Articles from August 2011

Risk is the Word at the end of the month

The current trend of trading between risk on/risk off remains in place as can be evidenced by the recent tight ranges seen in the major currency pairings.Risk is the Word at the end of the monthThis is in spite of August’s turbulence with both major financial and geo-political events hitting a thin market.

Today however, there is some decent stuff from the US to analyse, specifically the minutes from the last FOMC meeting, hard on the heels of Ben Bernanke’s speech last week at Jackson Hole and ahead of Friday’s employment numbers release.

The Dollar traded slightly stronger ahead of the FOMC minutes, but weakened following their release. Details from the minutes revealed that several members had favoured a more substantial move for adding further stimulus than the announced pledge to keep rates at current historic lows until mid 2013.

A range of tools were discussed and it was generally agreed that a further tranche of quantitative easing remained an option although a decision was made that this route was not appropriate just yet.

Today’s US Chicago PMI release could weigh on market risk appetite following a series of disappointing confidence indicators in August.

Another weak outcome this afternoon could see the Dollar reap some benefit if risk appetite fades.

We are also scheduled to get the ADP employment report today from which the market will likely try and gauge, normally with very little success, the probable outcome of the US payrolls data due out on Friday afternoon.

Sterling has been trading weaker over the past few days, admittedly on very little input, following its surge in value earlier in the month on safe haven gilt buying.

Data remains soft and given the almost inevitable weakening of Sterling on the last trading day of any month, it looks as though we are again going to see the Pound’s value depressed.

FED chief springs no surprises

We got no blockbusting policy from Jackson Hole on Friday, but the Fed chairman failed to rule out further action if the US economic outlook continues to deteriorate.FED chief springs no surprisesThe markets were probably wanting something more concrete, but Uncle Ben did deliver the one thing guaranteed to lift equity markets – hope.

He talked about fiscal policy, probably paving the way for President Obama to announce stimulus measures in a speech on Sept 5th he also sounded reasonably positive on the economic recovery, which may or may not turn out to be ill judged given we have an important non-farm payroll number coming up this Friday.

Other US data of note this week include the minutes from the last FOMC meeting on the 9th August and consumer confidence, both due this afternoon.

Given the importance of Friday’s speech it is unlikely that we get anything unexpected in the Fed minutes.

Sterling should take a bit of back seat this week, it has been stuck in trading ranges against both the Dollar and Euro in recent weeks and with a lack of any substantive data due this week we can expect that to continue.

The little data that is due this week is mostly housing related and includes mortgage approvals and the Nationwide house price survey along with net consumer credit, manufacturing and construction PMI later in the week.

The Euro has started the week on a roll, gaining against both the Dollar and Sterling even without any real data to back up the rally.

The merger between two of the struggling Greek banks seems to have lifted market sentiment, but quite how two bad banks makes one good one is beyond logic!

Wise Money still eyes Bernanke’s views

It’s all about Jackson Hole and ahead of today meeting the US Dollar index is likely to maintain its place in towards the middle end of its recent 73.47 – 75.12 range helped by weaker equity markets.Wise Money still eyes Bernanke's viewsExpectations or hopes that Fed Chairman Bernanke will announce or at least hint at a fresh round of quantitative easing have receded allowing the US Dollar to escape further pressure.

Bernanke will likely keep all options open but there are still some in the FOMC who do not want to embark on QE3.

Although the US Dollar may be saved from a further drubbing the commitment to maintain exceptionally accommodative monetary policy through Q2 2013 has contributed to a relative reduction in US bond yields and in turn is acting to restrain the US currency.

A likely revision lower to US Q2 GDP will not help the USD in this respect.

One currency in particular that is reactive to yield differentials is USD/JPY, which registers an impressively high correlation with US – Japan yield differentials.

Attempts this week by the Japanese authorities to encourage capital outflows and a downgrade of Japan’s credit ratings by Moody’s have done little to weaken the JPY.

Even the usually bearish JPY Japanese margin traders have been scaling back their long USD/JPY positions over recent weeks while speculative investors remain overly long (well above the three-month average) JPY according to IMM data. The risk of a shake out of long JPY positions is high but unless yield differentials reverse renewed JPY weakening looks unlikely in the short-term.

So far this week euro has shown impressive resilience despite weak data in the form the German August IFO business and ZEW investor confidence surveys.

However, there is a risk of euro weakness should Bernanke not hint at QE3, with the currency already trading around the bottom of its multi-day range.

Shine taken off Sterling on economic data worries

Sterling took a hit yesterday against most of its major rivals as investors look towards tomorrow’s GDP number from the UK.Shine taken off Sterling on economic data worriesThe estimate is for 0.2% growth over the last quarter, but traders are wary that with the recent weak figures from the UK economy, the number could be worse than the expectations.

The Pound has been buoyant recently and trading near 5 months highs though if the data does come out lower than the estimate, we could be set for a new downward trend for Sterling.

The US has had raft of data out recently with yesterday’s durable goods numbers coming in better than expected. They showed a 4% MoM increase in the number of new orders in the US which is a massive boost to the struggling economy.

The main focus for this week is tomorrow’s release of the US GDP followed by FED chief Ben Bernanke’s speech.

The expectation is for 1.1% growth in the most recent quarter from the GDP figure which would be yet more positive data for the States.

As we posted yesterday, Bernanke’s speech, coming from Jackson Hole Wyoming, he will be delivering key points for the US recovery which will lead onto the rest of the World.

The markets are looking for the Chairman to signal fresh steps to prop up the US economy with potentially more Quantitative Easing measures.

Bernanke’s views on Quantitative Easing’s odds

FED Chairman Ben Bernanke has hinted that further Quantitative Easing is unlikely, saying instead the Fed is committed to keeping interest rates low until at least 2013.  Bernanke's views on Quantitative Easing's odds Mr Bernanke indicated QE2 was on the way from Jackson Hole this time last year, and the markets responded better than even he could have predicted.

One of the aims of zero interest rates and QE is to force money into risk assets, and it looks like equity markets are setting up for the expectation of a further round of easing being announced. But they may be bitterly disappointed.

The key differences from last time are that the spectre of deflation, one of the key motivators for QE2, is not the threat it was a year ago and there is also dissent from 3 Fed board members further clouding the Feds ability to implement any new round of QE.

So how does the Fed’s announcement impact FX markets?

Safe haven currencies such as the Swiss franc, Aussie Dollar and the Scandinavian Krona’s look set to be very dependant on the outcome of Friday’s speech.

They have all benefitted from diversification out of Dollars and the prospect of further money printing by the US so we can expect significant moves in both directions depending on the content.

Special attention needs to be paid to the Swissie which has the SNB on the other side of the trade should QE3 go ahead.

Along with the US announcement (or not) Friday also sees UK GDP figures released. If we take the overall tone of recent UK data as a guide it is hard to be optimistic about UK growth.

There seems to be significant economic headwinds, set to get stronger as government spending continues to fall and companies hoard cash instead of hire workers.

In line with forecast is the best we can hope for. Later in the day, but before said speech, US GDP is also released along with the University of Michigan confidence survey.

Quiet money markets- for a change

A bit of “calm before the storm” has entered the markets this morning with the chaos of the last fortnight seemingly forgotten about.Quiet money markets- for a changeThe week starts with a very data light day and with no comments due from any of the financial leaders across the globe, we look set to stay within tight ranges for todays trading.

It will be an interesting weeks trading for many of the major currencies.

The Swiss National Bank has been active in the markets trying to weaken the Franc further.

Meanwhile, the US Dollar which has taken a battering over the last fortnight faces another tough week with traders still speculating about how the huge debt pile the US Government has built up will affect growth.

The rest of the week is packed full of releases that are likely to set the trend for the next month.

Tuesday brings a raft of Euro data showing how the manufacturing and services sectors are performing while home sales in the US could be yet another weak number for the housing market.

Wednesday contains data from Germany about sentiment in the strongest Eurozone country though durable goods numbers from the States are likely to dampen anything positive with a negative figure due for new orders.

Thursday includes jobs statistics from the US while we will conclude the week with Fridays GDP data from both the UK and America and FED chief Ben Bernanke will be speaking.

This will be the key indicator for growth prospects with 0.2% and 1.1% expected respectively. The markets will be looking for numbers that at the very least match expectations otherwise we could be set for more volatility.

Swiss Franc keeps gaining ground

The Swiss franc hits record highs against the US Dollar and the euro as attempts by the Swiss National Bank prove unsuccessful in slowing the currency’s rise. Swiss Franc keeps gaining groundThe decision to expand their liquidity policy did very little to ease pressure as traders looked for more aggressive action including the pegging to the Euro or US Dollar.

Following the announcement the CHF continued to strengthen which reiterated the point additional steps will be required and currently sits at 1.3118.

In what has been a reverse of the overnight session, the Greenback continues to recover lost ground with EUR/USD back on its lows and AUD/USD down to 1.0480.

Equities are falling further led by Seoul down 2.6%, Taipei down 2.0%, Sydney and Tokyo just over 1.0%.

EUR/USD touched a fresh low overnight removing the buying interest at 1.4390.

On the face of it, there appears no reason for today’s moves but then again there was nothing apparent for the overnight moves.

Elsewhere USD/SGD has surged higher today after the MAS flooded the forward market with domestic funds. Negative interest rates are really catching on amongst the strong currencies.

Today in the UK we had retail sales at 9.30am which saw weak growth for the month of July as cash strapped consumers cut back on spending.

According to the Office for National Statistics sales volumes grew inline with the 0.2% expected figure but down from last months figure of 0.8%.

The ONS statement blamed a fall in household goods, clothing and footwear as consumer’s battle against the latest CPI figures which indicated a number of 4.4% from June’s 4.2% and well above the Bank of England’s target figure of 2%.

Sterling as a result has fallen from the highs of yesterdays 1.6570 against the US Dollar and currently sits at 1.6487 and 1.1466 against the Euro.

UK interest rates rise? No chance!

We have just seen the release of the minutes from the latest MPC meeting amidst speculation that one of the two members who have been voting for a rate rise will have rejoined the group in opting for no change. UK interest rates rise? No chance!In fact, both Martin Weale and Spencer Dale moved their votes leaving the committee unanimous in keeping rates unchanged for the coming month.

Sterling dropped as a result with it now very obvious that the MPC are much more concerned and united in their views over weak recovery prospects rather than problems arising from the current high inflation numbers.

Adam Posen remained the only member of the committee arguing and voting for an increase from the current level of Quantitative Easing.

Yesterday’s summit meeting between Sarkozy and Merkel produced nothing of real substance.

There was talk about harmonizing fiscal policy across the region- an absolute must if the Euro is to have a viable long-term future, but this is not essentially what the market wanted to hear.

Traders were hoping for was a cunning plan on how the two power houses of Europe were going to stabilise the current debt situation in the Eurozone.

The sentiment in the run up was that the concept of Eurozone bonds would be furthered and in support of this, the first steps to expanding the size of the EFSF would be outlined.

Instead, the duo explicitly denied the need for a bigger EFSF or a Euro-bond and it soon dawned that there was no plan to deal with the current market pressure.

The one measure they did propose was a financial transaction tax although this will meet great resistance from European banks and looks unworkable if the measures are restricted to just Eurozone countries.

The likelihood of the ‘Tobin’ tax proposal making it through into law looks very slim.

Italian and Spanish bonds started negatively again, pushing yields up, equities fell and flows moved back into the safe haven investments like gold and Swiss Francs.

The Swiss National Bank has been in the market again today to try and alleviate demand for their currency.

The Euro itself has held up reasonably well, especially given the weak GDP data released yesterday morning.

It still looks only a matter of time before the weight of negative sentiment has an effect.

German growth disappoints wise money markets

The Euro has slipped lower in early trading after a lower than expected preliminary Q2 GDP German announcement. German growth disappoints wise money marketsThe German economy grew at 0.1% against a forecast level of 0.5% in the second quarter, which is a big miss in normal market conditions let alone the volatile markets currently prevailing.

Germany needs to be the driving force behind any Euro-zone recovery and the market will have to start to discount what happens if Germany begins to slow, given that France also reported stagnant growth last week.

The market is looking for some positive outcome from today’s meeting between German Chancellor Angela Merkel and her French counterpart Nicolas Sarkozy.

Any discussion of Eurobonds (shared debt across EMU nations) looks off the table at the moment – Merkel does not have the political clout to sell them to the German public currently, but the tide does look to be changing – so any announcements on measures to stop the crisis spreading further will be lapped up by an eager market.

But the run up in the Euro yesterday evening and overnight has probably set it up for disappointment unless Merkel and Sarkozy deliver a bombshell (Eurobonds) and that looks unlikely for reasons outlined above.

Sterling data due today includes the CPI reading, with expectations on a further rise in inflation from 4.2% to 4.3%.

The Bank of England inflation report last week seemed to set the scene for further rises so the market has been building in the data for the past week.

What is interesting is that the reaction has been muted because interest rate hikes look off the cards for the rest of the year and into the next.

Speaking of which, we will also get a glimpse into the MPC’s thinking with the release of the last MPC minutes tomorrow at 9.30 along with the key unemployment data and finally retail sales on Friday.

We should have a good picture of the UK economy at the end of the week, let’s hope it is slightly more positive than most participants currently think.

Wise money markets looking for calm

Following last week’s US credit downgrade thus creating the highest levels of volatility seen for years, the wise money markets this week will be looking to restore some form of normality and calm. Wise money markets looking for calmWe saw huge swings in the FTSE which fell below the key 5000 mark on two trading sessions.

We also saw a brief bounce following the US Fed Chairman Ben Bernanke’s statement that the US will maintain interest rates at a low level only for unfounded rumours of French sovereign rating threat pushing the FTSE lower again.

This led to European leaders forcing a ban on short selling of banking stocks in four countries in an attempt to calm markets, however the success of this has been questioned by traders and City minister Lord Myners.

He said authorities and the Treasury should focus on more high-frequency trading which places trades within micro-seconds that exaggerates market volatility.

As a result of last week’s volatility we saw the Swiss Franc and Japanese Yen strengthen significantly as investors seeking protection from rising uncertainty in the markets.

Authorities in Japan and Switzerland are now looking at options to stop further appreciation in particular against the US Dollar.

Last week saw the JPY strengthen against the USD to 76.31 which last month prompted intervention from Japanese authorities to sell off the JPY.

In Switzerland the Franc did lose some ground as the Swiss National Bank’s indicated that it could align its currency to the Euro to prevent further escalation which moved GBPCHF from a low of 1.1511 last week to currently over 1.29.

Hope that you have a good week.