Reason  

Posted by: globalmoneynews     

 
G10 Currencies

EUR-USD: It continues to be the case that US economic data hardly seems to move EUR-USD at present. The ISM index for the important service sector had hardly any effect at all yesterday despite the fact that it rose much stronger than expected. Obviously attention is already focussing on tomorrow's US labour market report. But Greece above all remains the driver for the currency pair.

And things are moving here: Even though the proposed measures of the Greek government have yet to be implemented, Prime Minister George Papandreou's administration has made it clear that it is willing to make savings by deciding on further tax rises and spending cuts.

This is positive news for the EUR for two reasons: First of all it increases the likelihood that the Greek government will be able to tackle the budget issues itself. And secondly even those market participants who do not believe that this will be the case will have to admit that at least the possibility of Greece receiving aid has increased considerably. The fall of Greek CDS demonstrates that markets appreciate Greece's efforts to make savings. These are below 300 this morning, i.e. 100 bp below the level seen last Friday. Recently FX market reaction to CDS levels has always lagged slightly so that EUR-USD has further appreciation potential.

We expect to see a notable recovery of EUR-USD towards 1.40 in the weeks to come. What is required is a proper catalyst to allow the considerable EUR shorts to have an effect, leading to a correction. Last weeks positioning data demonstrates that the rise in EUR-USD towards 1.37 was not sufficient to give those market participants cold feet who are betting on a further fall in EUR-USD. There are however numerous scenarios that might affect this. In addition to concrete aid agreements (Chancellor Merkel is meeting Papandreou on Friday) the successful issue of a Greek bond is another possible driver. Due to the difficult market situation the Greek government had postponed this issue. If – having announced the new savings measures – the government will be able to obtain capital under reasonable terms this is likely to cause a correction in EUR-USD.

JPY: Bank of Japan board member Tadao Noda is obviously no longer willing to play the government's scape goat. In an interview last night he made it clear that it is by no means solely up to the central bank to ensure that the long term yields in Japan, which are decisive when it comes to the government servicing its debt, are kept on a low level long term. We have pointed out repeatedly that the BoJ will be unable to raise key rate for the foreseeable future without this having an impact on the financing of the Japanese national debt. Noda made it clear now that this was no more than a sufficient condition for low yields at the long end. Without fiscal policy discipline, which in his view entailed a time frame for the reduction of national debt as well as its speedy implementation, it was far from certain that yields would not rise.

While the government is trying to increase pressure on the BoJ and last week even demanded the direct financing of state spending by the central bank, the central bank is not willing to increase its bonds purchases (currently USD 20bn per month). It has made clear that the purchases are intended solely to increase liquidity. Obviously this concept is currently credible for the markets as the risk premium for Japanese bonds has so far not risen. The JPY has also remains strong so far. It still acts as a safe haven when uncertainty on the markets rises. The case of Greece has however demonstrated that unstable national finances can easily be punished on the FX markets. While fundamental conditions mean that we are likely to see a strong depreciation of JPY in the course of the year (we forecast a rise in USD-JPY to 105 by year end) we consider the potential for a rise in USD-JPY to be limited short term. The BoJ has any number of possibilities to prevent a further appreciation of JPY. It does not need currency reserves nor would it have to sterilise possible interventions against its own currency. The central bank will however have to ensure that it stays its course and does not allow itself to be influenced by the government.

GBP: The Bank of England will leave key rates as well as the scope of the bonds purchasing scheme unchanged at its MPC meeting today. Even though BoE governor Mervyn King said last month that it was far too early to end the purchasing scheme as the economy was still very fragile. On the other hand the GBP weakness seen over the past few days is unlikely to have escaped the BoE, in particular as it had contributed to the monetary easing. Moreover Sterling is likely to remain weak for a bit. Once the situation in Greek begins to get under control, attention is likely to increasingly focus on Britain's national finances. Additional concerns are created by the fact that a possibly weak government following elections in June might be unable to implement a rapid consolidation of national finances.

Emerging Market Currencies

TRY: Yesterday's publication of the February rate of inflation was disappointing. For the first time since December 2008 consumer prices have recorded a double digit yoy rise. The mom rise of 1.5% was also more than twice as high as expected. At the moment the central bank is still interpreting the rise in inflation with one off factors. The recent inflation data should however constitute a warning signal that might lead to a change of course. We expect that the central bank will raise rates in early summer unless the rate of inflation has fallen notably by then. A decisive fight against inflation is of great importance for the economic development. Even though the central bank's expansionary monetary policy prevented a recovery of the lira last year thus increasing the competitiveness of the Turkish exporters, an increase in inflation is now threatening to erode this competitive edge. At the end this could end up in a spiral of lira depreciation and even faster inflation. The reaction of the lira to yesterday's inflation data (no depreciation) demonstrates that FX markets also expect the Turkish central bank to find the correct answer to rising inflation.

Tags: Greece, Market, Economy, ISM
Blog Comments (0)     

Reason  

Posted by: user no longer registered     

The dollar strengthened against the euro Friday as investors shook off a surprising drop in U.S core inflation and focused instead on a U.S. economy that looks to be emerging from the doldrums faster than its peers.   The first drop since 1982 in core U.S. inflation earlier caused the dollar to briefly lose its footing against the euro, but the greenback regained its composure and continued its march against the common currency as the Federal Reserve's late-afternoon Thursday increase of emergency bank-lending rates again came to the forefront.   The dollar screamed higher against its rivals after the late Thursday Fed announcement, which increased discount interest rates by 25 basis points charged for emergency lending to banks, to 0.75%.   Investors took that as a signal the U.S. economy was improving at a faster rate than its rivals, with an increase in key U.S. interest rates coming sooner than expected, but Fed officials warned the discount rate increase was not a sign of broader monetary tightening.   "The underlying dollar sentiment is constructive," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York. "It stands on two legs: Poor developments in general in Europe...and more positive developments in the U.S."   Separately, the U.K. pound came under additional pressure--sinking to a nine-month low overnight--as much worse-than-expected January U.K. retail sales highlighted the headwinds facing a stressed U.K. economy.   Friday morning, the euro was at $1.3506 from $1.3527 late Thursday, according to EBS via CQG. The dollar was at Y91.76 from Y91.80, while the euro was at Y123.94 from Y124.25. The U.K. pound was at $1.5414 from $1.5575. The dollar was at CHF1.0848 from CHF1.0829.   The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 81.095 from 80.859.   Global stock markets declined on the Fed discount interest rate increase, and U.S. stocks opened lower, as the ultra-cheap dollars that have sloshed around the economy could become more expensive if the Fed increases the key interest rates that have been kept ultra-low to stimulate a stressed U.S. economy.   "Although far from a tightening step," said Geoffrey Yu, currency strategist at UBS in London, "the signaling effect" of the increased discount rates is clear, "with the Fed being perceived as pushing ahead with normalization well before other central banks," and on the road to eventually increasing the key U.S. rates that weigh on the dollar.   The late Thursday afternoon announcement caught markets off guard, sending the dollar strongly higher across the board, soaring to its highest level in nine months against the euro and sending the Dollar Index to its highest level since June.   Contrasting with a U.S. economy dragging itself the depths of the financial crisis, the U.K. registered a steep and unexpected drop in retail sales, sending the pound lower by more than 0.7% by New York trading.   The U.K. retail sales index, including fuel sales, fell 1.8% on the month and rose 0.9% on the year in January. That was the sharpest monthly drop since February 2009. Economists surveyed by Dow Jones Newswires last week were expecting a 0.5% monthly decline and a 1.1% annual gain.   Separately, Russia's central bank cut its key interest rates Friday for the first time this year in an effort to stimulate bank lending and combat the wave of speculative capital pushing up the value of the ruble.   The central bank cut the refinancing rate 25 basis points to a record-low 8.5%, effective Feb. 24. Other key rates will fall as well, the central bank said in a statement.   On Thursday, the central bank lowered the ruble's trading band against the euro-dollar basket for the first time since November, allowing the currency to hit a 13-month high of 34.91. The ruble strengthened to 34.83 against the euro-dollar basket Friday.

Tags: Forex, Dollar, Euro, Currencies, Currency, Rate, ...
Blog Comments (0)     

Reason  

Posted by: user no longer registered     

---

Portugal moved towards a political crisis last night as its finance minister appealed to opposition parties not to defeat the minority Socialist government over a regional finance bill that he said would undermine the country's international credibility.
 
In a televised address, Fernando Teixeira dos Santos said opposition proposals to allow the Portuguese islands of Madeira and the Azores to increase their debt would have "grave consequences for Portugal's public accounts" and send "the worst possible message" to financial markets.
 
His warning came as Portuguese bonds and shares came under fire for the second day running as concerns over sovereign debt spread from Greece to other high-deficit countries in the eurozone.
 
The Lisbon stock market fell almost 5 per cent yesterday, the biggest daily fall since November 2008, and bond yields rose to new highs amid doubts over the ability of Portugal to consolidate its public accounts. The cost of insuring Portuguese debt against default also rose to a record high.
 
Mr Teixeira dos Santos said approval of the bill would involve an increase of €50m (£45m) in funding for the islands this year, rising to an increase of €83m in 2013. This would make it impossible for the government to meet its commitment to the European Commission to cut the budget deficit from 9.3 per cent of gross domestic product this year to less than 3 per cent in 2013.
 
The centre-right Socialists were re-elected to a second four-year term in September, but lost their overall majority in parliament.
 
Opposition parties accused the government of "irresponsibility" and deliberately creating a crisis to ensure the bill was defeated.
 
Earlier yesterday Mr Teixeira dos Santos said "strong and credible" measures to be presented to the Commission this month would be "no less ambitious" than the Greek plan to consolidate public finances endorsed by Brussels on Tuesday.
 
He said Portugal had taken over from Greece as the main victim of the "animal spirits" of financial markets that were often "irrational".
 
The concern in the case of Portugal, he said, was not justified. *Greek customs and tax officials yesterday launched a 48-hour strike that shut down ports and border crossing points amid signs of a growing union backlash against the government's austerity programme, Kerin Hope writes from Athens .
 
The country's largest union, the General Confederation of Greek Workers, which represents private sector employees, announced a one-day strike on February 24 in solidarity with public sector workers.

---

Tags: Finance, Political, Crisis, Bonds, Shares, Islands
Blog Comments (0)     

Reason  

Posted by: user no longer registered     
 

 
FX and MMKT Weekly Outlook and Strategy, 7th to 11th December
 
* Friday's post payroll disconnect between EUR/USD and equities didn't last - equities blinked first
 
* USD went up on better than expected payrolls - that rings a bell!
 
* MoF/BoJ the big winners, and they didn't spend a Yen
 
The Last Week:
 
* Payrolls surprise at almost flat
 
* RBA and BoJ decisions as expected, though the former had plenty worried
 
* EUR/USD fails to better the previous week's high; USD/JPY trades over 90!
 
The start of the week coincided with the end of the month, and while that was a reasonable excuse to slow down trade, December hardly came in with a bang. The week started with the Dubai debt problems slipping down the radar, and that helped switch risk to 'On', giving EUR/USD a boost and also helping ensure that in Japan MoF/BoJ did not have to go beyond verbal intervention to push USD/JPY and the crosses further away from their recent bases.
 
Focus quickly switched to Friday's payroll release by way of the ECB policy decision and press conference. The latter saw Trichet manage to lean just enough towards the hawks without falling off the tightrope.
 
The big surprise was the payroll release, where the -11k outturn was well below the -125k consensus, while October and September were also revised up. The employment rate fell back to 10.0%, that apparently catching the White House by surprise after a spokesman Thursday suggested it might be on the way higher.
 
The payroll data saw one of those currently rare disconnects of equities from EUR/USD, although to be frank they are not THAT rare on a Friday. Extra weight was added from long positioning and some of the model funds deciding that we had seen a double top (having twice just failed to push on through the previous week's high at 1.5144) and that was enough. That it was the equities that blinked first might prove a worry to those sticking with EUR/USD longs, while it also gives a boost to the 'high frequency trade' theory.
 
USD/JPY did stick with the equities and even managed a look over 90.00 on Friday. Earlier in the week the ongoing spat between the MoF and BoJ almost broke into open warfare, maverick SPD Banking Minister Kamei repeating his accusation that the BoJ was 'asleep at the wheel' after the Bank again left policy unchanged, though it did upgrade its economic fo recasts.
 
'Order driven' summed GBP up again, and those with the orders had things much their own way. GBP was stronger on the week, though EUR/GBP was still hanging on to .9000 at the time of writing. Standing orders to buy EUR/CHF at 1.5050, sell it at 1.5150 would have continued to enhance the bottom line, though for good measure we still got a reminder from the SNB's Roth as to what it's policy is on the cross.
 
AUD/USD continued to top out over .9300, some suspicion there that the RBA is still happy to feed AUD into the market on occasion. The Bank did deliver a 25bp interest rate hike, though signals were seen as a bit mixed and the 'Four Pillar' Australian banks raised their mortgage rates by varying amounts between 25 and 45bps (including 25 and 37!). The NZD suffered against its neighbour, suffering the tail end of an AUD/NZD buy order and also featuring on the sell side of many an early 2010 top trade recommendation.
 
Russia said it will buy CAD for its reserves - just not yet, and then not many.
 
The SEK started another recovery, but progress remains less than straightforward. It was interesting to note that the Riksbank arranged a swap of its SEK2.76bn EU budget payment so as not to impact a low liquidity market. The NOK remained close to its neighbour, early promise undone a shade by softer oil prices.
 
It was another roller coaster ride for Gold. The new record high for spot is 1226.10, though Friday's shake out and better bid USD did see it back in the 1100s.
 
Tags: Week, Money, News, Forex, Gold
Blog Comments (0)     

Reason  

Posted by: globalmoneynews     
 
It has become something of a parlour game in the City and in business circles: try to explain how quantitative easing (QE) works in as few words as possible.
 
There was a pretty good explanation in yesterday's speech by Charlie Bean, Deputy Governor of the Bank of England. In it, he also addressed a point that has confused many, namely the issue of whether a loss will be incurred by the Bank's Asset Purchase Facility (APF) — with an accompanying impact on public finances. After all, the APF has helped to drive down gilt yields, which means it is buying into a rising market. Surely, it is argued, this means that, once the APF starts selling gilts, this will drive yields up and effectively leave it selling into a falling market.
 
According to the Deputy Governor, it is not that straightforward. First, the APF gets coupon payments from the Government on the gilts it holds, now averaging about 5 per cent — more than enough to cover the 0.5 per cent interest it pays the Bank on the loan used to buy the assets.
 
Second, he argues, the question of whether the APF makes a profit or loss is a wider issue than a narrow definition of the prices paid and received for assets. He points out that, due to QE, gilt yields will be lower than they would otherwise have been — helping to cut the cost of financing the Government's budget deficit. He also argues that, since QE has helped to boost spending and activity, it should help to raise tax revenues and cut benefit payments — again boosting public finances.
 
So far, so good. What he did not address was the very real concern, held by many, that QE could turn out to be inflationary. On the face of it, yesterday's inflation data do not suggest this is much of a problem at present, which is partly why — in anticipation of a continued low bank rate — sterling hit its lowest level against the euro since March. But inflation hawks argue that this very weakness in the pound is why so-called “core” inflation, the measure that strips out volatile food and energy prices, remains so sticky. They fret about a possible extension of QE for this reason.
 
Perhaps the bigger question that the Bank could address, though, is how it intends to avoid the potential disruption that could be wrought on the gilt market — and, by extension, equities — once it gradually removes the monetary stimulus it has given the economy.
 
The Deputy Governor's response, thus far, has been to argue that the yield curve is already pricing in an end to QE.
 
But gilt prices suffered one of their biggest one-day falls this decade when, in early July, a statement from the Bank's Monetary Policy Committee was misinterpreted as heralding a suspension of QE. One feels further reassurance will be necessary.
 
Tags: Quantitative, Easing, News, Assessment, Speech, B...
Blog Comments (0)     

Reason  

Posted by: globalmoneynews     
 
The Reserve Bank of New Zealand has announced plans to remove and consolidate some of the temporary emergency liquidity facilities put in place during the financial crisis in 2008.
 
RBNZ Text - The specific measures include:
 
    * The removal of the Term Auction Facility (TAF) where banks have been able to borrow funds for 3, 6 and 12 months using eligible collateral (such as Residential Mortgage Backed Securities (RMBS), registered bank bills, NZ Government securities etc).
 
    * A change to the regular Tuesday Open Market Operation (OMO) to allow all eligible securities (including corporate securities and RMBS) to be acceptable collateral for repurchase transactions of maturity up to three months. Currently, only approved Corporate and Asset-backed securities are acceptable as collateral in this OMO for terms of up to two months. The regular weekly OMO will continue until the end of March 2010 when it will be reviewed with a view to discontinuing it if market conditions allow.
 
    * A shortening of the maximum term over which funds may be borrowed from the Bank in the Overnight/Term Reverse Repo Facility (ORRF/TRRF) from one month to an overnight basis only. All currently approved eligible collateral (including corporate securities and RMBS) will remain acceptable in the ORRF.
 
    * The withdrawal of the regular weekly Reserve Bank bill tender. The Bank will continue to offer Reserve Bank bills as required in the daily OMO.
 
    The changes announced above will take effect from the beginning of November, with the final TAF and Reserve Bank bill tenders scheduled for the week beginning of 26 October. For details on the Bank's liquidity facilities refer to http://www.rbnz.govt.nz/finmarkets/domesticmarkets/3329772.html. 
 
Commenting on the measures Reserve Bank Deputy Governor Grant Spencer said: "Financial market conditions have improved significantly since 2008 when these facilities were introduced.  New Zealand banks are now able to readily access funding from the markets, and the usage of these special facilities has been very low in the last six months. The Bank feels that the time has come to start removing and consolidating the temporary crisis facilities.
 
    "The Reserve Bank will continue to monitor markets closely and is in a position to supply sufficient liquidity as required depending on market conditions via its regular Open Market Operations.
 
    "This decision has no implications for the stance of monetary policy."
 
Tags: Reserve, Bank, NZ, New Zealand, Liquidity, Facili...
Blog Comments (0)