its effect even on future expectations of short rates is limited.

I am sceptical in its ability to stimulate demand.

And it doesn't provide much forward guidance either.

Apart from that it may be a marvellous!

According to the Federal Reserve, forward guidance supports the economic recovery by putting "downward pressure on longer-term interest rates and thereby lower(ing) the cost of credit for households and businesses, and also help(ing) improve broader financial conditions."

Remember of course that Central Bankers only control short rates, not the longer rates that are set by the market. So forward guidance is an attempt by central bankers to influence the long end of the yield curve, of which many financial products are priced.

Effect on long rates:

At its December meeting of last year, the Fed moved from date based guidance (Fed Funds rate would stay low until at least through to mid 2015) to guidance based on economic variables (unemployment staying above 6.5% and future inflation "no more than 0.5% point above the committee's 2% long run goal"). And yet the 10 year UST rate has gone from 1.75% at the beginning of the year to 2.89% on Friday. The market is much more worried about Fed tapering and ignoring Forward Guidance on tightening.

In the UK, Mark Carney arrived at the beginning of July and by August had officially announced forward guidance based on the unemployment rate too. And yet the 10 year gilt yield – like the UST – has also increased from 2.4% on 1^st July to 2.7% on Friday. Buyers of long dated gilts are worrying that forward guidance (low interest rates for longer) will allow a higher inflation rate.

In Europe, the big moves in long term rates have been driven by another policy altogether – the OMT. At the height of the EZ crisis 10 year borrowing costs for both Italy and Spain went to around 6.5-7.5%. That's despite a 0.5% rate set by the ECB. It was Mario Draghi's "Whatever It Takes" speech that has really brought these rates down and not his latterly adopted policy of forward guidance.

Effect on short rates:

Clearly the arrival of Mark Carney has had a dramatic effect on the expectation of future base rates in the UK. Before he arrived markets were just about pricing in the first rate rise by the end of this year. His speech 4 days into office changed all that, together with his forward guidance speech in August. At one point markets were pricing in the first rate rise in 2016 as Carney proclaimed. But after the stronger recent economic data, markets are now pricing in a rate rise by the end of 2014 – much sooner than Carney's 2016. All the thousands of market players don't believe Carney's Forward Guidance either. I am not alone in my scepticism.

And in the eurozone, Mario Draghi has a term for markets ignoring his FG –"passive tightening". When rate markets react to stronger EZ economic data, Draghi gets irritated and tries to talk them out of it. And of course, Draghi's recent Forward Guidance was driven by the markets anticipating tightening sooner than he sees.

Effect to stimulate demand:

Fed: "forward guidance helps to make monetary policy more transparent and predictable to the public". This is also what Mark Carney believes but I am a little more skeptical.

Does FG stimulate companies to spend? An educated Finance Director will know far more about central bank policy and rate expectations than an ordinary citizen. But what we know from the downturn is that companies have en masse paid back debt, strengthened their financial position and refinanced debt to low interest rates. What we haven't seen is a boom in capital expenditure – quite the opposite – profit margins are high because money has not been invested. What businesses bosses really need to see is signs of a stronger economy to get them to spend their cash.

So does the General Public react to Forward Guidance? Does Carney speak to the people? Again I am sceptical. And that is because time and time again we discover that most ordinary citizens are remarkably financial illiterate. This week saw another bank mis-selling scandal in the UK. 23 million card and identity fraud protection policies were mis-sold to 7mn customers. Well there are only 63mn people (including children) in the UK. Almost a third of households bought a policy that was not needed as once a credit or debit card is reported stolen or lost, then it's the bank that takes the losses, not the individual. With such a lack of financial knowledge, can central bankers really speak to ordinary consumers on forward guidance? A Markit survey of approximately 1500 individuals suggests that Carney's words have effected people's expectations of future interest rates. The number of households anticipating a rate rise within the next two years fell to 40% compared with 53% in July. But note that most are still expecting a rate rise sooner than Carney's 2016 – again a bunch of non FG believers. And the survey does not indicate whether that change to rate expectations has actually increased the household's spending. And also a quarter of those surveyed had no idea whatsoever on rates!

And then of course, forward guidance is not forward guidance if it is data dependant which it is. It is just old fashioned interest rate policy (dependent on economic news) but dressed up in a new way (much like any new fashion). But the biggest problem I have with forward guidance is that it may prove to be the name under which inflation is tolerated and rates not raised quickly enough.

However like all fashions, it does not matter what FG does or does not do, its all about being in on the latest thing. Judging FG on that basis, it is terrifically trendy.

I was having difficulty finding a song or video this week. And so I have chosen a Monty Python sketch – Vocational Guidance Counsellor. Clearly it has a tenuous link to FG but it is very funny.

Monty Python – Vocational Guidance Counsellor:

ForexLive Americas wrap: New home sales plunge

Posted: 23 Aug 2013 12:10 PM PDT

Forex headlines for August 23, 2013:

Surprise 13.4% plunge in July US new home sales
Canada July CPI +1.3% vs 1.4% expected
Fed's Lockhart 'would be supportive' of Sept taper if data strong
Fed's Bullard sees no rush to taper
Fed's Williams expects 'significant' uptick in GDP later this year and in 2014
Bean says QE remains an option for Bank of England
European August consumer confidence -15.6 vs -16.5 expected
‘New Normal’ downgraded
Gold gains $21 to $1397
US 10 year yields down 6 bps to 2.82%
AUD was the top performer while NZD lagged

The US dollar puked up the new home sales headlines. Not only was the July number bad, the three previous months were revised lower. The talk is that rising mortgage rates could snuff out the housing recovery, which is the only real sign of strength in the US economy.

The euro was quick to take advantage, climbing in a straight line to 1.3411 from 1.3340. It’s drifted back but a close above 1.3346 would be the highest since early February.

USD/JPY dropped on the new home sales headline but a strong layer of real money bids down to 98.40 cushioned the blow. Eventually the dollar rebounded to 98.70.

USD/CAD touched a multi-week high at 1.0568 but couldn’t climb higher despite softer-than-expected Canadian CPI numbers. When USD/CAD couldn’t rise on good news, the selling started and it was compounded by the US home sales flub.

CAD or NZD, which commodity currency will bottom first?

Posted: 23 Aug 2013 11:30 AM PDT

There’s a commodity currency race to the bottom underway.

USD/CAD up 6 straight days in 2.66% rise
NZD/USD down 5 straight days in a 4.9% decline

The Canadian dollar decline has been longer but the kiwi decline is a much larger magnitude.

Looking at the charts, both fell from the 100-day moving average and are nearing support/resistance.

USDCAD daily chart. The June high was 1.0610.

NZD/USD daily chart. 0.7692 was the June/July low

If you had to pick one, it’s tough and if you want to trade NZD/CAD, your broker will love you.

A few thoughts.

Both are overdue for a rally but CAD looks a bit better to me.
A good trade may be to wait for a break of 0.7692 in NZD/USD and sell it.
This comes in a period where USD hasn’t been particularly strong so if that side of the equation gets moving, this could be just the tip of the iceberg.