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Euro denominated covered bonds are securities created from either a pool of private or public sector loans. Covered bonds are similar to mortgage and asset-backed securities in many ways. 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.  The Canadian dollar has been on a tear. Over the past week, the currency has rallied more than 5 percent against the U.S. dollar and is up more than 10 percent since the beginning of March. On Tuesday, the loonie even hit a 6 month intraday high against the greenback. So far this week, there has been no economic data from Canada and in general, there haven’t been any remarkable improvements in the Canadian economy. IVEY PMI will probably decline given the disappointments in wholesales and leading indicators. With that in mind, what in the world is driving the Canadian dollar higher? 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 kathylienBoth the European Central Bank and the Bank of England announced asset purchases today, but the Euro skyrocketed while the British pound fell, leading many currency traders to wonder What Sets the ECB Apart from Fed and BoE? 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% 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 kathylienMost people know that non-farm payrolls is notoriously difficult to trade. However. I want to point out that in each of the past 4 months, the knee jerk reaction in the EUR/USD was quickly erased. This suggests that the initial move is “fade-able.†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
The U.S. dollar has sold off significantly against the Japanese Yen over the past 2 trading days. It is nearing a very important support level. If it breaks that level, we could see a test and potential break of 95. Given that equities are pressuring USD/JPY lower, a “break†of the 95 level would be contingent upon a top in equities. In my special report on FX360, I talk about the fundamental reasons behind the sell-off in USD/JPY. 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
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