Posts belonging to Category Forex

Roller coaster day for the pound

Early morning yesterday, Sterling slumped sharply before recovering in later trading.

Early morning yesterday, Sterling slumped sharply before recovering in later trading.

The volatility in the pound is not surprising as we move closer to the deadline set for triggering article 50. It seems the pound crashed through on sell orders on the downside especially versus the USD and JPY. The fight back came after key support levels kicked in and comments from the MPC hawk suggested that UK interest rates could move higher sooner than expected.

Article 50 takes the focus

Today, focus will once again be on parliament as the article 50 bill heads to its third and final reading in the House of Commons. Last night, the bill survived an attempted amendment to force the government to consult parliament on the deal struck with the EU before being finalised, after it was promised that a meaningful vote would occur. If passed, the bill will authorise the government to formally begin Brexit negotiations and the formal process of leaving the EU.

Attentions remains on Trump’s administration

Today is very quiet in terms of data, and attention will mainly be on any feedback from the Trump’s administration and developments in the House of Commons. It is still unclear what Trump’s fiscal plans will be and once known, it will shed more light on USD momentum and monetary policy direction. US data has also taken the wind out of the sails of a March rate hike with disappointing wage inflation on Friday.

Spotlight on Europe

Europe is also coming under some spotlight on the political scene, with the FranÁois Fillon scandal which will increase the focus on whether Marine Le Pen has gained in the polls. In addition, Greece has gained some new attention, following a bleak assessment by the IMF confirming that the country needs further debt relief and the surplus targets are unrealistic. The negative feedback from Europe has helped the EUR to shed value against the USD and GBP.

UK votes to Leave eu in BREXIT

After the UK’s vote to leave the EU following a very close sentiment, Sterling has weakened significantly- but is bouncing back from it’s lows.

UK votes to Leave eu in BREXIT

There is a factor of uncertainty within the markets which has caused a lot of major sell-offs. Further to this, GBPUSD has opened this morning at a 30 year low, representing a fall of around 10% from last night’s peak, after breaking through key resistance levels.

This volatility is emphasised by the fact that there has already been a 2% bounce back. Naturally, a heavily declining rate is being seen across other Sterling focused currency pairings.

For the rest of the day, Sterling looks to remain under a lot of pressure, as will EURUSD. The next main focus will likely be the contemplation of the aftershock and how to deal with the uncertainty that is sure to follow the referendum’s result.

Sharp reactions on the money markets

It was widely expected that a remain vote would be seen after all of the polls released and therefore, it comes as no surprise that the markets reacted sharply when the contradicting news came in this morning and last night.

Looking out to the rest of the day, it’s likely to be chaotic and busy in the world of trading. It’s not just currencies that are being affected either – we’re seeing huge risk off moves elsewhere, including within the futures and commodities markets, just to name a couple.

Further to the general impact, it would come as no surprise to see central banks tightening their financial conditions and cutting interest rates. We’re also likely to hear from the ECB soon. Politics will determine the long term cost and with David Cameron resigning this morning, there is yet another factor of uncertainty on this side of the Brexit.

Currency Wars start ahead of the G20 meeting

Currency wars have started in the build up to the G20 meeting in Russia this week with analyst’s expecting leaders to discuss a weakening of their currency to boost exports; this is being done currently by Japan where they are fighting deflation.Currency Wars start ahead of the G20 meetingHowever an initial statement has dampened such expectations as the G7 stated that ‘policies have been and will remain oriented towards meeting our respective domestic objectives’, which could be shown to underline the fact that central bank market intervention is regarded as an internal affair for now.

The ECB is refraining from applying unconventional policy measures, should the ECB continue a notably tighter monetary policy than the Fed and BoE, then the obvious implication is that EUR will continue to appreciate against the USD and GBP.

Sterling’s sharp drop in world markets will be the main discussion point in what should be a fairly important quarterly inflation report today from the Bank Of England.

Looking to the bond markets for inflation expectations you see a large jump upwards in the 10 year breakeven rate as the Pound deprecated against the euro and Dollar at the beginning of January.

We are now over 6% lower against the single currency and around 4% lower versus the US Dollar .

The Bank will probably address this with hawkish comments with the aim of trying to keep expectations in check, even if the overall stance will remain very dovish.

The coming year is further into the unknown for the Bank of England.

Central banks are managing the overall deflationary environment quite well by creating new money to counteract the deleveraging that is still proceeding across most developed nations, but we are now moving towards a point where this stimulus will need to be withdrawn, and how well this process is managed has large ramifications for inflation.

The Bank will need to begin addressing these issues in upcoming inflation reports and we may even see some mention of it this Wednesday.

Foreign exchange forex trading- Spirit Inside

Foreign exchange trading can be full of jargon.

For instance the word Forex comes from an abbreviation for foreign exchange, which itself is further abbreviated to just FX on occasions.

Originally, paper currency served as a mechanism of exchange which was convertible into “hard money”, usually Gold or Silver.

During the Second World War, industrialized nations of the world signed the Bretton Woods agreement laying the foundation for international exchange going forward.

Under Bretton Woods, nations maintained exchange rates to the US dollar and the US dollar was fixed to Gold.

In 1971, under President Nixon, the US suspended the convertibility of the dollar into Gold and this action led to a system of free floating, fiat currencies.

The value of a nation’s currency, in relation to other currencies, was whatever the free market determined it was. Banks, international business and speculators instantly recognized both the risk and opportunity this new system presented. In essence, this was the birth of the Forex market as we know it today.

With the advent of the internet and online trading, the market became accessible to the masses. Hence, leverage was introduced and became an integral part of online Forex trading.

By taking a position 100 to 500 times your deposited capital, the market could offer significant return on investment, but also significant risk. It is the use of leverage and daily volatility which have led to the Forex market exceeding a volume of 4 trillion USD per day.

Unlike most goods and services, currencies cannot be valued in themselves. We can say that 1 barrel of oil is worth X US Dollars but it is not possible to say that 1 US dollar is worth 1 US dollar.

We can however, compare currencies- for example to say that 1 USD is worth X Euros or Y Japanese Yen.

For this reason, Forex trading must be done via “currency pairs” – the ratio of 1 currency to another allows the market to function. The most actively traded currency pairs are the EUR/USD, USD/JPY, GBP/USD, USD/CHF and AUD/USD based upon these abbreviations:
USD – US Dollar     GBP – Great British Pound
EUR – EU Euro     CHF – Swiss Franc
JPY – Japanese Yen     AUD – Australian Dollar

Every time a trade is executed, it is the simultaneous buying of one currency and the selling of another. This is not as complicated as it seems.

When traveling, if you exchange Euros for dollars, you are in essence “selling” your Euros and purchasing dollars. The counterparty to the transaction, is buying your Euros for his/her dollars at the price he/she set.

Central Banks lend US Dollars to help euro bankers

Yesterday saw the world’s main central banks announce joint action to provide US Dollar liquidity, aimed at securing the funding needs of euro banks struggling to meet american funding requirements. Central Banks lend US Dollars to help euro bankers The money markets had been showing signs of stress, with several measures at their highest level since the financial crisis.

The loans will have three month maturities in contrast to the normal one week limit in central bank market operations so banks are given time in the run up to the end of the year to finish window dressing their results without worrying about funding issues.

The news gave a boost to the Euro against the Dollar, rising almost 2 cents in the course of the afternoon before falling back in the overnight Asian session.

The announcement was also good if you own bank shares, which clawed back recent losses especially if you bought the French lenders after their recent crashes.

More than £4 billion was wiped off UBS shares, however, as losses of $2 billion were uncovered stemming from trades put on by rogue trader in their London office.

The bank has not announced where the losses were made, but there is speculation that it could have stemmed from trades in the Swiss Franc which moved over 10 cents in a matter of minutes after the SNB announced it was pegging the currency to the Euro.

Have UBS not announced where the losses were made because of the potential embarrassment of a Swiss bank losing money as a direct result of the SNB intervention?

What the news has done is presented an open goal to all of the advocates of the ICB report on the ring fencing of retail banks from the “casino” investment banking side.

The timing was impeccable, not only was the fraud uncovered 3 years to the day of the Lehman bankruptcy, but it came in the same week as the report was published.

US Dollar v euro exchange rates- which is the weakest link?

Currency exchange money markets continue to dither between the US debt ceiling issue and eurozone peripheral debt worries.US Dollar v euro exchange rates- which is the weakest link?In spite of a lack of agreement to raise the debt ceiling, with House Republicans failing to back a bid by House speak Boehner, the Greenback in fact strengthened towards the end of last week as eurozone peripheral issues came back under scrutiny.

The strength of the Dollar to the lack of progress in raising the debt ceiling is remarkable and exposes the single European currency even uglier than the US Dollar, in many investors’ eyes.

The key drivers for the week ahead will depend on the scale of any boost in the debt ceiling and additional budget deficit reduction methods.

If a deal is reached ahead of the August 2 deadline it is not clear that the Dollar and risk currencies will enjoy a rally unless the debt ceiling deal is a solid and major one.

Given the limited market follow through, following the recent deal to provide Greece with a second bailout, the EUR remains wholly unable to capitalise on the USD’s woes.

A reminder that all is not well was the fact that Moody’s ratings agency placed Spain’s credit ratings on review for possible downgrade while reports that the Spanish parliament will be dissolved on September 26 for early elections on November 20 will hardly help attitude for the EUR.

Compounding the Spanish news doubts that the EFSF bailout fund will be ready to lend to Greece by the next tranche deadline in mid-September and whether Spain and Italy will participate, have grown.

The potential danger for the USD this week is not only that there is disappointing result to the debt ceiling discussions, but also that there is a weak outcome to the US July jobs report.

An increase of around 100k in payrolls, with the unemployment rate remaining at 9.2%, will fixate market attention on weak growth and if this increases expectations for a fresh round of Fed asset purchases the USD could be left rather vulnerable.

So far today we have had UK CPI manufacturing which came in at a disappointing 49.1 down from revised 51.4 in June and some way below median forecast of 51.0.

Sterling now currently sits at 1.6417 from a high of 1.6475 and 1.1390 against the Euro from a high of 1.1450….bad start to the week for the Pound.

Contagion- is the word for the day

As much as European bankers try to stop it, contagion appears to be spreading through the Eurozone with Italy’s high debt burden and lack of political will leading to more emergency meetings.  Contagion- is the word for the dayReports that their debt stands at double Greece, Ireland and Portugal combined led to equity markets slumping and bond spreads jumping.

Europe signed a treaty to establish a permanent €700bn bailout fund, but this is only available from 2013.

In the meantime, a second bailout for Greece is still being agreed with the hope this will shield Italy.

Last night, Moody’s downgraded Ireland into the junk territory saying “it is likely that, like Greece and Portugal, Dublin will need another bailout before it can return to the markets.

Meanwhile, the UK received some unexpected news with a fall in inflation; the first negative number for June since 2003.

The figures showed CPI inflation rising by 4.2% against expectations of 4.5%.

This gave a mixed view for the UK economy as on the positive side, it shows the huge rise in inflation potentially starting to tail off and drop towards the target level.

Unfortunately, the main reason for things becoming cheaper is retailers having to slash prices to entice the public to spend what little cash they have.

Overall, Sterling was pretty steady after these figures and moves were mostly as a by product of massive swings in Eurodollar.

The volatility has continued today as the uncertainty surrounding many of the worlds markets has left traders and investors with massively diverging opinions.

It seems to be “watch this space” at the moment while we wait for more news out of Europe.

Portugal’s turn for a credit downgrade rocks eurozone markets

The credit rating agency Moody’s has downgraded Portugal’s long term government bond rating to junk- this has heightened fears that only eight weeks after their first bailout Portugal may need further help in meeting its debt obligations.Portugal's turn for a credit downgrade rocks eurozone marketsThis has rattled the euro which was recovering nicely against the US Dollar following the recent Greek fears- it also emphasises that the rot does not stop with Greece.

The Euro has lost over a cent against the US Dollar and has lost against all but two of 16 major currency peers.

The hard line taken by Moody’s in downgrading Portuguese debt by 4 notches sends a message to the markets that the ECB and the EU still have significant work to do and that their methods may not align with the credit rating agencies- a concern for the markets and the euro.

The ECB is expected to raise interest rates tomorrow which will have helped support the Euro even in the light of other issues- but quite how the PIGS will react is an open question.

The ECB is expected to raise rates by 25 basis points to 1.5% even in the light of slowing economic growth- a policy that is currently the opposite of the UK and the US.

However at the moment the euro is on the back foot and any more feedback from ratings agencies could pile on the pressure.

Over to the UK and the Pound has managed to claw back some of its losses against the euro- this is  mainly due to euro weakness as explained above.

Against the US Dollar the Pound is down- this is due to risk aversion which is US Dollar positive and again due to the Moody’s downgrade of Portuguese debt.

Data from the UK showed that UK shop price inflation increased sharply and a survey by KPMG-REC identified a slowdown in fulltime jobs growth.

However the Pound has been largely unaffected by this data- tomorrow we have the Bank Of England interest rate decision and it is expected that no change will be on the cards.

Asian economies are the focus for money market’s attention

Asian currencies are stronger following of a spike in risk appetite after the agreement on Greece’s austerity measures.Asian economies are the focus for money market's attentionThe rise in Asian money markets are revealed in the ADXY (an index of Asian currencies) index which is approaching a test of its 2nd May high around 119.26 around its highest level since August 1997.

Technical levels have turned more positive, with the ADXY breaking above its key moving average levels and the 14-day relative strength index also turning higher.

The Asian rallies have been led by the South Korean Won (KRW), the Asian currency that has had the strongest link with risk over the past few weeks.

Given that risk aversion has dropped sharply since mid June it is no surprise that this currency has strengthened the most.

USD/KRW is trading around its lowest level since August 2008.

Strong equity capital outflows had kept the KRW on the back foot over much of June but there has been a bounce back in flows recently.

However, USD/KRW is likely to find it tough to break below 1060 over the short-term, especially given likely resistance from the local authorities.

The Thai Bhat (THB), the worst performing Asian currency in June, has rapidly reversed some of its losses.

The THB looks set to consolidate its gains following a decisive election result which saw the opposition Puea Thai Party gain control of parliament.

The biggest relief for markets was the fact that the outcome was relatively clear cut, suggesting a potentially a smooth handover of power.

Nonetheless, the currency has already jumped and after having dropped to around 30.40 from a high of around 31.01 USD/THB is likely to trade off gyrations in risk appetite.

The fact that the Greenback has lost some ground in the wake of firmer risk appetite and better news in Greece has also allowed Asian currencies to strengthen.

In other words, although USD weakness has helped to facilitate Asian currency strength, the recent strengthening in Asian FX is more likely to have been due to a rebound in capital inflows to the region.

Risk is the Word

The Greenback lost some ground as risk appetite increased but markets remain lively as attitude switches between ‘risk on’ and ‘risk off’.Risk is the WordAs US Q1 GDP was left unchanged as jobless claims astonishingly increased together with continuing Greece worries suggests that a risk off mood may filter into markets despite positive US earnings.

Although the USD has not particularly benefited from any rise in risk aversion lately, worries about the next IMF tranche being withheld from Greece will likely play more positively for the USD.

Nonetheless, lurking in the background and helping to keep the USD restrained is the Fed’s ongoing asset purchases as QE2 remains in place until the end of June.

Moreover US data disappointment points to risks that the Fed will only slowly embark on its exit strategy.

Additionally any agreement towards extending the US debt ceiling appears to be far off, and threatens to go down to the wire all the way to August 2.

US debt markets and the USD appear to be downplaying this issue at present but it remains a clear threat to US markets.

Continuing to limit any upside in the EUR is the fact that officials and markets continue to gyrate on whether Greece will or will not restructure its debt.

Apparent divisions between the view of some officials and the ECB are adding to the confusion whilst fresh worries about the IMF withholding funding for Greece will likely keep EUR/USD capped.