The US dollar has taken a bit of a breather today after making gains against most major currencies over the past couple of days. Yesterday’s big story was the downgrade of Greece’s debt by rating agency Fitch from A- to BBB+, citing the country’s banking system as the riskiest in Western Europe and dashing hopes that the European Central Bank would raise interest rates in the near future. Moody’s was also in the news, calling into question the AAA ratings of the US and UK, while downgrades of Dubai’s government-sponsored issuers served to keep investors on the defensive. The euro was punished as a result, continuing its recent slide by falling 3% in the past three sessions versus the USD. Soft German industrial production also added to the woes of the euro as it becomes increasingly clear going into year end that all is in fact not well in Europe. Meanwhile, the sterling was off nearly 1.5% on weak manufacturing data and continuing uncertainty due to the large exposure of UK banks to Dubai. All this negative data transferred over to North American equity markets with the Dow trading off more than 1% on the day in yet another bout of risk aversion (sorry to sound like a broken record). The Big Dollar behaved as we expected and made gains against most majors save the yen as investors dumped risky assets for a short-term reprieve in USD and JPY denominated assets. The Big Dollar is trading slightly softer against the majors this morning while stocks in Europe are modestly lower and the Dow looks set to open in negative territory as well.
After selling off sharply following last Friday’s better-than-expected Non-Farm Payrolls number, the Japanese yen continues to make gains this week and is once again trading in the upper 80s against the USD, much to the chagrin of export-dependent Japan. The Bank of Japan and the Ministry of Finance have been very vocal in their displeasure with the strength of the yen and have made it clear that they will intervene if necessary should the yen continue to get stronger. Eighty-five yen to the dollar seems to be the level that makes them nervous and gets them talking, and seems to be providing good support at the moment. Any move below this level is causing serious pain to Japan, and will most likely result in direct intervention by the Bank of Japan to weaken the yen. The huge debt problems in the US are certainly not helping here, as the overwhelmingly bearish sentiment towards the USD should help to keep the yen at its recent strong levels for the time being.
The Bank of Canada kept rates on hold at 0.25% at their meeting Tuesday, reaffirming their commitment to keeping rates at exceptionally low levels until June of 2010. Carney and company maintained their outlook on the economy for 2010, expecting that growth will pick up in the first quarter of 2010 and that inflation will hit their target of 2% in the second half of 2011. They did, however, point out that the strength of the Canadian dollar has been and continues to be a drag on the domestic economy, as it is serving to offset most, if not all, of the positive developments that have occurred since the summer. The Loonie traded off modestly after the announcement and continued to drift lower throughout the day, seemingly more affected by the USD strength attributed to the selloff in stocks than the Bank’s statement itself. The rhetoric from the BoC does underscore the fact that FX rates are taking on more importance to the bank than they have in the past and that further strength in the Loonie may be met with verbal intervention, as we saw at their last meeting. The CAD is modestly higher today, and with little in the way of data out today, currencies will once again look to stocks for direction. Crude inventories are released at 10:30 am Eastern and could provide some fireworks for the CAD.
By Brendan McGrath, Senior FX Trader
]]>Equity markets from across the globe sank lower overnight as fresh concerns surrounding Dubai World’s debt led the charge in dampening sentiment. Sliding as much as 6% at one point, Dubai’s DFM General Index was the catalyst in dragging down indices, most notably from emerging markets. While in the midst of its worst losing steak in close to five weeks, the MCSCI Emerging Markets Index added to its woes and gave back an extra -0.6% throughout London trading. Since the later half of November when the government requested a “standstill” on Dubai World’s mammoth debt, Dubai equities have been on a slippery slope south, losing about one quarter of their value in the past few weeks.
While speaking to the Economic Club of Washington yesterday afternoon, Fed Chairman Ben Bernanke’s overly dovish tone all but squashed any realistic hopes of a potential near-term rate increase. By stating that “significant headwinds” remain on the forefront throughout the U.S. economy, rhetoric as such can be deciphered as a strong verbal indicator that rates will remain low for an extended period of time. Though Bernanke’s address was certainly noteworthy, the reaction of the markets as the words were being digested was also an important occurrence. Response to the speech implies that the USD carry trade remains present; in addition, an inverse correlation between equities (risk) and the Greenback is still hanging on by a thread. Last Friday’s exceptionally strong employment data and subsequent dollar rally was the first sign of a decoupling from recent trading themes, a potential indicator that the ever-popular “risk on, risk off” trade has run its course. The next round of data releases over the short-term will be absolutely critical for the fate of the Greenback as better economic figures should no doubt influence the Fed in altering its dovish stance and bring about the prospect of a rate increase.
While the Greenback has picked up modest ground against the majors (excluding JPY), no other currency has taken a nosedive quite like the GBP. Dropping over 200 pips from early this morning, cable is being pummeled from all angles as numerous factors have been dragging on the crown currency. Overnight, Moody’s released a statement that brought the United Kingdom’s (and the U.S.’s as well) AAA credit rating into question. Obviously weighing on sentiment, the Moody’s report said that the U.K. is “resilient” to a ratings downgrade, as opposed to “resistant” like well capitalized nations such as Canada and Germany. According to Moody’s, countries in the “resilient” category have considerably deteriorating public finances and “may therefore test the AAA boundaries”. Coupled with the less-than-peachy Moody’s report, U.K. production data released this morning has not helped the cause of the fledgling currency. October manufacturing came in much weaker than expected at flat for the month, certainly adding to fears that the sector could be on the brink of stalling out. Also on the data plate and below par, the BRC reported that annual growth in retail sales figures dwindled in November, indicating that early Christmas shopping has been on the disappointing end of things. As weak economic data makes the rounds, coupled with an overly dovish outlook from the U.K. central bank, look from the pound sterling to remain an underperformer versus a basket of widely traded currencies.
By Jamie Heighway, Market Analyst
]]>The USD is better bid across the board this morning, still receiving a boost from Friday’s better-than-expected Non-Farm Payrolls figure, which showed the rate of U.S. job destruction to be reaching a cyclical low – very good news for an economy built on the strength of consumer spending. Only the Japanese yen, which is benefitting from a general unwind of carry trade activity by way of position trimming rather than outright risk avoidance, is outperforming the Big Dollar on the day, with most other currencies trading between 0.5% and 1.0% lower to start the week. Global equities have been mixed as traders mull the possible exit strategies of the world’s major central banks from this period of historically suppressed interest rates and accommodative monetary policy. Though one data point does not make a trend, the sharp decline in job losses has market participants preparing for an upswing in the U.S. employment market – an upswing that is likely to be met by higher interest rates in the second half of 2010 if not slightly before. The move higher in longer-term rates is forcing many market participants to take a sober second look at the level of risk and leverage currently at work in their portfolios. This market-wide revaluation of risk sentiment is taking the dollar higher as traders trim their short positions and lighten up on carry trades where they’ve sold the Greenback or borrowed heavily in dollars in favour of purchasing risk assets of all varieties. These may be in the form of minor or emerging market currencies more leveraged for global growth, commodities such as gold and oil, or equities from all geographies. Those economies that have benefitted from speculative interest in all three arenas, most notably that of Brazil, are likely to see the biggest retracement in overall risk appetite should this two-day “event” become more of a trend.
The North American data calendar gets off to a sluggish start to begin the week, with only a speech by Federal Reserve Chairman Ben Bernanke before the Economic Club of Washington and Canadian Building Permits for the month of October to provide markets with direction on the day. The Loonie has already received a significant boost with an eye-popping increase in Building Permits of 18.0% vs. the market’s consensus estimate of 1.1% for the month, providing a significantly robust leading indicator of future economic activity north of the border. USDCAD has retraced almost a cent lower after testing the 1.0650 area on general USD strength earlier this morning.
Big Ben’s speech today will be watched with keen interest from market participants to see if the Fed Chairman changes his tune with respect to the previously positioned pace for the removal of monetary accommodation or future rate increases. As we’ve said, however, one data point does not make a series, and though the outlook for the employment market may be improving somewhat in the U.S., Bernanke isn’t likely to become outwardly hawkish overnight.
Perhaps one of the most interesting developments taking shape after Friday’s North American jobs reports is the notion that the market may be moving away from its strict adherence to taking direction from general market risk sentiment. For the better part of 18 months now, traders have simply oscillated back and forth between outright risk acceptance and the accompanying purchase of risk assets with leverage on the one hand and the shedding of risk and flight to the safety provided by the dollar (or lower uses of leverage) and U.S. Treasuries on the other. As we noted on Friday, the market’s favourable USD response to the positive data surprise was one of very few instances in recent memory where strong American data led to an increase in buying interest and market support for the Greenback. The fact that Friday’s sentiment is still alive and well Monday morning is significant in this regard, leading many traders who have ridden this principle to outsized market profits to pare back positions and their dependence on a broader market theme that has provided direction to markets like few other trends in recent market memory. For those of you who are saying, as I just have twice today, “One data point does not make a trend,” and are of the opinion that it is still too early to say that overall risk sentiment is any less informative from the standpoint of providing market direction, I will respond by saying that it is only a matter of time before markets begin to normalize and this paradigm shift does in fact take place. I won’t go so far to say that this has occurred completely in the past 96 hours, but I will say that Friday’s NFP report was a significant event in terms of taking us back to more normalized trading – an event that could be looked back on in the future as the defining moment where market sentiment began to shift away from such stark and clear contrasts. For those that embraced the risk trade, where risk was either fully on or fully off, the past 18 months have been a glorious time where markets were easy to determine in terms of overall direction despite the interday “event risk.” For those who never truly understood the paradigm shift that we experienced, or simply chose to ignore the direction it provided, more profitable days are likely ahead where traditional economic textbooks will suddenly become relevant once again.
By Mark Frey, Regional Director for Corporate Canada
]]>News that Bank of America intends to repay $45 billion in borrowed government funds caused equity markets worldwide to climb, and prodded investors back into the search for yield. The VIX index, which is often used to measure investor nervousness, fell by three percent over the session, indicating an increase in risk appetite and increased confidence in the economic recovery. Markets have largely shrugged off last week’s concerns about Dubai. In keeping with recent patterns, the US dollar and the yen fell as investors sold them to buy higher-yielding currencies.
The Federal Reserve released the Beige Book report, summarizing current economic conditions in the United States. According to the report, the economy is improving “modestly,” and weakness remains in bank lending and in steadily-deteriorating commercial real estate markets.
The euro rose against the dollar in advance of today’s meeting of the European Central Bank. After holding rates at 1%, the Bank is widely expected to announce reductions in emergency stimulus measures, indicating a return to economic strength and stability and an end in sight for monetary easing efforts. The Japanese yen fell as the improved mood percolated through the markets, reducing its appeal as a safe haven. While the message communicated by finance authorities is unclear, the government is clearly pressuring the central bank to intervene, and Prime Minister Yukio Hatoyama said that the strong yen could not be “left as it is.” Traders have substantially increased their bets that the Japanese authorities will intervene in currency markets to slow its appreciation, and domestic equity markets rallied overnight in expectation of a reprieve for exporters.
Front month crude oil futures slid 2.3% after an inventory report highlighted a further expansion in petroleum stockpiles, while overall demand remains 6.5% below last year’s levels. The Canadian dollar fell from a peak near 1.0430, and remains range bound at the time of writing. Both ends of the trading range have been repeatedly tested, and yesterday’s failure to push through 1.0400 is a further illustration of trader’s hesitation to place large bets on CAD strength. Resistance levels at 1.0430 and 1.0380 represent strong barriers to CAD rallies.
Trading flows are dropping as the end of the year approaches, but the market should remain volatile as traders digest a slew of competing economic assessments and the global risk trade remains in place. Tomorrow’s US Non-Farms payroll report is expected to peg the unemployment rate at 10.2, and carries the potential to move markets.
The price of gold has risen stratospherically over the last year, prompting a flood of headlines and a deluge of requests for our views on the market. The Canadian dollar tends to follow movements in the gold price relatively closely, and many investors use the shiny metal as a barometer of economic conditions. The natural humility of foreign exchange traders forbids us from attempting to forecast future gold prices, but we can certainly shed some light on the dynamics that have transformed the gold markets over the last year and are likely to remain in play for some time yet.
Largely due to elevated price levels, mined gold production increased during 2009 by at least six percent, and “recycled” (or second-hand) gold supply available to the market rose as well. On the demand side of the equation, total demand for physical gold has dropped by 30% (including investment and industrial purchases). Central banks have helped, with India and Sri Lanka purchasing just over 12% of this year’s production, but the IMF is looking to unload twice that much. Chinese demand increased almost 15%, but jewelry markets in the United States, the Middle East and India have experienced 30% declines, more than offsetting this. Clearly, supply and demand fundamentals fail to explain gold’s rise.
On a broad trade-weighted basis, the US dollar has declined almost 20% since late 2008. Because of the dollar’s role as a price numerator, gold’s value is naturally negatively correlated – it should rise to the same degree that the Greenback falls, all else being equal. USD depreciation is therefore sufficient to explain a fraction of the increase, but no more than that.
Investment flows are clearly dominating the gold market. By allowing private investors to enter this hitherto illiquid and esoteric market with ease, Exchange Traded Funds (ETFs) and their ilk have changed the dynamics of the market considerably. In a departure from historical patterns, gold prices have risen at the same time as equity markets have rallied and bond yields have dropped dramatically. Aside from the fact that this removes support for the use of gold as a diversification tool, investors are buying gold assets for a variety of reasons. Broadly, these investors can be split into two groups – those who are looking to preserve capital in the face of uncertain financial conditions, and those who are speculating on continued upward momentum in the gold price.
Interestingly, recent market dynamics suggest that both groups are consistently pushing the price up. When financial conditions seem to take a turn for the worse, gold’s role as a safe haven means that prices rise. When sentiment improves, speculators add to bets on further increases. This massive influx of capital has overwhelmed many skeptics, making plenty of speculators rich – on paper at least.
Both groups appear to be wagering that gold represents a hedge against inflationary risk and a proxy for USD weakness. Looking at the historical record, the price moves relatively independently over the long term, and does not generate increasing yields in high inflation environments. Gold is also not permanently correlated with the USD or any other currency - it is neither a hedge against USD weakness, nor a play on USD strength.
The gold market has long been one of the most deeply psychological and unpredictable markets in existence. Investor motivations can change very quickly. Unless someone has found the Philosopher’s Stone, the alchemy which transmuted a dull metal which was considered overpriced at $500 only a year ago into the lustrous gold we see today is difficult to fathom. The gold price and its relationship with the US dollar are vulnerable to rapid, significant corrections. Caveat emptor.
By Karl Schamotta, Market Strategist
]]>Currencies were steady during overnight trading, holding onto gains from yesterday’s “risk on” play. A general sense that the Dubai World debt repayment crisis was overblown, moderately positive equities in Asia, and a run on gold all have majors in a holding pattern against a weak USD. The Hang Seng and Nikkei both eked out gains overnight, at +0.8% and +0.38% respectively. With the addition of the overnight run on gold, there was enough to hold the USD down as most major currencies came into resistance around the extremes of recently established ranges.
Not to be confused with the actual Non Farm Employment Change number out on Friday, the ADP (the HR solutions giant whose moniker is on most people’s paycheques) version of the same was out this morning, and came in worse than projected at -169K versus an expected -149K. While not the true number, this figure still gives us a peak into what can be expected on Friday, as, over the last couple of years, the ADP number has proven itself a fairly accurate predictor. At the time of release, the USD is up slightly, though markets have mostly yawned this data off, and currencies seem content to stay where they are. The market sentiment this morning suggests that, while not as good as expected, weak employment data isn’t all that surprising, and is still better than last month’s reading of -195K—so at least the trend is in line with expectations.
Extending its prolific upwards trend, gold passed easily through the $1,200 per ounce figure during Asian trading overnight, topping out at $1,210.59 on the back of a weak American dollar and greater market uncertainty. This marked the second day in a row that the lustrous metal forged new records, a far cry from lows in April of this year, when gold was trading under $900.00 per ounce. While the velocity of the most recent leg of this rally isn’t sustainable (gold appreciated over $150.00 in the month of November), many traders are still gold bulls, even at these levels.
With the road to recovery shakier than ever, and most central bankers hesitant to rubber stamp victory too soon, conservative investment instruments that once seemed rock solid are not as reliable as they once were. And the Fed in the US, moreover, has made it very clear that there will be no rate hike in the near future. Granted, US bonds have become something of a favourite short-term instrument of late, but they don’t exactly pay huge premiums. Furthermore, like it or not, the state of the American economy is precarious. While stock exchanges are performing well, unemployment and inflation concerns still loom.
The other major hub for safe haven money is Tokyo, and the Bank of Japan has begun discussing outright intervention to halt the rise in the yen, which is hovering at 14-year highs. The skyrocketing yen has had disastrous effects on the Japanese economy, which is primarily export driven. The strong yen has made Japanese products relatively more expensive in a time when consumers’ pocketbooks are already strapped. So, pumping funds into a currency that may be nearing its peak to buy up already obscenely low returning investments makes poor financial sense. Gold has long been considered a safe haven in which one can park investment funds, and in these uncertain times, when market sentiment runs the entire spectrum of emotions from, “The end is upon us!” to, “Things are looking up; what were we worried about?” in the course of any given week (see Dubai World debt repayment), gold indeed shines brightly.
Out this afternoon are Retail Sales in Australia, for which expectations are +0.4% versus last month’s -0.2%. Considering the Royal Bank of Australia increased interest rates for a third straight time this week, a strong Retail Sales number would help to validate the aggressive stance taken by the central bank. Some analysts have already begun looking to February, when the next rate announcement will occur, and are calling for yet another hike. The AUD has certainly been a strong performer in the past few months, and continued rate hikes will be a major contributor to further gains given that countries like the US and Japan are unlikely to hike rates anytime soon, and interest rate differentials make an AUDUSD or AUDJPY carry trade play attractive once again.
Have a great day!
By David Starkey, FX Trader
]]>Asian equity markets shook off early weakness and soared over 2% on the back of an emergency meeting held by the Bank of Japan overnight. Japanese markets responded well to the news that saw the BOJ unveil a plan to pump ten trillion Japanese yen ($115 billion) into a struggling economy that has felt the effect of the JPY flying to an unprecedented 14-year high versus the U.S. dollar. The meeting was held as a “call-to-action” due to the fact that the Japanese government has been under the gun of late as political and market pressures have forced their hand to combat lower prices and a surging Japanese currency. While the ten trillion yen liquidity injection is a start, the market as a whole has seen this most recent action as a rather halfhearted move in an economy that is so exposed to deflationary pressures. That said, expect the Bank of Japan to take further action to complement today’s emergency loan package. Additional measures that could be put into play may come in the form of quantitative easing or even direct currency intervention by the Japanese central bank. Look for this issue to be the thème du jour this week as the Japanese government is scheduled to meet with the BOJ tomorrow to further discuss how possible intervention could stimulate the lacklustre Japanese economy.
Taking direction from a positive close throughout the Asian session, the subsequent London gathering also saw markets trade with a rather upbeat tone. The Dow Stoxx 600 Index climbed to its best one day gain in over a week, adding a shade over 2% as stocks rallied off the back of fresh reports that helped ease concerns of a possible default from Dubai World. While initial reports on November 25th stated that Dubai was looking to restructure as much as $60 billion dollars worth of debt, the most recent figure that has been thrown around is actually $26 billion. Coupled with reports that now see the alleged debt restructuring figure cut in half, Dubai officials have been on the wires this morning to reassure investors that the remainder of their liabilities are on “stable financial footing.” This most recent update has been integral in offsetting a portion of the panic that set in just before last week’s Thanksgiving holiday, thus breathing new life into the risk trade that has been so popular of late. As concerns ease off the back of a potential overreaction, safe haven outlets like the U.S. dollar have taken it on the chin as traders flock into higher-yielding asset classes. All the major currencies (minus the JPY) have been trading with a bid tone versus the Greenback this morning, with GBP and CAD taking full advantage of the wounded American currency.
Given the fact that the risk party has been back in favour this morning, gold has been a major benefactor in a move away from safe assets. Currently trading $14 higher to sit at $1,196 per ounce, the precious metal is making a charge and will almost certainly break another psychological level north of $1200/oz. Adding to the positive outlook for gold, Barrick Gold Corporation has lifted all their hedges that protect against the potential decline of the surging commodity. The world’s largest gold producer is now able to take full advantage of the unparalleled increase of the precious metal, a sign that more good things could be in store. And Shakespeare’s pronouncement that “All that glitters is not gold” may indeed need to be updated to coincide with modern times, when all that glitters IS gold in today’s markets.
By Jamie Heighway, Market Analyst
]]>The story around the requested debt payment restructuring of Dubai World, the state sponsored holding company at the root of the UAE’s financial crisis, has made for very interesting market watching over the past few days. Since the story broke on Thursday of last week, the market has been of more than a few minds. After an initial knee jerk reaction where risk evaporated from the market and the Big Dollar rallied, the market settled down as fears of further contagion to other city states in the UAE and broader region began to dissipate. Markets still sold off, but retraced from their lows, safe in the knowledge that Dubai was by far and away the most heavily levered entity within the region – a city-state whose real estate fuelled boom was powered by the use of dizzying degrees of leverage. Thursday’s illiquid trading conditions due to the U.S. Thanksgiving holiday only contributed to the market’s seemingly confused state, as the price action seemed to be exaggerated to both the downside as well as the retracement, or so we thought. Risky assets took a haircut the world over, with commodities, equities and currencies all heading lower while flight to safety plays like the Yen, Greenback and its Treasuries rallied. Limiting the losses however was the fact that Abu Dhabi, the oil rich neighboring emirate and fellow member of the UAE , pledged to inject liquidity into the troubled firms.
Friday’s reduced liquidity in the North American session saw U.S. markets catch up to everyone else and while traders were no longer exhibiting widespread panic over contagion to other states, they then became concerned about the financial institutions which held the loans, primarily within the region but also across Western Europe as well. Speculators postulated as to which banks held related exposures as well as how much, acting as a drag on broader markets again despite the fact that some participants thought the whole story was much ado about nothing and a good opportunity to get long risk at cheaper levels.
That takes us to today. Asian markets were buoyed significantly by the fact that the UAE Central Bank has committed to “stand behind” both the local financial institutions that hold Dubai World’s now distressed debt as well as those foreign institutions that showed faith in the region’s economy that now somewhat resembles that of Iceland, if only as another illustration that the effects of leverage can work both ways. The creation of a special facility tied to the current accounts of the banks which access it has now been constructed to provide liquidity at a cost of 50 basis points over the current 3-month local benchmark rate. Finally, it appears as though there may be a reasonable resolution to this mini-crisis, at least in terms of its affect on broader market risk appetite, though there will be many months and perhaps even years of drama surrounding the actual debt repayment schedule of the state sponsored firms involved. The USD, which benefitted from the broader market’s flight to safety, is now trading at lower levels than when the story broke. Equity markets have regained their footing and assets of all classes, save corporate debt within the region, seem to be normalizing. That said, it is amazing how skittish markets remain with stories such as this taking on added importance given the world’s realization at just how interconnected financial markets are. If we’ve learned anything over the past year and a half, it’s that a ripple in Dubai just may morph into a tsunami in New York or London and its best to grab the life vest just in case.
Today’s U.S. data calendar is relatively light with only the release of the Chicago Purchasing Manager’s Index, which exhibited a more robust view of the region’s manufacturing activity than expected with a reading of 56.1 vs. the market’s consensus call of 53.4. In Canada, the revised Q3 GDP figures came in right on expectations at 0.4% against a previous reading of -0.1 in Q2, confirming that Canada has at the very least returned to positive economic growth, albeit just so. Weighing slightly on the loonie are the fact that the Raw Materials and Industrial Product Price indexes missed by fairly wide margins with readings at 2.5% and -0.3% respectively against expectations of 3.1% and 0.4%. Despite the data however, investors seem to be beginning to dip their toes back into the water this morning, indicating that the USD could remain somewhat on the defensive while the loonie probes into the 1.05 region.
By Mark Frey, Regional Directpr for Corporate Canada
]]>Asian stock markets traded lower overnight despite a strong showing from the previous Wall Street session that saw the Dow post a solid 1.3% gain. After coming back from a holiday on Monday (Labour Thanksgiving Day), Japan’s Nikkei Average sank a shade over 1%, caused largely by the increasing levels of the Japanese yen. With USDJPY currently trading toward levels that haven’t been seen since the summer of ’95, a direct weight has been placed on exporters, forcing obvious strain throughout the Japanese economy. Adding to Japan’s overnight woes, JAL (Japan Airlines Corp.) took an almost 10% stumble on the session as traders shed shares on fears that bankruptcy could be on the horizon for the airline. JAL has lost over half of its market capitalization since the beginning of the year.
Following on the back of lacklustre Asian equity performance, European markets kicked-off their session in red figures as modest risk aversion made its way back onto the forefront. Adding fuel to the fire was a warning issued by the S&P that nearly all of the world’s big banks remain in a vulnerable capital position. Each and every bank in Japan, the United States, Germany, Spain, and Italy lacks adequate funds to cover exposure on common items including trading and investment loss. Falling below the 8% safety level under the S&P’s risk-adjusted capital ratio, these banks risk additional downgrades if capital levels are not shored up within the next 18 months. According to reports, the three most susceptible banking institutions are Mizuho Financial, Citigroup, and Sumitomo Mitsui. It should come as no surprise that all Chinese (who own the world’s largest) and Canadian banks were absent from the S&P’s list of 45 ailing global banks.
While European equities traded south early in the session, better-than-expected economic data from Germany allowed stocks to pare previous losses. The German IFO survey, a gauge that essentially takes the temperature of domestic business confidence, climbed to its highest levels since August 2008. This month’s IFO index rose to 93.9 (92.5 expected, 92 prior), suggesting that economic growth had gathered speed in the third quarter throughout Europe’s largest economy. The breakdown of the survey saw both the current assessment and expected portion improve, a telltale sign that the economic recovery is on proper course. Off the back of the upbeat data release, EURUSD was able to trade with a high correlation to equities, reversing its modest misfortunes seen earlier versus the Greenback. Even with risk appetite being the dominant theme of late, EURUSD has been experiencing a tough time breaking out of its current range-bound activity seen throughout the past two weeks. While plenty of American economic data is slated for release over the next two trading days, the markets have a touch of idleness as U.S. traders seem content to sit on sidelines and focus their efforts on Thursday’s Thanksgiving instead of their typical capital markets.
On today’s American economic data plate, the Fed is due to discharge their minutes from the FOMC meeting held earlier in the month. Typically released on Wednesday, this month’s minutes have been pushed up and slated for release this afternoon due to American Thanksgiving held on Thursday. While the transcripts could always contain a surprise, the bulk of the market will be looking for rationalization surrounding the Fed’s surprisingly dovish tone heard throughout the November 3rd and 4th FOMC meeting. The rationale heard in this afternoon’s minutes could certainly dictate the short-term price action of the Greenback in today’s North American session.
Have a great day.
By Jamie Heighway, Market Analyst
]]>The Monetary Policy Committee (MPC) within the Bank of England confirmed voting 3 ways on their recent QE announcement. The additional funding injected into the UK economy had support from seven of the nine MPC members who voted for the £25bln extension. One vote pushed for an additional £40bln and the remaining vote for no change at all. With the additional funding now committed the BoE will see the total planned spending under the policy rise to £200bn. The members however, all came to an agreement in keeping the UK’s interest rates at a record low of 0.5%.
Whilst policy makers have increased their forecasts for economic growth and inflation this month, BoE Governor, Mervyn King stated last week that he will keep an “open mind” about the possibility of expanding QE further down the line.
Within the UK we saw a range of positive and negative fundamental data throughout last week. Consumer Price Index (CPI) was confirmed at 1.5%, a surprise to the market exceeding expectation of 1.4%, this was the first increase over the last eight months.
Then at the end of last week we saw a negative release from public sector net borrowing which showed Britain sinking ever deeper into the red, with figures hitting the highest level in October on record. The latest figure reinforces the need for the government to take swift action to curb the rising deficit with both main political parties vowing to cut spending.
Looking ahead this week we have Nationwide House Price Index on Wednesday, forecasted at last months levels and also we have revised GDP for the US on Tuesday. The numbers are likely to dominate in the UK with markets anticipating some upward revision to the provisional estimate of a contraction of 0.4%. Also, the markets will be anticipating the talk from Mervyn King about the Inflation report tomorrow at 15:30pm. However, any revisions are unlikely to be sufficiently great to change the view that the UK is lagging the US and the Eurozone in terms of the economic cycle.
The Euro struggled to gain momentum and stability against the USD and continued to dip back and forth from the $1.50 level. The sentiment was undermined by a spike in risk aversion from the selling off on the equity markets. It has since regained some ground but concerns that a rebound in the global economy could yet fizzle out helped keep it off the $1.50 level. Investors rather looked to safe haven assets like the USD and the yen.
The European Central Bank (ECB) will scale back its liquidity measures for fear of fuelling inflation.
ECB President Jean-Claude Trichet said some fiscal stimulus measures were no longer needed to the same extent. Trichet said any measures that pose a threat to the achievement of price stability must be undone promptly and unequivocally. The Eurozone emerged from recession during the third quarter. Its annual inflation rate is currently 0.5%. This week in the Eurozone sees the release of a series of key sentiment and activity survey data for November. The week kicks off with the flash PMI’s, which are expected to continue their upward trend.
Further improvement is also anticipated in terms of the EC sentiment survey. A number of national surveys, including the closely watched German Ifo index, should also support hopes for recovery. Also on the agenda in the Eurozone this week, is the M3 money supply report for October, which is likely to show a further drop in the rate of lending to the private sector, as well as detailed German GDP for Q3 and preliminary CPI data for November. Meanwhile, today Jean Claude Trichet is scheduled to speak today on the Eurozone economy.
At the beginning of last week we saw Federal Reserve Chairman Ben Bernanke, on a rare occasion comment on the U.S. dollar’s value. He acknowledged the currency’s slump was raising some prices, but said other factors restraining inflation were winning the day. While showing he was not indifferent to the dollar’s slide, Bernanke said tight credit and a weak job market would weigh on the economy’s recovery and he repeated the Fed’s pledge to keep interest rates exceptionally low for “an extended period.” “We are attentive to implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability,” he told the Economic Club of New York. The Fed chairman said the central bank’s commitment to its dual objectives, along with the strength of the U.S. economy would help ensure that the dollar was strong and a source of global financial stability. The dollar initially rose on his comments, but eventually fell back later in the day hitting a 15-month low against a basket of six major currencies. Gold prices hit record highs and oil prices settled up more than 3.0 percent as the dollar weakened.
Charles Evans, president of the Federal Reserve Bank of Chicago commented on the US unemployment and stated that the figure is likely to peak at about 10.5% and may not start to come down until the summer of 2010. He added “hopefully by the summer we’ll see that the unemployment rate has peaked and begun to decline” – falling to about 9.5% by the end of the year. However, he did not think there was much risk of a double-dip recession and was optimistic of the recovery gaining traction.
For this week the release of the last FOMC minutes for November is likely to dominate in the US, alongside the latest data in terms of consumer confidence and personal income and spending. Meanwhile, the second estimate of Q3 GDP is expected to show a downward revision to growth, as disappointing trade figures are taken into account. The downgrade however, is not expected to be significant. Although remaining on the back foot versus other majors, last week saw the dollar make up some ground as year-end factors start to impact in setting the tone. Risk appetite remains the dominate force and any signs of renewed confidence on stock markets and put the greenback under renewed pressure. Thursday’s Thanksgiving holiday is also likely to impact in terms of activity levels.
By Tom Stafford, FX Dealer
]]>The Big Dollar’s fleeting rally in the latter half of the previous week has come to a crashing halt today, reversed by a buoyant market appetite for risky assets that has seen markets move higher across the board. The dollar index is down more than a percent from Friday’s high to trade to the low 75.0 range. Meanwhile, the commodity fuelled Aussie, Kiwi, Nokky and Loonie have rallied in the range of one percent on the back of much higher commodity prices, most notably gold which has hit another all-time record high this morning of $1,167.50. The Loonie has also received a boost from Canadian retail sales figures, which printed a September gain of 1.0% against expectations of a more modest 0.6% advance. Not to be left out of the fun, the euro and beleaguered pound sterling are also trading with a bid tone to start the week, each pushing higher by about 0.75%.
Equity markets are also trading with a bid tone to start the week with the Hang Seng rallying 1.41% as much of Asia added more than a percent overnight. The major European bourses are also trading well into the close with gains ranging from 1.0% to 1.5% while North American equity futures are pointing to a firm opening here as well, ensuring that the big dollar remains under pressure as global investors flock to riskier assets over the safety and security of the dollar and U.S. Treasuries.
Market bulls received a show of support from a pair of Fed officials this morning who are in favour of not only maintaining the record low Fed Funds rate but the central bank’s quantitative easing program as well, which is flooding the market with liquidity and effectively suppressing or devaluing the Greenback. The Chicago Fed’s President Evans stated this morning that he was in favour of keeping the Bank’s target interest rate stable at the current record low levels until “late 2010, perhaps later in terms of 2011.” Also this morning, St. Louis Fed President Bullard commented that he would be in support of maintaining the Bank’s mortgage repurchase program as a precautionary measure beyond the previously stated Q1 2010 deadline. Both policies are seen as key cogs in the wheel of the nascent economic recovery and both policies are ensuring that the Big Dollar remains fundamentally weak as long as they are in force.
Though there is plenty of data on tap this week, including U.S. existing home sales later this morning, which are forecasted at 5.71 million units, liquidity will be exiting the building early Wednesday morning ahead of the U.S. Thanksgiving holiday.
Gold, which has been running at a weekly inverse correlation with the dollar index at –0.89, is making a concerted move higher today on rumours of an option strike set to expire at $1,200 this morning. Large option strikes tend to act like a magnet for the day’s price action in any asset as the time to expiry nears, ensuring that we should see a bid tone to the precious metal well into mid morning. The goldbugs are loving the continued run higher, and while gold has failed to keep pace with other metals amid the recent surge in market risk appetite, the market is seeing no shortage of bulls even at today’s record high prices. Though it is of limited productive use, gold is accepted universally as a store of value and unit of accounting in very much the same manner as the USD, which is why it is often viewed as a proxy trade for the dollar or the next best reserve alternative. That said, the value in gold is very much the same as the paper currency in our view – it has value only because others perceive it to have value, not because it really serves any meaningful purpose. You can’t eat gold. You can’t burn it as a fuel or manufacture much of anything other than gaudy jewellery out of it. A colleague pointed out last week that if the world ever really goes to hell in a hand basket via a truly global crisis (and not just a financial one), gold’s traditional role as a safe haven place to park your cash in times of economic turmoil may be the first big market idea to break down. Until then however, stay out of the way of the steaming locomotive that is barrelling down the tracks with a one-way ticket to $2,000.
By Mark Frey, Regional Director for Corporate Canada
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