FOREX TRADING INN: NEWS

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Monday, April 13, 2009

Yen Falls Below 100 as Risk Aversion Fades

This week marked a couple milestones for the Japanese Yen. First, the Yen fell below 100 JPY/USD for the first time in five months. Second, the Central Bank of Japan “celebrated” five years of not having intervened in forex markets. Of course, the relationship between these two events is not difficult to ascertain; as the Yen retreats from the stratospheric highs of 2008, intervention is becoming progressively less necessary (and hence less likely).

yen-declines-against-dollar

Risk aversion, or in this case a decline thereof, has been identified as the likely cause of Yen weakness, although as I alluded in an earlier post, there is still a question of causation, as opposed to correlation. Is it higher equity and commodity prices that are driving risk tolerance, or the other way around?

Regardless of whether the chicken or the egg comes first, higher asset prices have recently been accompanied by modest declines in so-called “safe haven currencies,” namely the Dollar and the Yen. In the case of the Yen, there were previously two different narratives, one that underlies the Yen’s performance solely against the Dollar, and another thread seems to govern its fluctuations against virtually all other currencies.

In recent weeks, however, a combination of forces have come together to drive the Yen down against all currencies. First, of course, is the theme of declining risk aversion: ” ‘The euro was bought for the yen on the back of recent firm stock markets and this supported the dollar relative to the yen,’ ” summarized one analyst. The $1 Trillion economic stimulus plan unveiled today by the G20 will also have the effect of “sapping demand for Japan’s currency as a refuge.”

There are also end-of-quarter factors that have played a role in the Yen’s decline. ” ‘The dollar is being buoyed as Japanese investors try to secure currency on the last day of the fiscal year. Investors’ demand for the yen stemming from repatriation flows, on the other hand, appears to have peaked,’ said a trader at a Japanese bank.”

Last but not least, there is the Japanese macroeconomic picture, which shows a country that is headed towards a deep recession. The latest monthly figures show a 49% year-over-year decline in exports, which is contributing to rising pessimism among Japanese businesses. According to a recent survey by the Bank of Japan, “Confidence among Japan’s large manufacturers dropped to minus 55 in March from minus 24 in December, [which]…would be the lowest since 1975 and the biggest drop since the bank started the survey.” Given that Japanese household spending is also falling, “Japanese companies are caught in a double bind, facing markets at home that are shrinking with the population as well as the global downturn.”

japanese-exports-decline-in-2009

Euro Gains after ECB Rate Cuts

Yesterday, the European Central Bank delivered a surprise to the forex markets; instead of cutting rates by the consensus expectation of 50 basis points, the ECB knocked down its benchmark lending rate by only .25%. The Bank also opted against certain non-standard measures that would accompany a change in monetary policy. At this point, all investors can do is wait until the next meeting to see if the ECB will finally intervene in credit markets as well as on behalf of beleaguered Eastern European currencies.

While Jean-Claude Trichet, President of the ECB, coyly refused to rule out the possibility of further rate cuts, analysts are puzzling over the relatively minuscule cut. After all, the consensus was that the ECB had already fallen well behind the curve, and was not struggling as quickly as possible to play catch up with its counterparts in the UK, US, and Switzerland. “ ‘By again buying time, the ECB risks falling further behind the curve…You cannot buy time forever.’ ”

ecb-lowers-rates-in-2009 There are a few explanations. First of all, it’s possible that the ECB is selectively interpreting data as a basis for deriving a more optimistic economic forecast. Given the spate of recent bad news emanating from Europe, however, this seems unlikely. Besides, no less than Trichet himself has suggested that an economic recovery is unlikely to occur before 2010. There is also the possibility that the ECB is simply prioritizing its mandate to guard against inflation, rather than to stimulate economic growth. This theory is also unconvincing, given that price inflation has already fallen well below the ECB’s target of 2%.

Perhaps, the best explanation is technical: “A 50 basis point cut would have required the ECB to cut the interest that it pays on deposits by banks to zero, from 0.5%, in order to maintain the current spread between the two of 1 percentage point.” Along the same lines, “European interest rates are lower than those in the U.S. when making a comparison of real inter-bank lending.” Ultimately, it’s probably the Bank’s conservatism that is behind both its comparatively tight monetary policy and its failure to unveil a quantitative easing plan that would mirror those put forth by the Fed and Bank of England. In other words, the door for more drastic monetary prescriptions has been strategically left open in the EU, while all but closed in the US and UK.

Curiously, the “the smaller-than-expected rate cut ‘remains an all-round booster for the single currency.’ ” Prevailing trading patterns and market sentiment seemed to herald a decline in the Euro, as investors have recently prioritized capital preservation and vigilance against deflation. Based on the positive market response, however, we can conclude that there are still some traders for whom interest rate differentials are important. After all, the only remaining alternatives to the EU (from the standpoint of yield) are Australia and New Zealand, but both of these economies/currencies are perceived as risky.

Alas, the ECB’s role is not to make currency traders happy. Unless the ECB follows up with a big move next month, the result could be a “very prolonged slump in euro-zone activity.”

Canadian Dollar Edges Down on Quantitative Easing Fears

Despite an ebb in risk aversion, the Canadian Dollar is once again falling. Since touching a high of $1.18 in January, the Loonie has zigzagged its way downwards and hovered around $1.25. March 31 marked the end of its third straight quarterly decline.

canadian-dollar-falls

With the exception of the Japanese Yen (which is declining due to economic factors), virtually every currency has risen against the US Dollar in recent weeks. Stock market rallies have been accompanied by a general pickup in risk tolerance, and investors are piling back into assets and currencies that had been abandoned during the worst of the credit crisis. Why, then, has the Canadian Dollar been excluded from this rally?

Investors cannot be faulted for focusing on the abysmal Canadian economic situation. Employment, public and private spending, and construction - to cite a few indicators - are all falling at alarming speed. As a result, “the nation’s economy, the world’s eighth largest, will shrink at an 8.5 percent annualized pace in the first quarter, the largest decline since at least 1961.” Given that the picture is equally grim throughout the world, however, there must be another explanation.

Cue Mark Carney, head of Canada’s Central Bank, who has announced that Canada will “adopt a much milder version of the U.S. and U.K. strategy of printing more money to fight the recession.” Euphemistically referred to as “quantitative easing,” such a policy involves the injection of cash directly into credit markets and government bond markets, with the dual purpose of creating liquidity and stimulating the economy.

The concern, especially among forex traders, is that printing money will lead to inflation further down the road. When similar policies were announced by the Central Banks of the US, UK, and Switzerland, for example, their currencies plummeted instantly. In the words of one trader, “The precedent is a haircut right off the currency.” The Central Bank of Canada does have a reputation for being conservative, which suggests that it is likely to pursue quantitative easing only as a last step, and in a measured dose.

Accordingly, there is still some bullish sentiment surrounding the Canadian Dollar. One analyst even urges readers to “Consider the Canadian Dollar as a Possible Inflation Hedge,” partly on the basis that “The Loonie is a commodity based currency, so stronger commodity prices mean a stronger Loonie.” Given that crude oil and base metals prices are extremely correlated with the Loonie, this is a fair point.

“Canada’s currency will fall 3.3 percent to C$1.27 to the U.S. dollar by July, from C$1.2298 on April 3, according to the median forecast in a Bloomberg News survey of 40 economists and analysts.” Whether this prediction actually obtains depends primarily on what, if anything, Mark Carney and his colleagues at the Central Bank of Canada decide at their next meeting, scheduled for April 23.

Wednesday, April 8, 2009

Update − Euro up slightly, awaiting ECB views on quantitative easing

Economic Calendar

Market Update

Nikkei average gained 4.1 percent on Thursday as automakers surged on growing optimism about the U.S. economy after a string of better data than expected.
Hong Kong's Hang Seng index jumped 4 percent, with HSBC leading the gauge up nearly 7 percent.
Stocks rallied, driving the MSCI World Index higher for a third day
Treasuries and the yen declined as the Group of 20 met amid growing speculation that the worst of the global recession is over.

News Summary

The European Central Bank may cut its key interest rate to a record low of 1 percent today, increasing pressure on policy makers to use new tools to fight the worst recession in more than 60 years.
World leaders will strive to reach an agreement on how to confront the worst global financial crisis since the 1930s at the G20 summit in London, amid signs that the world economy is stabilizing after months of freefall.
Stocks climbed on Wednesday as factory activity in March fell at a slower rate than the month before, while pending home sales rose more than expected in February, sparking a broad advance.
Timothy Geithner said global economies are showing “traction” amid widening stimulus efforts. Geithner’s remarks reflect the view of some analysts that the worst of the economic downturn may be past, even as some banks are likely to fail and unemployment is set to worsen.
U.S. auto sales fell 37 percent in March, a smaller-than-expected drop that encouraged hope that the world's largest car market is nearing a bottom after a freefall that has pulled the industry into a deepening crisis. Toyota's U.S. sales fell less than analysts predicted last month as the world’s largest carmaker offered near-record incentives to spur demand.
Commercial property loans in default or foreclosure grew in the first quarter as the U.S. recession cut occupancies and the credit crisis stymied refinancing.
Companies in the U.S. cut an estimated 742,000 workers in March, pointing to no relief in sight for the labor market amid the longest recession in seven decades, a private report based on payroll data showed yesterday.
Although the U.S. economy is expected return to growth later this year, there is a danger of a second recession if monetary easing and a weak dollar leads to increased inflation expectations, a report said on Wednesday.
Changes to General Motors Corp's contract with the United Auto Workers union could save the automaker $1.1 billion or more in hourly labor costs, GM said in a report to the U.S. Treasury released on Wednesday.
The UK manufacturing sector declined at a slower pace in March, adding to signs that the recession may be near its deepest point, data published on Wednesday suggested.
China’s leaders, increasingly concerned about the nation’s $740 billion of U.S. Treasuries, are making it easier for trading partners and consumers to do business in yuan.

U.S Market Update

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- With another extremely light economic calendar stock investors continue to turn their attention to the upcoming earnings seasons and are lightening up in equity holdings in the early going. The US indices are down about 1.5% a piece, although they are off their worst levels mid morning. PIMCO CEO Mohamed El-Erian had plenty to say to CNBC ahead of the open, noting that he would not be surprised if equities retested lows and that government bonds are "not worth owning." Front-month crude is below $50, around $1.50 off overnight highs, while natural gas is making six-year lows around trading below $3.60. The Colorado States latest forecast for the upcoming hurricane season only confirmed the early weakness in the energy complex when they lowered the number of named storms expected to 6, with only 2 major.

- Pessimism over upcoming earnings at leading financials is sending the banks down 2-4% in early trading. Overnight "Heard on the Street" wrote that after a strong start in 2009, banking shares may be due for a pullback due to uncertainty over book values, which may fall amid uncertainty of banks being able to earn ROE above the current 13% cost of equity. Meanwhile, the IMF has said that the toxic assets held by financial companies could rise to $4T, with the deterioration in US-originated assets to reach $2.2T by the end of next year. Citi is an exception this morning, spiking up 2.5% in early trading.

- There has been a smattering of guidance reports and profit warnings ahead of earnings season, but nothing like the deluge of highly negative guidance seen ahead of last quarter's earnings season. Two consumer-facing names offered strong guidance this morning, restaurateur Brinker International and electronics retailer HH Gregg, with EPS forecasts for the coming quarter that blew out consensus estimates. Shares of EAT+6% and HGG+10% have lost a little altitude in early trading. March same-store sales come on Wednesday and Thursday, and the analysts are out talking up retailers. Yesterday Needham was positive on the sector, while Merrill raised price targets on multiple names. But today most retail names are down with overall indices and headed lower in early trading.

- Managed healthcare names traded off somewhat in the premarket after being granted a substantially lower baseline rate increase for Medicare Advantage (0.8% rather than the approx 4% increase in recent years), although the cuts are slightly less severe than those initially proposed in February. Humana, Aetna, UNH, Cigna, Wellpoint and Health Net slipped 2-3% before quickly heading back toward positive territory, with HUM, AET and UNH up 2-3%.

- Currency markets are still seeing the effects of some risk aversion trades, but the Pound Sterling is showing some relative strength late in the NY morning. Cable has paired nearly all if its losses for the day to trade back towards 1.4750 after trading below 1.46. EUR/GBP has droped below 0.90 for the first time in roughly a month. JPY has also exhibited some relative strength trading pretty much higher across the board. The EUR.USD pair has been down more than 1% for most of the session trading below 1.33.

US Cash Hogs Midday: Bids Flat-Lower; Most Plants Are Full

KANSAS CITY (Dow Jones)--Slaughter hog prices in the Midwest Wednesday are flat to lower, and most plants are reportedly done buying for this week.

Demand is expected to remain slow through the weekend and could be light on Monday as well since several plants will be taking a day off between now and then, said livestock dealers and market managers.

Two plants will be down Friday, and nine others will be dark Monday in observance of the Easter holiday Sunday. With the plant closures seen for Friday and Monday, the estimates for those daily figures are around 410,000 and 300,000 head, respectively. Projections for Saturday's slaughter are from 45,000 to 50,000 head.

Sales of pork domestically and in the export markets have not been active enough to encourage packers to chase after hog supplies and process more animals, analysts and livestock dealers said. Processing margins have been thin to negative throughout most of this year, so packers are trying to hold the line on costs.

A few plants may need another load or two for later in the week but the buyers expect to be able to purchase the hogs at flat to weaker prices. Selling interest, however, has turned extremely slow as well, and most producers are willing to wait until next week before offering additional loads for sale in hopes that prices will move higher by then.

Prices at the terminal markets were reported mostly steady with one location down $1 per hundredweight. Top prices are reported from $34 to $39 on a live basis.

-By Curt Thacker, Dow Jones Newswires; 913-322-5178; curt.thacker@dowjones.com

Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=nTu4LxwcXyZ5kQj31xplfg%3D%3D. You can use this link on the day this article is published and the following day.

ICE FCOJ Review:Rallies On Charts, Underpinned By Fundamentals

NEW YORK (Dow Jones)--ICE Futures U.S. frozen concentrated orange juice rallied on technical buying Wednesday as demand ideas and supply concerns underpinned prices.

May juice settled up 380 points at 81.05 cents a pound, off of the 81.50 high, and the July contract settled up 335 points at 83 cents.

OJ dipped in early dealings to the 77.10 session low basis May, but quickly regained balance. The contract surged through resistance at the 78- and 79-cent levels to hit 81.50, the contract's highest price point since Jan. 22. May juice trimmed gains to below the 80-cent level but reclaimed ground and settled stronger on the day.

Analysts said juice could advance to the 82-cent level, a high hit Jan. 22, and the 83-cent level on continued technical buying.

Aside from technical buying, supply and demand conditions are adding to FCOJ's appeal, analyst said. Ongoing drought conditions in the northern part of Florida have been adding to gains during the week, though the trees are blooming satisfactorily and recent rains have taken the edge off of dry conditions, said an Orlando-based FCOJ broker.

Florida's 2008-09 orange crop projection is expected to be left unchanged at 158 million boxes when the U.S. Agriculture Department issues its April crop production report at 8:30 a.m. EDT Thursday, analysts said.

Increased consumption of reconstituted orange juice in place of chilled juice beverages is adding support amid the tight economic situation, the broker said.

Added support is springing from ideas of a weaker orange crop from Brazil, the leading producer of FCOJ, ahead of the U.S., said Jimmy Tintle, analyst at Transworld Futures in Tampa. Weather premium may be trickling into the market ahead of the June-July onset of the Florida tropical storm and hurricane season, he added. These bullish factors could push orange juice futures to the $1.20-a-pound level by mid-September, Tintle said.

ICE FCOJ open interest deceased by 30 positions Tuesday to total 28,296, the exchange reported.

Volume was estimated at 7,061 contracts, according to exchange data. In options, approximately 1,057 calls and 389 puts traded.


ICE         Settle      Change    Range (At time of settlement)
May         $0.8105     up  380   $0.7710-$0.8150
Jly         $0.8300     up  335   $0.7920-$0.8325

-By Holly Henschen, Dow Jones Newswires; 201-938-2338; holly.henschen@dowjones.com

Forex: GBP/USD: Pound rejected by the 1.4745 level

FXstreet.com (Barcelona) – Sellers seem to have flocked to the GBP/USD as the pair reached 1.4745 level, sending the pair below minor support 1.4675 towards 1.4635 intra-day low.

On the downside, in case downside reaction is strong enough to break below 1.4635 level, next support levels would come at 1.4580 (Apr 7 low) and 1.4560 (100 day moving average). On the upside, above 1.4745 intra-day high, next resistance level lies now at 1.4776 (Apr 7 high) and, above here, 1.4875.

According to Valeria Bednarik, collaborator at FXstreet.com, traders are squaring positions ahead of Easter holidays: "Gbp remains also slightly bullish, but contained in a tight range around the 1.4700 zone, as traders square positions ahead of the Easter Holiday. Indicators are mostly flat in the hourly chart, not giving clear signs of further bias, while bigger time frames suggest some upside pressure, limited by the 1.4780 zone."

ited by the 1.4780 zone."