Thursday, 29 March 2012

Daily Forex Brief London: Thursday 29th March 2012


Notwithstanding the general mood of optimism surrounding US recovery prospects, there is one recent development that needs to be watched closely. If the US economy is to reach a point whereby it becomes self-sustaining, then a critical ingredient will be decent growth in business investment. Since late summer, the pace of growth in private capital spending has stalled, as proxied by non-defence ex-aircraft capital goods orders. That said, the actual value of capital goods orders is currently consistent with that which prevailed in the first half of 2008 before the GFC. Part of the explanation for the slower growth in capex lies in the maturation of the inventory cycle. In addition, some investment spending was clearly brought forward ahead of January's halving of an investment tax credit. More encouragingly, a survey of US executives in the manufacturing and services sectors (conducted recently by KPMG) generated record highs in terms of optimism regarding revenues, profits and new business. US service sector companies are overwhelmingly bullish – 96% of US executives in this sector expect hiring to remain the same or increase this year. Attitudes to capital spending are also very buoyant in both sectors. Should the outcome of this survey actually be replicated out there in the real economy, then the prospects for the US economy look (at the very least) quite sound, with the potential to surprise on the upside.

Also in today's Daily Forex Brief:
  • Yet more euro short-covering
  • The pressure on UK households
  • A bumpy time in China

Wednesday, 28 March 2012

Daily Forex Brief London: Wednesday 28th March 2012


Once again it is the latest decline in the Aussie dollar that is attracting most interest in the forex market this morning. After reaching a high of 1.0560 yesterday and looking relatively comfortable, the selling pressure since has been relentless, and in late Asian trading the AUD fell to a low of 1.0420. Not even a mildly encouraging RBA report on financial stability down under provided any assistance. Also worth highlighting is the Aussie's continued losses against other major currencies – GBP/AUD has climbed to 1.53 from a mid-February multi-decade low of 1.4556, and EUR/AUD is close to 1.28 (the mid-February low was 1.2133). Asian equities were softer overnight, with the Shanghai Composite again leading the way, down another 2%. The sluggish relative performance of both the Australian currency and the Chinese stockmarket are not unrelated – investors and traders share a suspicion that China is experiencing something rather more turbulent than a soft landing. For the month-to-date, apart from the BRL, the Aussie is the worst performer of the major currencies. Interestingly, it is the pound that tops the performance standings – these are rare days indeed!

Also in today's Daily Forex Brief:
  • Oil prices now the biggest growth headwind
  • Dark days ahead for the Dutch
  • The wobbly won

Tuesday, 27 March 2012

Daily Forex Brief London: Tuesday 27th March 2012


Yesterday's remarks by Fed Chairman Bernanke have put paid to the recent hypothesis that the Fed might be reversing its commitment to an extended period of ultra-loose monetary policy any time soon. His suggestion that wages growth remains subdued because of the weak labour market scuppered speculation that the Fed might need to start raising rates as soon as 2014. Although Bernanke acknowledged the better news on both the labour and housing market fronts, he reaffirmed that the Fed would stay cautious. The content and tone of his remarks is completely understandable, notwithstanding the recent suggestion from two regional Fed Presidents that policy officials in the US might need to revise the setting of monetary policy before too long. At their last meeting on March 13th, policy-makers at the Fed slightly raised their forecasts for growth this year, although they observed that unemployment remained elevated and that there were still 'significant downside risks' to growth. Last week, the Fed Chairman told Congress that higher oil prices represented an additional headwind for growth. New York Fed President Dudley recently pointed out that roughly half of the improvement in the unemployment rate over the past six months was due to declining labour force-participation. Dudley claimed that a rising proportion of Americans have left the labour force because they have become discouraged after a lengthy search for work. It remains to be seen whether this latest shift in expectations is premature

Also in today's Daily Forex Brief:
  • Bernanke's dovishness gives the dollar the boot
  • Tough times in India
  • Contrasting Germany

Saturday, 24 March 2012

Daily Forex Brief London: Friday 23rd March 2012


The US currency is only 0.5% below the opening level of the year, looking at the DXY dollar index and has been on a rising trend for most of the week. Whilst there are concerns with the turn in peripheral bond markets and the softer tone to equities this week, the FX markets have been in a 'risk-off' mood for most of the month to date, with the Brazilian real 5% softer and the Aussie nearly 3% lower. There's a debate to be had as to what extent this is down to the better US data and there has been more from Fed officials overnight suggesting that rates are likely to be raised before the end of 2014 – despite the previous pledge by the rate-setting committee. But equally key have been the perceived stretched valuations of some of the higher-yielding currencies, with Brazil being the most vocal and active in its fight against a stronger real. This week's moves suggest bond and equity markets are only just coming round to the FX markets' way of thinking.

Also in today's Daily Forex Brief:
  • Tough times for the Aussie
  • Ireland slippage
  • Some perspective on the US jobs market

Thursday, 22 March 2012

Daily Forex Brief London: Thursday 22nd March 2012


Throughout this week China has been a talking point for markets, acting as a cooling breeze on risk trades. Initially, it was reports from BHP of the prospect of softening iron ore demand, but it remains in focus thanks to the softening of the latest PMI data overnight, showing the manufacturing series down to 48.1, from 49.6. A China slowdown has been the dog that has not barked for some years now and China played a pivotal role in supporting the global economy through the 2008-09 slow-down. But this time the need for a rebalancing is widely acknowledged, by the Chinese leaders themselves. The key question is whether this can be achieved in an orderly manner. It's not until the readings on Q1 output are available that the market will take a more pronounced view on this. For now, FX is taking a more cautious approach, with the Aussie in particular proving vulnerable this week to the prospect of weaker demand from China.
  • The UK's fiscal slippage
  • The decline of the yen
  • Aussie under pressure once again

Wednesday, 21 March 2012

Daily Forex Brief London: Wednesday 21st March 2012


Even for those beyond UK shores, today's budget should be of interest because austerity is the only game in town for many European countries and the UK is further down that path than most, at least in terms of implementation. There used to be a time when UK budgets were a closely guarded secret, but that's long gone. As such, even though the chancellor cannot afford any net fiscal give-aways, we know that some subtle shifts in the tax burden will be made. The Chancellor will be able to announce that borrowing for the current fiscal year, which ends this month, will be broadly in line with the forecast made a year ago, which contrasts with the fiscal slippage being seen in several other European countries. But the UK remains on a fiscal knife-edge, with the economy expected to grow by less than 1% this year. Sterling has been performing relatively well of late, in part helped by the UK's relatively comfortable fiscal performance but also helped by the changing dynamics of FX markets, which are shifting the focus away from carry and risk. From the sovereign risk, growth and policy viewpoint, sterling is perceived to be the better of the bunch, at least within Europe.


  • The Saudis step up
  • More Chinese growth concerns
  • Return to UK inflation disappointment

Tuesday, 20 March 2012

Daily Forex Brief London: Tuesday 20th March 2012


The recovery in the Aussie seen over the past few sessions was brought to a halt overnight, AUD/USD stalling above the 1.06 level. The minutes of the latest RBA meeting were one factor in eliciting a more cautious approach - the door was left open to further easing should the global environment deteriorate. Also in the background is the slower pace of growth expected in China, which is expected to impact the domestic economy, but the Aussie has remained surprisingly resilient to such fears. There can be no doubt however that the dynamics of FX markets have changed over the past few weeks and this has broken some of the established dynamics (such as between the Aussie and global stocks), so it's more the change in global risk dynamics (and appetite for higher yielders) that has softened the Aussie, rather than domestic factors exclusively.

Also in today's Daily Forex Brief:
  • FX and bonds
  • Sterling's big week
  • Booming German house price

Monday, 19 March 2012

Daily Forex Brief London: Monday 19th March 2012


Friday was a remarkably dim day for the dollar, and yet apart from 'flows' it was no easy task to pinpoint an exact trigger for it. During the early afternoon there were some large sell orders for the greenback, especially against the euro – the single currency almost touched 1.32 at one point, after declining to 1.3050 earlier. Sterling did even better, with cable climbing from under 1.57 to above 1.5850. The dollar index, which had seemed rather comfortable above 80 over recent days, suddenly and rather inexplicably found itself below that level. Interestingly, bond yields were under continued assault, with 10yr bund yields up above 2.0% for the first time in a few weeks and the 10yr gilt yield climbing to 2.43% - just two weeks ago, it was trading below 2.0%. US treasury yields also rose, not helped by news that one-year inflation expectations in the latest University of Michigan survey had jumped to 4% from 3.3% in the latest month. Stocks remained well-bid while Brent crude rose above USD 124.

  • Keep a close eye on Spain
  • Fiscal compact resistance
  • Brazilian fragility

Friday, 16 March 2012

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Daily Forex Brief London: Friday 16th March 2012

No hurry to worry

For once, markets are approaching the end of the week in a relative state of calm. Oil prices have eased around 4% from the highs seen earlier in the month, global equities have more than recovered from the modest correction and the sell-off in higher yielding currencies (Brazil and Australia, among others) has stabilised, at least for the time being. The other notable event was the further fall in the VIX index to levels not seen since mid-2007. In other words, investors are putting a much lower premium on uncertainty. Now, this can be seen as both a good thing and a bad thing, given that it was the under and mis-pricing of risk that was partly a factor in the financial crisis in the first place. But for now, investors appear content to at least breathe a sigh of relief and not to worry about the latest twist and turn in Greece. Enjoy it, as it won't last forever.

  • China's growing pains
  • Rate race
  • Another bubble bursting – this time down under
 

Thursday, 15 March 2012

Daily Forex Brief London: Wednesday 15th March 2012


The US Federal Reserve pulled off a difficult balancing act last night, sounding both more upbeat on the economy, but also keeping open the option of further easing measures and maintaining the commitment to keep rates low until the end of 2014. The expectation of growth was altered from "modest" to "moderate", a seemingly small adjustment but a sign of the Fed's cautious optimism that the recent run of good data is more than likely to be sustained. It also noted the easing of strains in financial markets, whilst acknowledging the "notable" decline in the unemployment rate which remains "elevated" in its view. The interesting thing is that, even with reduced chances of further QE, markets are increasingly shifting their focus onto economy, so Asian stock were able to follow through on the strong gains seen yesterday in European and US markets. But FX remains more circumspect. It's interesting to note the declining correlation between AUD/JPY and stocks, from 0.90 to just above 0.70 now (rolling 3mth vs. S&P500). It's a sign that FX is disconnecting from the wider risk-on/risk-off ebb and flow in other markets.

Also in today's Daily Forex Brief:
  • China further eases lending standards
  • Yen weakness not down to BoJ
  • Green shoots in the UK

Wednesday, 14 March 2012

Daily Forex Brief London: Wednesday 14th March 2012


The US Federal Reserve pulled off a difficult balancing act last night, sounding both more upbeat on the economy, but also keeping open the option of further easing measures and maintaining the commitment to keep rates low until the end of 2014. The expectation of growth was altered from "modest" to "moderate", a seemingly small adjustment but a sign of the Fed's cautious optimism that the recent run of good data is more than likely to be sustained. It also noted the easing of strains in financial markets, whilst acknowledging the "notable" decline in the unemployment rate which remains "elevated" in its view. The interesting thing is that, even with reduced chances of further QE, markets are increasingly shifting their focus onto economy, so Asian stock were able to follow through on the strong gains seen yesterday in European and US markets. But FX remains more circumspect. It's interesting to note the declining correlation between AUD/JPY and stocks, from 0.90 to just above 0.70 now (rolling 3mth vs. S&P500). It's a sign that FX is disconnecting from the wider risk-on/risk-off ebb and flow in other markets


Also in today's Daily Forex Brief:
  • China further eases lending standards
  • Yen weakness not down to BoJ
  • Green shoots in the UK

Friday, 9 March 2012

Daily Forex Brief London: Friday 9th March 2012

A great result for Greece
Greece announced the details of the largest sovereign debt restructuring in history this morning, with private sector bond-holders finally recognising that the deal on the table was probably a much better one than they were likely to get by holding out. According to a statement from the Greek government, the participation rate of investors in the debt swap was extremely high at 95.7%, no doubt encouraged by the threat of collective action clauses being imposed. Some EUR 152bln of Greek-law bonds were tendered, together with EUR 20bn of foreign-law bonds. Athens ought to be very pleased with this outcome. The aim of the restructuring exercise was to reduce the EUR 206bln of Greek debt held by the private sector by 53.5%, in order to put Greece onto a more sustainable debt footing. Importantly, high participation is a key condition for the EU to approve the EUR 130bln bailout. ISDA is set to meet later today to discuss this 'potential credit event'. Although the take-up has been well above expectations, the single currency has actually softened slightly, with some traders taking profits on long positions accumulated over the last couple of days. Apart from the way that the euro responds to this Greek debt-restructuring, observing how the bond markets of Europe's other fiscal miscreants perform over coming days will also be instructive. Despite some real concerns in recent weeks over the extent of private sector participation, in the end this outcome surpassed even the most optimistic expectations.


Also in today's Daily Forex Brief:

  • Yen on the back foot once more
  • Brazil backs more sober global outlook
  • SNB faces a tougher year ahead.

Thursday, 8 March 2012

Daily Forex Brief London: Thursday 8th March 2012


Underlying unease

Ahead of today's ECB and BoE meetings, and the impending Greek PSI announcement, both investors and traders displayed an understandable reluctance to commit to risk yesterday, although overnight nerves steadied just a little. For example, the single currency is back near 1.32, after lingering threateningly near 1.31 yesterday afternoon. The recovery is partly on the back of positive noises regarding participation in the Greek debt-swap, with the minimum participatory level (below which would mean a disorderly default) apparently set to be reached. Despite the partial overnight recovery, equity markets are on edge too and commodity prices are on the defensive. The gold price for instance has really struggled of late, falling USD 100 since late last month. A sharp decline in both German industrial orders and Spanish industrial production contributed to the underlying tension. Unsurprisingly, high-beta currencies in Asia have been tentative while the yuan has been softening as well.

Also in today's Daily Forex Brief:
  • Beyond the Greek PSI
  • RBA refuses to countenance Aussie FX intervention
  • Reasons to question the ECB

Tuesday, 6 March 2012

Daily Forex Brief London: Tuesday 6th March 2012


It's the Aussie and Kiwi that were hurting overnight, the Kiwi taken to a five-week low vs. the USD. Whilst there were domestic factors that were evident in both moves, the wider tone is one of more caution so far this month. There's a certain dynamic at play, in that there is a concern that the large amount of cash that European banks are currently sitting on could shift the euro into becoming a carry currency. But the more important issue is that where the cash might go. There are concerns with all the high yielders that have done well in recent months, such as Brazil's desire to weaken its currency and the simple fact that many are viewing the dollar bloc as looking rich, especially if we are entering a period of slower growth in China. Furthermore, the impetus to invest in eurozone debt is less than was the case in December, given the rally in yields seen over the past two months. For now, the cash seems happy to sit at the ECB, but we've got to watch the numbers given this situation is unlikely to last.

  • The ECB numbers
  • Russia's slow road to ruin
  • China's subtle shift

Friday, 2 March 2012

Daily Forex Brief London: Friday 2nd March 2012


The deadline and hurdles for Greece are passing at a pace. Yesterday it was the decision that CDS would not be activated on Greek bonds, although this does not mean that they won't be in the future (for lengthy technical reasons). The other factor to note is that, even thought the EU has delayed the approval of the full EUR 130bln of the second aid package, there were positive responses to the degree of progress made by Greece to date in fulfilling the 38 requirements needed before full approval will be given. Don't expect any major headlines from the remainder of the EU summit today, with just a set-piece signing of the 'fiscal compact' on the main agenda. The other small slice of good news was an agreement to further speed up payments into the new rescue fund (European Stability Mechanism) which starts in the middle of the year. The single currency was feeling heavy during yesterday's session though, seemingly still pondering the implications of the ECB cash injection from earlier in the we.

  • The recovery of gold
  • The liquidity risks in Europe
  • What makes Portugal different

Thursday, 1 March 2012

Daily Forex Brief London: Thursday 1st March 2012


Yesterday's session was something of a roller-coaster for three reasons. Firstly, it was the last trading day of the month, which always elicits rebalancing and liquidity-induced flows. Secondly, the market had to digest the implications of the ECB's 2nd injection of 3yr funds, which is not easy when you don't know exactly where they have gone and what the participating institutions plan to do with them. Thirdly, there was Fed Chairman Bernanke's testimony, which reportedly disappointed markets because he did not lead us into Q3, but was he ever going to? Gold was one of the big losers of the day - down 5% on the day - together with Portuguese bonds, with investors worried about the progress of the country towards achieving the objects of their austerity program. There was talk of the ECB checking prices, although not necessarily buying bonds. For today, the focus is with the meeting of EU leaders. There's no point in setting ourselves up for disappointment by expecting anything major from it. The main focus for the markets is whether leaders are poised to increase the fire-power of the rescue fund(s), but Germany has played down any imminent announcement on this. That said, Germany is looking increasingly isolated in its opposition, principally beyond EU borders.

  • Lessons from the German labour market
  • Double the money

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