US Dollar Holds on to European Session Gains as Consumer Confidence Improves, Ahead of G8 Meeting
The US dollar was the strongest of the majors on Friday as the currency staged a solid rebound against the Canadian dollar, Swiss franc, British pound, euro, Japanese yen, and Australian dollar. Looking to the economic data on hand, the University of Michigan’s consumer confidence index rose slightly less than expected to 69.0 for the month of June from 68.7. That said, this reading still marked a 9-month high, and a breakdown of the report revealed an interesting shift. Indeed, in recent months we’ve seen that overall increases in the index were led by optimism about the economic outlook. However, this time around we saw a rather sharp rise in sentiment on current conditions to a 9-month high while confidence in the economic outlook actually fell for the first time since February. Meanwhile, rising gasoline prices seem to be spurring inflation concerns, as inflation expectations for 1-year ahead and 5-years ahead rose to 3.1 percent, up from 2.8 percent and 2.9 percent, respectively.

The Group of 8 (G8) will meet over the weekend, and while it may ultimately prove to be a non-event, traders should keep an eye out for the communiquأ© as indications that exit strategies for the stimulus measures enacted by members are being plotted could provide a boost to risk appetite when trading resumes on Sunday. Though highly unlikely, discussions about currencies would be sure to shake up the markets as well.

Next Wednesday, the latest inflation figures for the US are forecasted to show slight increases on a monthly basis, but clear weakness on an annual basis. Indeed, headline CPI is projected to have risen 0.3 percent during May, while the core measure, which excludes food and energy, is anticipated to rise 0.1 percent. Meanwhile, headline CPI is expected to have fallen 0.9 percent in May from a year ago, the steepest drop since February 1950, compared to a decline of 0.7 percent in April. On the other hand, core CPI may have only eased to a 1.8 percent annual pace of growth from 1.9 percent, suggesting that volatile commodity prices are the sole reason for the contractions in headline inflation. Weaker than expected results have the potential to stoke deflation fears, but overall, the FX markets haven’t shown a strong reaction to past CPI reports, and this time around we may see more of the same.

Euro Tumbles as Industrial Output Falls by Record, Swiss Franc Down Ahead of SNB Decision
The euros ended the day down against the greenback on Friday as the US currency staged a broad rebound across the majors. Fundamentals were also working against the euro, as Eurostat said that industrial production in the Euro-zone fell 1.9 percent during April, bringing the annual rate down to a record low of -21.6 percent and highlighting the impact of the global economic slowdown on export-reliant economies.

Meanwhile, the Swiss franc was one of the weakest major currencies on Friday, and it will face very high event risk next week. On Thursday, the Swiss National Bank is like to leave their 3-month LIBOR target range unchanged at 0.0 percent – 0.75 percent, but the thing to watch for in the SNB’s subsequent policy statement is talk of FX intervention. Indeed, the SNB’s last statement on March 12 indicated that the central bank wanted to “prevent any further appreciation of the Swiss franc against the euroâ€‌ in an effort to “counter the risk of deflation and of a dramatic deterioration in the economy.â€‌ Similar comments have the potential to drive the Swiss franc lower upon this 3:30 ET release, while a neutral policy stance and no mention of currencies will likely lead the Swissie higher.

British Pound Backs Down, BOE Minutes to Clarify Policy Bias Next Week
The British pound experienced broad weakness on Friday after spending most of the week as the strongest of the majors. Next Wednesday, the minutes from the Bank of England’s June 4 meeting may not be as market-moving as they’ve been in the past, as there has already been significant detail revealed about the mindset of the Monetary Policy Committee (MPC). Indeed, we already know that the BOE has decided to expand their quantitative easing (QE) program by 50 billion pounds to 125 billion pounds, but there are indications that they may increase the scope of the program even further as they recently published a paper in which they sought comments on the prospect of including purchases of secured commercial paper in their Asset Purchase Facility (APF). That said, the inclusion of secured commercial paper doesn’t necessarily mean that they will allocate more money toward the APF, and this is a detail that will be critical to British pound price action as past QE announcements have weighed on the currency.

Japanese Yen Remains Mixed as US Equities Consolidate Below Key Highs
The Japanese yen ended on a mixed note on Friday, falling against the US dollar and New Zealand dollar while gaining against the Canadian dollar. The moves suggest that risk appetite remains on edge, which was also evident in equities as the DJIA closed at the highest level since January 6, but still remained in consolidation mode below 8800. This weekend the Group of 8 (G8) will meet, and while it may ultimately prove to be a non-event, traders should keep an eye out for the communiquأ© as indications that exit strategies for the stimulus measures enacted by the member countries are being plotted could provide a boost to risk appetite when trading resumes on Sunday. Though highly unlikely, discussions about currencies would be sure to shake up the markets as well.

Next Monday evening, the Bank of Japan is anticipated to announce that they are leaving rates unchanged at 0.10 percent, but this is not the part of the central bank’s announcement that will garner the most attention. Instead, the FX markets may only respond to the sentiment reflected in their subsequent policy statement. After the BOJ’s last meeting, they raised their outlook on the economy for the first time in nearly 3 years, saying that “economic conditions have been deteriorating, but exports and production are beginning to level out.â€‌ There is speculation that the BOJ will upgrade their outlook once again, and if this is the case, the Japanese yen could gain on a very short-term basis. On a longer-term basis, though, risk trends have been driving price action and the impact of positive BOJ commentary may not go very far.

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ECONOMIC DATA


SUPPORT AND RESISTANCE LEVELS

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by: Terri Belkas

The British pound continued to rally against is currency counterpart this week following the improved outlook held by the National Institute of Economic and Social Research, and long-term expectations for higher interest rates in the U.K. may continue to drive the GBP/CHF higher over the near-term.

urrency Pair: GBP/CHF

Chart: 60 Min Charts

Short-Term Bias: Flat

Analysis

آ The British pound continued to rally against is currency counterpart this week following the improved outlook held by the National Institute of Economic and Social Research, and long-term expectations for higher interest rates in the U.K. may continue to drive the GBP/CHF higher over the near-term. After reaching a high of 1.8976 in November, the pound-franc slipped to a low of 1.5124 on 12/29 following the rise in risk aversion, and the turnaround in market sentiment led the pair to push back above 1.7490-1.7500- (61.8% Fib) this week. However, the lack of momentum to break above 1.7715, the 2009 high, paired with the bearish divergence in the relative strength index suggests that the GBP/CHF is putting in a top, and we may see the pair fall back below the 61.8% Fib to fill-in the gap from the 120 moving average. Over the next few hours of trading, we may see the pair give back and work its way down to 1.7464, the 120 SMA, and a break below the moving average could lead the pair to test 1.7040-50 (50.0% Fib) for support. Be sure to check out other Technical Reports from DailyFX for additional information on the major currency pairs.

from yahoo finance

Foreign exchange trading services provider, Alpari today launched its Indian operations by offering its forex trading platform for institutional and retail customers.آ آ آ آ آ آ آ آ 

The company, which will initially operate from Mumbai, has targeted to acquire at least 1,000 clients in the next six months, Alpari’s Head of Global Sales, Andreas Wigstrom told reporters here.آ آ آ آ آ آ آ آ 

“Alpari India will create a new investment medium, provide an institution level trading experience for retail investors and present hedging opportunities for the corporates at a lower cost,” Wigstrom said.آ آ آ آ آ آ آ آ 

Indian forex market has grown from $2 billion in April 1998 to over $34 billion by April 2007 and is expected to grow at a faster pace in the period ahead, he said.آ آ آ آ آ آ آ آ 

Globally, forex market has a daily turn over of $3.8 trillion currently, which is expected to surpass $5 trillion by 2010, Wigstrom said.

Alpari has targeted an annual volume in excess of $3.5 billion in the retail investor segment and plans to open new offices in Japan, Singapore, Hong Kong, Germany, France, Canada, British Columbia, Brazil and Mexico in the coming days, he said.آ آ آ آ آ آ آ آ 

The company has also plans to offer free training to customers to help investors make informed and responsible trading decisions.آ آ آ آ آ آ آ آ 

At present, Alpari group has 26 offices in seven countries and has around 300 employees worldwide.

from business standards

Forex options markets offer an excellent sentiment indicator and can be quite useful as a sentiment indicator for currency traders. As is well known, there is no central market for leveraged forex trading. Instead, the market is spread across a great number of banks and other financial institutions. Yet there are all the same data sources that aggregate important forex positioning data, and recent signals increasingly point to a major EUR/USD top.

Forex Sentiment Indicators

We would love to claim that our proprietary Speculative Sentiment Index is the be-all and end-all of forex sentiment indicators, but the fact of the matter is that it does not capture the entire FX Market—no indicator does. To gain a more complete understanding of positioning for the most important forex pairs, we look to publicly available Commitment of Traders data published by the US CFTC and more timely information from major banks.

Why?

Put simply, we want to capture as good a snapshot of market sentiment as possible. Through the COT report, we are able to view a wealth of information on well-segmented groups. The CFTC separates their samples into three different categories—Non commercial traders, Commercial traders, and “Nonreportableâ€‌. The first group is the one that most interests us—classic forex market speculators. Here we find traders who latch on to trends and tend to outperform the broader market during times of strong, directional currency moves.

The second group comprises mostly multi-national corporations with hedging interests in the FX market. That is to say, if Toyota wishes to lock in future obligations at a specific US Dollar/Japanese Yen exchange rate, it may go through futures markets and purchase FX contracts.

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The combination of both pools gives us an interesting view of the FX market. In fact, our weekly COT report (most recent example here) ranks the relative positioning of both Commercial and Non-commercial traders to develop an accurate picture of market sentiment—often quite useful to predict future currency price direction.

Yet there is a key limitation to COT data: it is a weekly report published with a noteworthy delay. The low-frequency nature of this data makes it very difficult to use for more short-term trading strategies. Thus it is very challenging to use as a market timing tool, and we instead look to broad positioning to attempt to identify sentiment extremes.

Where do we look for more up-to-date professional trader information?

Forex Options Markets

Though the CFTC provides detailed and informative positioning reports, we are forced to look to Over-The-Counter (OTC) FX Options markets for a more up-to-date look at professional trader sentiment. The world’s foremost banks and other financial institutions are the primary actors in this market, and each individual trading desk provides up-to-the-minute data on important options pricing information.

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If we know options prices and other key details, we are able to glean an all-important piece of information: volatility expectations.

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What is Implied Volatility and Why Should the FX Trader Care?

“Implied Volatilityâ€‌ is a measure derived from all options prices, and it gives us one of the best estimates for professional trader market expectations. On DailyFX we publish our “DailyFX Volatility Indicesâ€‌, which use FX Options markets to gauge trader expectations for currency price moves. Given that said implied volatility level is so critical to the prices paid for options, they likewise give us an accurate view of market expectations for specific currencies.

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Risk reversals measure the difference between volatility levels for out of the money Puts and Calls. If demand for out-of-the-money call options is stronger than demand for the equivalent puts, options traders are on aggregate bullish a given currency pair and are willing to pay more for calls. This makes Risk Reversals positive.

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Why is this a good proxy for professional trader positioning?

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The chart shows that medium-term risk reversals tend to track net Non-Commercial positioning quite nicely—exactly the kind of proxy we’re looking for. In fact, we tend to see EUR/USD risk reversals hit major peaks and troughs before the delayed COT data can illustrate sentiment extremes. Though not perfect, we see that FX options markets can offer an excellent view on professional positioning figures.

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What do FX Options Markets tell us about the Euro/US Dollar?

What we see right now is the confluence of Commitment of Traders data and FX Options Risk Reversals: US Dollar positioning is setting major bearish extremes.

According to our FX Commitment of Traders report, the difference between Non-Commercial and Commercial positioning on the US Dollar Index is currently at its most bearish in over 13 weeks, while Euro/US Dollar positioning set similar bullish extremes. Our options numbers show that risk reversals on the Euro are actually at their most extreme since 2003—impressive numbers by any measure.

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Much like we do with our COT report, it is useful to put a percentile on these risk reversals figures to get a sense of where sentiment stands in relation to its medium-term range.

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The chart above shows an interesting and important relationship between risk reversals and the underlying EUR/USD price: yearly extremes very often coincide with major spot reversals. In fact, there were six relatively clear instances in which the sentiment extreme in 3-month risk reversals occurred at an important top in the EUR/USD.

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As the chart shows, our EUR/USD risk reversal percentile recently hit its highest levels in the calendar year, and said price action suggests that highs of 1.4350 will be an important medium-term top. If we see anything like we did at the March sentiment extremes, the EUR/USD could correct for the next month or so before any potential push higher.

Since the inception of the credit crisis, US imports have fallen by a record 40%, on an annualized basis. In March, “Imports decreased 1 percent to $151.2 billion, the fewest since September 2004. Demand fell for industrial supplies such as natural gas and steel and for capital goods such as engines and machinery, reflecting the slump in U.S. business investment.â€‌ Lower commodity prices have also played a role on the imports side of the equation. In fact, if not for a slight uptick in energy prices, the deficit probably would have declined further this month.

Exports are also falling, but at a slower pace, such than the net effect is a more positive US balance of trade. “The 2.4% monthly fall in exports in March more than reversed the 1.5% rise the month before. But even that 2.4% drop compares well with the monthly declines of 6% plus that had become the norm since last September,â€‌ explains one economist. In other words, worldwide demand (as symbolized by US exports), is stabilizing.

Economists remain divided as to whether the trade deficit will continue to decline: “The low-hanging fruit has been achieved, and it will be difficult to narrow the trade deficit by much more going forward, especially if the vicious downturn in the economy seen in the fourth quarter and first quarter has begun to abate…..Once the economy begins to return to health in earnest (mainly a 2010 story), the trade deficit will likely begin to re-widen.â€‌ But a competing view expects “drooping consumer demand to weigh on imports and keep the trade deficit on a narrowing trend in the coming months,â€‌ in which case the deficit could fall to $350 Billion by the end of the year. Compared this to the record $788 Billion deficit of 2006!

While the balance of trade doesn’t figure directly into GDP (although it confusingly is incorporated into the expenditure method), a declining trade balance is generally reflective of a healthier economy. It implies that either exports are growing relatively faster than imports, and/or consumers are diverting more of their relative spending towards domestic consumption, both of which should contribute positively to GDP. Summarizes one economist, “If the current account did move towards balance, then it would allow the U. S. economy to probably grow at a more sustainable rate in the long term.â€‌

The idea of sustainability (not in the environmental sense, unfortunately) is also connected to the US Dollar. Generally speaking, it is the Dollar’s role as the world’s reserve currency which has enabled the US to run a trade imbalance almost continuously for the last 30 years. In other words, trade surplus economies are willing to accept Dollars because they can be stably and profitably invested in the US. In this regard, one commentator hit the nail right on the head: “When it comes to the U.S. trade gap, how many refrigerators the U.S. sells overseas is far less important than how many dollars the rest of the world wants.â€‌

Note: Both Charts courtesy of International Business Times.

This uptick in sentiment is somewhat unspectacular, since “The Bloomberg-JPMorgan Asia Dollar Index, which tracks the 10 most-active regional currencies,â€‌ has now risen for almost three consecutive months [See chart below]. Leading the pack are the Taiwan Dollar and South Korean Won, which recently touched five-month and seven-month highs, respectively. “The Korean currency has climbed 28 percent since reaching an 11-year low of 1,597.45 in March.â€‌

Investors are now pouring money back into Asia at rapid clip. “Asia ex-Japan received $933 million in the week ended May 20, the most among emerging-market stock funds, bringing the total this year to $6.9 billion.â€‌ Meanwhile, the “The MSCI Asia Pacific Index of regional stocks climbed 22 percent this quarterâ€‌ while Chinese stocks are up 45% since the beginning of 2009.

But it’s unclear – doubtful is a better word – whether this rally is supported by economic fundamentals. One commentator summarized this contradiction as follows: “Improved sentiment has led to a massive resurgence in flows to emerging markets, irrespective of the underlying data, which remains weak. Investors are going out of dollars to riskier markets, riskier currencies.â€‌

Let’s drill down into some of the data. Chinese exports fell 15% in April. Japan’s economy contracted 15% in the most recent quarter. Singapore’s exports are down 20% on an annualized basis. The South Korean economy is projected to shrink by 2% this year. The Central Bank of Thailand just cut its benchmark interest rate to an unbelievable 1%. The only bright spot economically is Taiwan, which is benefiting both from improved economic ties with China and a healthy current account surplus. I suppose everything is relative, as “developing Asian economies will grow 4.8 percent in 2009, even as the world economy contracts 1.3 percentâ€‌ according to the International Monetary Fund.

The notion that the rally is not rooted in fundamentals is shared by the region’s Central Banks, which clearly realize that economic recovery will be much more difficult in the face of currency appreciation. One analyst argues that, “Until the signs of global economic recovery become more convincing, central banks will unlikely tolerate significant currency appreciation.â€‌ The Central Banks of South Korea, Taiwan, and Indonesia have already actively intervened to hold their currencies down, while Malaysia and Singapore (discussed in a Forexblog post last week) have also intervened for the sake of stability.

As a result, this rally could soon begin to lose steam. “A â€کcorrection’ in regional currencies is â€کappropriate’ following recent gains,â€‌ said one analyst. Another has called the rally “overdone.â€‌ Still, Central Banks and economic data pale in comparison to capital flows and risk/reward analysis. In short, these currencies (and other investments) will continue to find buyers for as long as there are those hungry for risk. Citigroup, whose “Asia-Pacific foreign-exchange volume may rise about 10 percent from the first quarter,â€‌ is bullish. A representative of the firm declared: “Fund managers are still ’sitting on lots and lots of cash’ so the pickup in volumes will continue.â€‌

Meanwhile, “Implied volatility on major currencies, which reflects investors’ expectations of currency swings, fell to 13.96 percent yesterday, from…17.22 percent at the end of March. A drop in volatility tends to signal less demand for options to protect investors from currency swings.â€‌ This indicator is now at its lowest level since the days preceding the Lehman Brothers bankruptcy and subsequent stock market collapse. One would normally expect a correlation between risk and return, but in this case, rising returns have been accompanied by lower risk.

Even more unbelievable is that this decline in risk is taking place against the backdrop of declining economic fundamentals. “Risk appetite in the currency market is nothing short of impressive considering the fact that the Fed reduced their growth forecasts,â€‌ said one analyst. However, “The euro-area economy will contract 4.2 percent this year, according to the International Monetary Fund, more than the projected 2.8 percent contraction in the U.S. and 4.1 percent slump in the U.K.â€‌ If investors were focusing on this divergence in economic growth, one would expect the Euro would be falling.

One hypothesis is that inflation-conscious traders are flocking to the Euro, since the ECB remains vigilant about fighting inflation, even in the face of declining prices and aggregate demand. After cutting rates to a record low 1% earlier this month, the ECB unveiled its own version of a quantitative easing plan, involving the purchase of 60 billion euros worth of low risk securities. But this is a pittance, both relative to the size of the EU economy (it represents a mere .6% of GDP) and compared to the Trillion Dollar Fed program. This led one analyst to call the ECB’s plan “chicken feed.â€‌ While all of this is noteworthy, it’s unlikely that this is having a meaningful effect on forex markets, which still remain focused on (avoiding) deflation.

If the Euro is to continue rising, it must overcome some technical obstacles. “The euro could hit a ceiling if the recent resilience of U.S. stock markets faces headwinds. â€کAt some point…stronger nongovernment growth has to show up to sustain and justify these moves in equities.’ â€‌ It’s interesting that the fear of Euro bulls is not that the EU economy won’t recover, but rather that US stock prices are overvalued. Given recent market movements, however, their concerns are reasonable, and “any disappointment [in corporate fundamentals] could provide an excuse to take profit [this] week — benefiting the dollar.â€‌

Click on the chart for a zoomed in view

Source: Bloomberg

The most recent IMM Commitment of Traders report shows that USD longs were cut back substantially. This suggests that traders are starting to turn dollar bearish which is in line with the recent improvements in risk appetite.

source: Deutsche Bank

There is also an article in today’s NY Times that suggest better than expected results from stress tests based upon quotes from a “senior official.â€‌ Tests of Banks May Bring Hope More Than Fear

The central question in the financial markets right now is whether the global recession is nearing an end. In addition to the U.S., improvements were also seen in the Chinese and the U.K. manufacturing sectors. The price action of the currency, equity and bond markets suggest investors believe that the worst is over. The U.S. Treasury yield curve is steepening, which means that longer term rates are rising. This is a reflection of the market’s optimistic outlook for the U.S. economy. However we are only cautiously optimistic because it is far too early to label the recent improvements a new trend.

Wad of Cash

One of the primary arguments for a recovery and further gains in equities is the wad of cash sitting on sidelines. According to JPMorgan, close to $700 billion is parked in bank accounts and money market funds in the U.S. alone and therefore deployment of these funds could pave the way for a stronger recovery in currencies and equities. If you remember, the recession was triggered by a crisis of confidence and if confidence is restored, the money sitting on the sidelines may move back into the markets. We will be watching closely to see if the recent stability can turn into sustainability here in the U.S. and abroad. In the meantime, it is encouraging to see currency, equity, commodities and bond traders all price in a greater chance of a recovery.

article from kathylien

The primary difference is that the loans backing a covered bond remain on the balance sheet of the issuing bank. The bonds are therefore obligations of the issuing bank, and the issuer retains control over the assets. Traditional mortgage and asset-backed securities are typically off-balance-sheet transactions in which lenders sell loans to special purpose vehicles that issue bonds, thus removing the loans—and the risk associated with those loans—from the lenders’ balance sheets.

Many European governments have introduced covered bonds.

According to PIMCO:

Germany introduced covered bonds, known as Pfandbriefe, in 1770 to finance public works projects. Since then, 24 other countries in Europe have adopted the covered bond structure, each with its own unique laws. In Spain, for example, covered bonds backed by mortgages, known as Cأ©dulas Hipotecarias, were created by a special law in 1981, while in France, covered bonds, known as obligations fonciأ¨res, can be traced as far back as 1852, with the establishment of the first mortgage bank, Credit Foncier de France. All countries with covered bond laws now allow for bonds backed by mortgages, while only a few allow covered bonds backed by public sector loans: Germany, France, Austria and Spain. In Denmark and Germany, covered bonds may also be secured by ship loans.

Oil, Oil, Oil

There is only answer to that question – and that is Oil, with a capital O. Talk of a recovery in the global economy has cemented the bottom in commodity prices. The price of oil is now above $50 a barrel, leaving the fear that oil prices could fall below $30, a distant memory. Over the past year, the positive correlation between oil prices and the Canadian dollar / U.S. dollar currency pair is more than 95 percent. The rise in oil prices is a direct consequence of the fall in the U.S. dollar and therefore it is the greenback that will determine the sustainability of the rally in oil prices and by extension, the Canadian dollar. The results from the stress tests on banks and the U.S. non-farm payrolls report poses the biggest threat to the U.S. dollar this week but we believe that the market will shrug off both event risks. A lot of the potential results from the stress tests have been leaked and the market is ignoring them for the most part. We also believe that non-farm payrolls will surprise to the upside given the improvement in the employment component of service sector ISM. Investors are focused on the recovery story and as long as the U.S. reports are not horrendous, risk appetite could hold steady which would be positive for the Canadian dollar.

Click on chart to enlarge

China Spending Spree Likely to Include Canada

Even though Canadians are annoyed by China’s ban on pork imports, the country’s spending spree should include Canadian resource companies. China has invested heavily in Canadian oil sand projects and there is a decent chance that they will take advantage of the cheap oil prices to add to their investments. Like the U.S., China has been flashing signs of a recovery and Canada will stand to benefit from an upturn in both economic giants.

But, 1.15 USD/CAD Hurts Exporters

The only problem is that a USD/CAD exchange rate of 1.15 is damaging for Canadian exporters. Canadian policy makers may be eyeing that level very closely because it represents significant support. If USD/CAD breaks below the 1.15 level, there is no meaningful support until 1.05. In this current economic environment, the Canadian economy may not be able to handle much more appreciation in the currency. It will also offset any gains that higher oil prices can provide for Canadian oil producers. Near term support in the currency pair comes in at 1.1685, which is exactly where the USD/CAD sell-off stopped intraday. A further rebound up to 1.1850 is possible, but as long as the currency pair does not break above 1.1945 on a closing basis, it should be looked at as an opportunity to add to short USD/CAD positions. There is scope for further gains in the Canadian dollar this month – I expect a test of the 1.15 level.

Click on chart to enlarge

article from kathylien

Read Boris’ take on the Bank of England Rate Decision

Before talking about why the euro recovered, here are the 4 key announcements made by the ECB today:

1. Cut Repo Rate from 1.25 to 1.00%
2. Narrow Rate Corridor by 50bp (Marginal Lending Rate Cut by 50bp to 1.75%)
3. Extend maturity of refinancings to 12 months
4. Announced purchases of up to EU60 billion in euro-denominated covered bonds

There is no question that these are unprecedented measures for the European Central Bank. Everyone expected the quarter point rate cut to a record low of 1.00 percent, the decision to increase the maturity of refinancings to 12 months and also the narrowing of the rate corridor by 50bp, but the chance of purchasing euro-denominated covered bonds was low.

Nonetheless, Trichet has resorted to what many consider Quantitative Easing (even though he explicitly denied that this is QE) and rather than punishing the euro, currency traders are applauding the ECB for being flexible and realizing that there is no longer a stigma attached to asset purchases. Also, the amount of bonds that the ECB is purchasing is nominal compared to the rest of the central banks. The ECB plans on buying up to EU60 billion, which is less than half of the BoE’s Quantitative Easing program. More importantly however, Trichet suggested that they may sterilize the liquidity impact of bond purchases, which would limit the impact on the money supply and the pressure on the euro. The Fed and the BoE’s purchases are unsterilized. Finally, this is only an initial announcement. Further details on the bond plan will be released in June. Although rates are appropriate for the current time, the central bank could still take interest rates below 1 percent based upon Trichet’s comment that they have decided if rates have hit their lowest point

article from kathylien

Take a look at the 5 minute charts yourself to see how the EUR/USD traded intraday on the heels of the Non-farm payrolls report. Also read my article, April Non-Farm Payrolls Preview: The Charts that Matter

On a technical basis, the chart below illustrates how USD/JPY is approaching very critical levels. We have a major head and shoulders pattern in place, the currency pair is attempting to enter the sell zone according to our Bollinger Bands and is approaching trend line support. For those of you that like Ichimoku clouds, it has also entered the cloud. Therefore a close below 96.80 would open the door for a significant slide.

Click on Chart to see Larger Version

article from kathylien

Many people have criticized the U.K. government’s response to the financial crisis and recession but U.K. officials may be having the last laugh. The latest string of economic data has been surprisingly strong. There are signs of stabilization in both the housing and labor markets. Last week, the Bank of England increased the size of their Quantitative Easing program to ensure that the recent improvements will continue.

According to the RICS House price balance, new buyer inquiries were the strongest in 10 years. Housing market turnover was still low, but that may soon improve as well. The BRC retail sales monitor also jumped 4.6 percent. As a leading indicator for the broader retail sales index, the data suggests that consumer spending improved materially in the month April. The early release of the employment numbers helps to explain why consumer spending has picked up. Although the unemployment rate hit a 10 year high, the number of people claiming unemployment benefits has decreased significantly while earnings saw a smaller than expected decline.

The Bank of England will be delivering its Quarterly Inflation report tomorrow. A more negative tone is expected given the comments made following the last monetary policy decision. This should lead to a correction in the GBP/USD, but that should be looked as an opportunity to add to long positions. I expect any retracement in the GBP/USD to be limited to 1.51 and I am still looking for a move to 1.55.

article from kathylien

Australia stands to benefit from both a U.S. and Chinese recovery. The Chinese government has previously said they are looking to increase their investments abroad and Australian commodities have long been an attractive investment for the Chinese. A growing nation has growing resource needs and the previous decline in commodity prices has encouraged China to add to their stockpiles at current levels. Australia is a big copper producer and Chinese demand for copper should remain strong thanks to their stimulus spending. Last month, the Australian labor market reported positive job growth which confirms my overall belief that when the dust settles, Australia will be first to rise from the ashes. Yes, the budget deficit is expected to hit record levels, but that is a problem that plagues all major economies.

With that in mind, I have my eye on EUR/AUD. This pair has a higher spread and is more volatile, but there is scope for a move down to 1.75. I’ve been bearish this pair since 1.85, and now the 1.80 level will serve as resistance.

article from kathylien

According to Walker, if the health care reforms strains finances further or if the federal government fails to monitor spending, tax or budget control, rating agencies could strip the U.S. of its credit rating.

Is Losing AAA Rating that Big of a Deal?

But is losing the AAA rating that big of a deal? Yes. A credit rating reflects the risk of default. Therefore a lower credit rating means that a country is at greater risk of defaulting on their debt. Some global funds are mandated to invest only in AAA debt and therefore if the U.S. loses its AAA rating, we could see a massive outflow of foreign investment. Also, a credit rating downgrade is the perfect excuse to push through an alternative reserve currency to replace the dollar because it would strip the confidence of sovereign funds like China that have been buying dollars to prop up the U.S. economy. Yes, investors will still buy U.S. Treasuries, but their purchases will be less. It could also have a spillover effect on corporate debt and will raise the cost of borrowing for the U.S. government.

How Real is the Risk?

Now with the risk in mind, I think that ratings agencies talk a good game but they will problems following through. The consequences of downgrading U.S. sovereign debt is huge both politically and economically. Therefore Moody’s or any rating agency for that matter may be reluctant to the first to pull the trigger. Downgrading the U.S. is very different from downgrading Ireland. Based upon how the rating agencies have handled the credit derivatives bubble, chances are they will be behind the curve once again.

With that in mind, U.S. finances are deteriorating significantly, raising the concern of Asian nations. However if President Obama is successful at turning around the U.S. economy, America will be well equipped to meet its debt obligations.

article from kathylien

In my article yesterday, Could America Lose Its Triple A Rating, I talk about how a ratings downgrade of U.S. debt would be the perfect excuse to push through an alternative reserve currency to replace the dollar because it would strip the confidence of sovereign funds.

In the NY Times Today, Nouriel Roubini touches on this point in detail:

Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time.

But what could replace it? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi.

I encourage you to read the entire Op-ed article The Almighty Renminbi?

article from kathylien