FX month(s) in review: Wild transition to the New Year.
Themes for 2011
Carry Trade Model – coming unhinged
Central Bank Watch: Expectations shifting higher
Saxo Bank G-10 FX Outlook
The document summarizes recent movements in the stock market, bond market, commodity markets, gold, and US dollar. Stocks rallied on hopes that politicians would negotiate to end the government shutdown and raise the debt ceiling. Short-term interest rates spiked due to uncertainty around a potential US debt default. Commodity prices remained flat due to weak global growth. Gold declined further as deflationary pressures continued globally despite central bank actions. The US dollar weakened against the euro due to improving economic news in Europe and ongoing Fed stimulus.
This document discusses the fluctuations of the US dollar and its effects on the global economy. It identifies several key factors that influence the US dollar, such as trade deficits, housing markets, interest rates, and inflation. The author then examines how fluctuations in the dollar impact the economies of other countries and cause currency values to rise or fall. Several nations are discussed as being particularly affected by changes in the dollar. Finally, the document reviews some policies the US government has implemented to address fluctuations, such as monetary and fiscal policies.
FOMC meeting crucial for forex and commoditiesHantec Markets
After the huge swing in positioning for the Fed to turn dovish, this week's meeting of the FOMC will be crucial for the medium term outlook on financial markets. We look at the impact on forex, equities and commodities markets in the coming days.
1) The global stock markets had a difficult year in 2011 with significant volatility and uncertainty driven by slowing economic growth and debt problems in Europe and the US.
2) Bond markets significantly outperformed stock markets as investors sought the perceived safety of bonds.
3) Commodity prices were also volatile, with gold and oil gaining for the year but base metals declining on slowing global demand.
1. The portfolio manager discusses the market performance in Q2 2014, with the Canadian equity markets outperforming other global regions.
2. He explains that central bank monetary policies, particularly from the US Federal Reserve and European Central Bank, have been a key driver for the stock market rally over the past few years by keeping interest rates low.
3. The portfolio manager reiterates his advice to investors to stick to their customized plans and not be deterred by short-term market fluctuations, as the plans are designed to navigate periods of volatility.
The document discusses the recent turmoil in global financial markets and argues that governments have failed to address the root causes of the economic crisis. It makes three key points:
1) Stock market declines show that the recovery is fragile and a double-dip recession may be on the horizon.
2) Governments have kicked the can down the road rather than fixing underlying problems, and the global economic landscape now has additional constraints making responses more difficult.
3) The US economy in particular remains weak with high unemployment, stagnant GDP, and a large budget deficit, showing similarities to Japan's "lost decade" raising the risk of prolonged low growth in the US.
The document summarizes the outlook for markets in 2009. It believes the recession will persist through 2009 with a weak recovery. Government stimulus plans aim to boost spending but the effects may be delayed. The Federal Reserve has increased money supply but must remove excess cash to avoid inflation. Consumers are saving more due to debt and falling asset values, which may slow growth but support bond prices. Global trade and capital flows are also slowing. The outlook calls for a challenging year with opportunities in quality companies and bonds offering higher yields. Flexibility will be needed to respond to changing opportunities and risks.
The global markets were volatile in Q1 2014 due to inconsistent economic data, geopolitical tensions in Ukraine, and fears of slowing growth in China. Canadian markets performed best, gaining 6.2%, while US, European, and emerging markets also posted strong returns. The portfolio manager recommends sticking to a diversified plan and not making hasty decisions during periods of market uncertainty. Maintaining a balanced portfolio with stocks, bonds, and cash helps reduce risk and smooth returns over the long run.
The document summarizes recent movements in the stock market, bond market, commodity markets, gold, and US dollar. Stocks rallied on hopes that politicians would negotiate to end the government shutdown and raise the debt ceiling. Short-term interest rates spiked due to uncertainty around a potential US debt default. Commodity prices remained flat due to weak global growth. Gold declined further as deflationary pressures continued globally despite central bank actions. The US dollar weakened against the euro due to improving economic news in Europe and ongoing Fed stimulus.
This document discusses the fluctuations of the US dollar and its effects on the global economy. It identifies several key factors that influence the US dollar, such as trade deficits, housing markets, interest rates, and inflation. The author then examines how fluctuations in the dollar impact the economies of other countries and cause currency values to rise or fall. Several nations are discussed as being particularly affected by changes in the dollar. Finally, the document reviews some policies the US government has implemented to address fluctuations, such as monetary and fiscal policies.
FOMC meeting crucial for forex and commoditiesHantec Markets
After the huge swing in positioning for the Fed to turn dovish, this week's meeting of the FOMC will be crucial for the medium term outlook on financial markets. We look at the impact on forex, equities and commodities markets in the coming days.
1) The global stock markets had a difficult year in 2011 with significant volatility and uncertainty driven by slowing economic growth and debt problems in Europe and the US.
2) Bond markets significantly outperformed stock markets as investors sought the perceived safety of bonds.
3) Commodity prices were also volatile, with gold and oil gaining for the year but base metals declining on slowing global demand.
1. The portfolio manager discusses the market performance in Q2 2014, with the Canadian equity markets outperforming other global regions.
2. He explains that central bank monetary policies, particularly from the US Federal Reserve and European Central Bank, have been a key driver for the stock market rally over the past few years by keeping interest rates low.
3. The portfolio manager reiterates his advice to investors to stick to their customized plans and not be deterred by short-term market fluctuations, as the plans are designed to navigate periods of volatility.
The document discusses the recent turmoil in global financial markets and argues that governments have failed to address the root causes of the economic crisis. It makes three key points:
1) Stock market declines show that the recovery is fragile and a double-dip recession may be on the horizon.
2) Governments have kicked the can down the road rather than fixing underlying problems, and the global economic landscape now has additional constraints making responses more difficult.
3) The US economy in particular remains weak with high unemployment, stagnant GDP, and a large budget deficit, showing similarities to Japan's "lost decade" raising the risk of prolonged low growth in the US.
The document summarizes the outlook for markets in 2009. It believes the recession will persist through 2009 with a weak recovery. Government stimulus plans aim to boost spending but the effects may be delayed. The Federal Reserve has increased money supply but must remove excess cash to avoid inflation. Consumers are saving more due to debt and falling asset values, which may slow growth but support bond prices. Global trade and capital flows are also slowing. The outlook calls for a challenging year with opportunities in quality companies and bonds offering higher yields. Flexibility will be needed to respond to changing opportunities and risks.
The global markets were volatile in Q1 2014 due to inconsistent economic data, geopolitical tensions in Ukraine, and fears of slowing growth in China. Canadian markets performed best, gaining 6.2%, while US, European, and emerging markets also posted strong returns. The portfolio manager recommends sticking to a diversified plan and not making hasty decisions during periods of market uncertainty. Maintaining a balanced portfolio with stocks, bonds, and cash helps reduce risk and smooth returns over the long run.
The magnificent 7 and equity markets review 11Markets Beyond
2011 was a bumby year for financial markets and 2012 will be no less hectic. However the US economic picture is improving and as written in early 2011 no double dip to be expected but for FED policy folly.
Global imbalances remain, but the eurozone is where lies the deepest problems which have not been properly addressed.
Remain invested in high yielding equities / net cash companies with a strong franchise and look at strong brands in fast growing economies; stay clear from the bond market and financials.
The document summarizes bond market activity in the second quarter of 2015. It notes that while headlines proclaimed a "bond crash" and "bond rout", bond losses were still small at around 3% given the total size of global bond markets. It discusses factors that pushed some European bond yields negative, including quantitative easing by the ECB. It also notes increased volatility in markets due to events like Greece's debt crisis and a stock market drop in China, but concludes that bonds are not "dead" and various central banks will continue supporting low rates.
- Emerging markets have experienced weaker economic growth compared to developed markets in 2013.
- Emerging market equities have significantly underperformed developed market equities since 2010, with the underperformance accumulating prior to recent tapering talk.
- Within emerging markets, BRIC countries like Brazil, Russia, India, and China have particularly underperformed the broader emerging market universe.
Mid year outlook market perspectives july 2012 finalRankia
The document provides an outlook for the second half of 2012. It discusses that the global economy remains in a slow recovery threatened by the ongoing European crisis. The US economy is expected to continue modest growth of around 2% for the rest of the year. However, risks include the potential "fiscal cliff" facing the US and uncertainty around resolving Europe's banking and debt issues, which could trigger a global recession if not addressed. The outlook remains cautious given these geopolitical and economic uncertainties.
‘Deflationary Boom Markets’
‘Deflationary Boom Markets’ is the name of the game. Deflation forces Central Banks into action. Central banks to push Bonds and Equities higher, inflating the bubble some more, although on a rougher path and with higher volatility than we got accustomed to in recent years.
This document provides an investment outlook and analysis from Fasanara Capital. It discusses recent volatility in the bond markets, particularly the German bund market, and provides Fasanara Capital's medium and long-term views. In the medium term, they expect bund yields to fall further, European government bond spreads to tighten, and European equities to rise. In the long term, they believe deflationary trends will continue in Europe and central banks will need to continue monetary stimulus to prevent economic deterioration, which could eventually lead to a break in the euro currency peg.
How Does the US Economy Affect the US Dollar?InvestingTips
http://www.forexconspiracyreport.com/how-does-the-us-economy-affect-the-us-dollar/
How Does the US Economy Affect the US Dollar?
When a Forex trader looks to the future in trading the US dollar, he or she watches for the factors that drive the currency higher and lower against others. One of the major factors is the strength of the US economy. How does the US economy affect the US dollar? The US dollar fell in value against other major currencies the other day when US retail sales missed estimates according to NASDAQ.
The U.S. Dollar was pressured against a basket of currencies on Monday after a government report showed retail sales data for September missed economists’ expectations.
A Commerce Department report on Monday showed that U.S. retail sales barely rose in September as a rebound in motor vehicle purchases was offset by the biggest drop in spending at restaurants and bars in nearly two years.
Other factors in the dollar’s decline were the prospect of trouble with Saudi Arabia in regard to the murder of Saudi reporter by Saudi security people and tightening of US Treasury yields.
Economic Reports That Affect the US Dollar
Investopedia explains how economic factors in an expansion can cause inflation which in turn weakens the dollar and how an economic contraction can cause deflation which makes the dollar more valuable. Forex traders who follow the fundamentals look at 5 reports that affect the dollar.
A broad range of economic reports are useful when conducting research on the dollar.
Keep in mind that the actual statistics are often less important than their direction (rising or falling) and their success or failure in meeting pre-release expectations.
Jeremy Grantham provides a brief summary of key points in a short quarterly letter due to travel and client conferences. He notes the dire situation in the Eurozone and feels vindicated in his forecast of a multi-year economic slowdown due to high debt levels and financial incompetence. Additionally, developed nations face permanently slower growth due to aging populations and inadequate savings. The US specifically has declining infrastructure, education, and government effectiveness that threaten competitiveness. Grantham recommends avoiding lower quality US stocks but having a normal weight in global equities overall, tilting toward safety, and being willing to hold substantial cash reserves given long-term risks.
Could the Fed drive a Santa Claus rally this week?Hantec Markets
It may be the final trading week of the year, but the key risks remain and volatility is elevated. The FOMC monetary policy will be the key risk factor for traders this week. We consider the impact on forex, equities and commodities.
Lattice Energy LLC-Larsen Memo re Stock Indexes vs Gold Price Ratios-August 1...Lewis Larsen
Memo prompted by anomalies in price of Gold versus price of stocks (DJIA/Gold ratio) that occurred in August 2011. Quoting: “Gold is not presently expensive because of a soon-to-be rapid acceleration in overall rate of inflation. In my view, that scenario is very unlikely, especially given the reduction in government fiscal stimulus now starting in the U.S. and Europe. Recent behavior of U.S. Treasury securities supports that notion --- yields on the long-end of the debt markets (which Fed has very little direct control over) have actually gone down significantly since the latest market break began. As of mid-session this morning, the 30-year US Treasury bond was being priced to yield 3.53%; if a pending inflationary surge were the underlying factor spooking today’s equity markets, long bond yields would be going up not down. Three-month T-bill rates are within a rounding-error of zero %; no hints of inflationary pressures there either. The fact is that the U.S. economy is still quite weak and there is little demand for short-term credit --- U.S. consumers aren't in good enough financial shape to help run-up hard asset prices and create inflationary pressures.”
Ss china the us & currencies harvard kennedy school presentationMarcus Vannini
- The document discusses currency issues between China, the US, and the RMB. It argues that China should allow gradual appreciation of the RMB for several reasons, including avoiding overheating of the Chinese economy and making exchange rate policy an effective tool for balancing internal and external economic conditions.
- It also discusses criticisms of US twin deficits and theories around sustainable current account deficits. The global monetary system is shifting from a dollar-based system to one with multiple international reserve currencies.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Despite hopes that the anti-QE rhetoric would die down, the noise continued last week, and unfortunately, become more political. One of the key aspects of the Fed is its independence. The Fed is answerable to Congress, and ultimately, to the American people. However, it is not controlled by Congress – nor would we want it to be controlled by Congress. Attacks on the Fed and its latest round of asset purchases aren’t helping.
The document provides a comprehensive review and outlook of the US economy across several areas including demographics, markets, real estate, employment, and GDP. It summarizes key data and trends in each area, with some of the main points being that demographics will weigh on consumption as baby boomers retire, the housing market still faces significant headwinds from high inventory and foreclosures, unemployment remains at historically high levels across many sectors, and GDP growth is expected to be positive in the short term but a return to recession is still possible given weak underlying fundamentals.
- The global economy slowed in the first half of 2019 as manufacturing orders declined and trade growth weakened due to the US-China trade war.
- Despite these headwinds, global markets posted positive returns in the first half led by developed market equities. Both stocks and bonds rose together due to diverging views on future central bank actions.
- Key investment themes for the second half include ongoing central bank easing, uncertainty around the US-China trade war, potential for an earnings recession, and safe haven assets like gold continuing to benefit from rising global risks.
Rumpelstiltskin at the Fed by Harley Bassman, PIMCO, executive vice presiden...Nigel Mark Dias
Rumpelstiltskin at the Fed by Harley Bassman, PIMCO, executive vice president & portfolio manager
SUMMARY
Has the Federal Reserve reached the bottom of its policy toolkit? Many things are still possible, at least in theory, including negative interest rates (which we believe would be ineffective and potentially harmful) or a “helicopter drop” of money. Another option is to resurrect a successful plan from 83 years ago: Purchase a tremendous amount of gold at a price substantially higher than market levels.
A massive Fed gold purchase program might finally lift the anchor on inflationary expectations and consumers’ spending habits. It would increase the price of a globally recognized store of value. It almost sounds like a fairy tale – but it’s happened before.
Though it seems incredibly farfetched, a massive Fed gold purchase program could echo a Depression-era effort that effectively boosted the U.S. economy.
Warren Buffett famously railed against the shiny yellow metal in 2012 when he noted all the gold in the world could be swapped for the totality of U.S. cropland and seven ExxonMobils with $1 trillion left over for “walking-around money.” His point was that these assets can generate significant returns while owning gold produces no discernable cash flow.
While this observation is certainly true, the rub is that this is not a fair comparison since gold is not an asset; rather, it should be considered an alternate currency. Pundits often describe the five factors that define “money”:
Its supply is controlled or limited,
It is fungible/uniform – this is why diamonds cannot qualify,
It is portable – this is why land cannot qualify,
It is divisible – thus art cannot be money, and
It is liquid – this means people will readily accept it in exchange.
By this definition, gold is certainly a form of money, and to Mr. Buffett’s point, one also earns no cash flow on paper dollars, euros, yen or yuan.
The magnificent 7 and equity markets review 9Markets Beyond
Turmoil in the Arab world triggered a market correction that was overdue. We are still in a bull market and opportunities to re-enter will soon materialize.
The US dollar may be bottoming based on several factors:
1) Valuation measures like the Big Mac Index and OECD measures imply the dollar is undervalued by 30-35%
2) Increases in US oil and gas production from shale could reduce US imports and improve the trade balance by a third
3) A turnaround in US economic confidence and growth could support a rise in the dollar through upward revisions to interest rate expectations
there will be 2 articles attached may you please summarize the artic.docxbarbaran11
there will be 2 articles attached may you please summarize the articles attached seperatley and add a bibllography and opinion to each (must be at least 2 pgs double spaced)
Japan’s Swinging Bonds — A Future Economic Crisis
ARTICLE
COMMENTS (1)
BONDS
JAPAN
smaller
Larger
facebook
twitter
google plus
linked in
Email
Print
By Vincent Cignarella
The inability of Japanese government debt to stop gyrating wildly poses a significant threat to the country’s climb out of its two-decade economic mire.
In the past six months, Japanese 10-year bond yields have swung like a pendulum. The huge swings were never more prescient than Thursday, when the yield jumped over 1.0% for the first time in over a year.
That volatility poses a significant threat to Japan, specifically through the balance sheets of its banks. In a statement clearly acknowledging those risks, Bank of Japan Governor Haruhiko Kuroda said Friday that it is “extremely desirable” for the nation’s debt market to be stable.
When it comes to government debt, Japan’s biggest banks are all in. Consolidated financial statements of
Mizuho Financial Group
8411.TO
0.00%
and Mitsubishi Financial Group show they each hold 23% of total assets in Japanese national government and a variety of government agency bonds.
As that debt vacillates in price so do the banks’ Tier 1 capital asset ratios and presumably their ability to lend and create loans. Japanese banks would face 6.6 trillion yen in losses should interest rates rise broadly by one percentage point, according to the Bank of Japan.
One week into 2013, 10-year government bonds climbed in yield to nearly 0.85% from early December lows of 0.69%. They then fell dramatically to 0.44% in early April only to climb again violently to the 12-month high on Thursday. All that interest rate volatility and so far, no inflation in sight.
Recent gross domestic product figures from Japan showed growth of 3.5% on an annual basis but the GDP deflator, a measure of inflation printed at a decline of 1.2% from a year earlier. That is 14 consecutive negative quarters.
If these government bond yields continue to gyrate beyond the central bank’s control and no inflation comes, the government stands to lose credibility domestically.
That credibility is already somewhat in question given during his first term as prime minister, Shinzo Abe lacked the political power to follow central bank action with his own government reform. Without that reform, Abe’s goal of 2% inflation within two years is in grave peril.
If he has any doubts about the need for government action, look no further than U.S. Personal Consumption Expenditures, the Federal Reserve’s favorite indicator for inflation, was 2.5% in 2008 before the global financial crisis took hold. Now almost five years later and massive quantitative easing from the Fed, the PCE is just 1.1% because there has been no help from fiscal policy.
The importance of credibility is even greater in Japan, where local investors finan.
Signs of inflation will raise the stakes for the Fed’s policy communications. Favorable conditions for leveraged strategies could reverse quickly. Reasonable valuations and the Fed’s policy goals continue to support risk assets.
The magnificent 7 and equity markets review 11Markets Beyond
2011 was a bumby year for financial markets and 2012 will be no less hectic. However the US economic picture is improving and as written in early 2011 no double dip to be expected but for FED policy folly.
Global imbalances remain, but the eurozone is where lies the deepest problems which have not been properly addressed.
Remain invested in high yielding equities / net cash companies with a strong franchise and look at strong brands in fast growing economies; stay clear from the bond market and financials.
The document summarizes bond market activity in the second quarter of 2015. It notes that while headlines proclaimed a "bond crash" and "bond rout", bond losses were still small at around 3% given the total size of global bond markets. It discusses factors that pushed some European bond yields negative, including quantitative easing by the ECB. It also notes increased volatility in markets due to events like Greece's debt crisis and a stock market drop in China, but concludes that bonds are not "dead" and various central banks will continue supporting low rates.
- Emerging markets have experienced weaker economic growth compared to developed markets in 2013.
- Emerging market equities have significantly underperformed developed market equities since 2010, with the underperformance accumulating prior to recent tapering talk.
- Within emerging markets, BRIC countries like Brazil, Russia, India, and China have particularly underperformed the broader emerging market universe.
Mid year outlook market perspectives july 2012 finalRankia
The document provides an outlook for the second half of 2012. It discusses that the global economy remains in a slow recovery threatened by the ongoing European crisis. The US economy is expected to continue modest growth of around 2% for the rest of the year. However, risks include the potential "fiscal cliff" facing the US and uncertainty around resolving Europe's banking and debt issues, which could trigger a global recession if not addressed. The outlook remains cautious given these geopolitical and economic uncertainties.
‘Deflationary Boom Markets’
‘Deflationary Boom Markets’ is the name of the game. Deflation forces Central Banks into action. Central banks to push Bonds and Equities higher, inflating the bubble some more, although on a rougher path and with higher volatility than we got accustomed to in recent years.
This document provides an investment outlook and analysis from Fasanara Capital. It discusses recent volatility in the bond markets, particularly the German bund market, and provides Fasanara Capital's medium and long-term views. In the medium term, they expect bund yields to fall further, European government bond spreads to tighten, and European equities to rise. In the long term, they believe deflationary trends will continue in Europe and central banks will need to continue monetary stimulus to prevent economic deterioration, which could eventually lead to a break in the euro currency peg.
How Does the US Economy Affect the US Dollar?InvestingTips
http://www.forexconspiracyreport.com/how-does-the-us-economy-affect-the-us-dollar/
How Does the US Economy Affect the US Dollar?
When a Forex trader looks to the future in trading the US dollar, he or she watches for the factors that drive the currency higher and lower against others. One of the major factors is the strength of the US economy. How does the US economy affect the US dollar? The US dollar fell in value against other major currencies the other day when US retail sales missed estimates according to NASDAQ.
The U.S. Dollar was pressured against a basket of currencies on Monday after a government report showed retail sales data for September missed economists’ expectations.
A Commerce Department report on Monday showed that U.S. retail sales barely rose in September as a rebound in motor vehicle purchases was offset by the biggest drop in spending at restaurants and bars in nearly two years.
Other factors in the dollar’s decline were the prospect of trouble with Saudi Arabia in regard to the murder of Saudi reporter by Saudi security people and tightening of US Treasury yields.
Economic Reports That Affect the US Dollar
Investopedia explains how economic factors in an expansion can cause inflation which in turn weakens the dollar and how an economic contraction can cause deflation which makes the dollar more valuable. Forex traders who follow the fundamentals look at 5 reports that affect the dollar.
A broad range of economic reports are useful when conducting research on the dollar.
Keep in mind that the actual statistics are often less important than their direction (rising or falling) and their success or failure in meeting pre-release expectations.
Jeremy Grantham provides a brief summary of key points in a short quarterly letter due to travel and client conferences. He notes the dire situation in the Eurozone and feels vindicated in his forecast of a multi-year economic slowdown due to high debt levels and financial incompetence. Additionally, developed nations face permanently slower growth due to aging populations and inadequate savings. The US specifically has declining infrastructure, education, and government effectiveness that threaten competitiveness. Grantham recommends avoiding lower quality US stocks but having a normal weight in global equities overall, tilting toward safety, and being willing to hold substantial cash reserves given long-term risks.
Could the Fed drive a Santa Claus rally this week?Hantec Markets
It may be the final trading week of the year, but the key risks remain and volatility is elevated. The FOMC monetary policy will be the key risk factor for traders this week. We consider the impact on forex, equities and commodities.
Lattice Energy LLC-Larsen Memo re Stock Indexes vs Gold Price Ratios-August 1...Lewis Larsen
Memo prompted by anomalies in price of Gold versus price of stocks (DJIA/Gold ratio) that occurred in August 2011. Quoting: “Gold is not presently expensive because of a soon-to-be rapid acceleration in overall rate of inflation. In my view, that scenario is very unlikely, especially given the reduction in government fiscal stimulus now starting in the U.S. and Europe. Recent behavior of U.S. Treasury securities supports that notion --- yields on the long-end of the debt markets (which Fed has very little direct control over) have actually gone down significantly since the latest market break began. As of mid-session this morning, the 30-year US Treasury bond was being priced to yield 3.53%; if a pending inflationary surge were the underlying factor spooking today’s equity markets, long bond yields would be going up not down. Three-month T-bill rates are within a rounding-error of zero %; no hints of inflationary pressures there either. The fact is that the U.S. economy is still quite weak and there is little demand for short-term credit --- U.S. consumers aren't in good enough financial shape to help run-up hard asset prices and create inflationary pressures.”
Ss china the us & currencies harvard kennedy school presentationMarcus Vannini
- The document discusses currency issues between China, the US, and the RMB. It argues that China should allow gradual appreciation of the RMB for several reasons, including avoiding overheating of the Chinese economy and making exchange rate policy an effective tool for balancing internal and external economic conditions.
- It also discusses criticisms of US twin deficits and theories around sustainable current account deficits. The global monetary system is shifting from a dollar-based system to one with multiple international reserve currencies.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Despite hopes that the anti-QE rhetoric would die down, the noise continued last week, and unfortunately, become more political. One of the key aspects of the Fed is its independence. The Fed is answerable to Congress, and ultimately, to the American people. However, it is not controlled by Congress – nor would we want it to be controlled by Congress. Attacks on the Fed and its latest round of asset purchases aren’t helping.
The document provides a comprehensive review and outlook of the US economy across several areas including demographics, markets, real estate, employment, and GDP. It summarizes key data and trends in each area, with some of the main points being that demographics will weigh on consumption as baby boomers retire, the housing market still faces significant headwinds from high inventory and foreclosures, unemployment remains at historically high levels across many sectors, and GDP growth is expected to be positive in the short term but a return to recession is still possible given weak underlying fundamentals.
- The global economy slowed in the first half of 2019 as manufacturing orders declined and trade growth weakened due to the US-China trade war.
- Despite these headwinds, global markets posted positive returns in the first half led by developed market equities. Both stocks and bonds rose together due to diverging views on future central bank actions.
- Key investment themes for the second half include ongoing central bank easing, uncertainty around the US-China trade war, potential for an earnings recession, and safe haven assets like gold continuing to benefit from rising global risks.
Rumpelstiltskin at the Fed by Harley Bassman, PIMCO, executive vice presiden...Nigel Mark Dias
Rumpelstiltskin at the Fed by Harley Bassman, PIMCO, executive vice president & portfolio manager
SUMMARY
Has the Federal Reserve reached the bottom of its policy toolkit? Many things are still possible, at least in theory, including negative interest rates (which we believe would be ineffective and potentially harmful) or a “helicopter drop” of money. Another option is to resurrect a successful plan from 83 years ago: Purchase a tremendous amount of gold at a price substantially higher than market levels.
A massive Fed gold purchase program might finally lift the anchor on inflationary expectations and consumers’ spending habits. It would increase the price of a globally recognized store of value. It almost sounds like a fairy tale – but it’s happened before.
Though it seems incredibly farfetched, a massive Fed gold purchase program could echo a Depression-era effort that effectively boosted the U.S. economy.
Warren Buffett famously railed against the shiny yellow metal in 2012 when he noted all the gold in the world could be swapped for the totality of U.S. cropland and seven ExxonMobils with $1 trillion left over for “walking-around money.” His point was that these assets can generate significant returns while owning gold produces no discernable cash flow.
While this observation is certainly true, the rub is that this is not a fair comparison since gold is not an asset; rather, it should be considered an alternate currency. Pundits often describe the five factors that define “money”:
Its supply is controlled or limited,
It is fungible/uniform – this is why diamonds cannot qualify,
It is portable – this is why land cannot qualify,
It is divisible – thus art cannot be money, and
It is liquid – this means people will readily accept it in exchange.
By this definition, gold is certainly a form of money, and to Mr. Buffett’s point, one also earns no cash flow on paper dollars, euros, yen or yuan.
The magnificent 7 and equity markets review 9Markets Beyond
Turmoil in the Arab world triggered a market correction that was overdue. We are still in a bull market and opportunities to re-enter will soon materialize.
The US dollar may be bottoming based on several factors:
1) Valuation measures like the Big Mac Index and OECD measures imply the dollar is undervalued by 30-35%
2) Increases in US oil and gas production from shale could reduce US imports and improve the trade balance by a third
3) A turnaround in US economic confidence and growth could support a rise in the dollar through upward revisions to interest rate expectations
there will be 2 articles attached may you please summarize the artic.docxbarbaran11
there will be 2 articles attached may you please summarize the articles attached seperatley and add a bibllography and opinion to each (must be at least 2 pgs double spaced)
Japan’s Swinging Bonds — A Future Economic Crisis
ARTICLE
COMMENTS (1)
BONDS
JAPAN
smaller
Larger
facebook
twitter
google plus
linked in
Email
Print
By Vincent Cignarella
The inability of Japanese government debt to stop gyrating wildly poses a significant threat to the country’s climb out of its two-decade economic mire.
In the past six months, Japanese 10-year bond yields have swung like a pendulum. The huge swings were never more prescient than Thursday, when the yield jumped over 1.0% for the first time in over a year.
That volatility poses a significant threat to Japan, specifically through the balance sheets of its banks. In a statement clearly acknowledging those risks, Bank of Japan Governor Haruhiko Kuroda said Friday that it is “extremely desirable” for the nation’s debt market to be stable.
When it comes to government debt, Japan’s biggest banks are all in. Consolidated financial statements of
Mizuho Financial Group
8411.TO
0.00%
and Mitsubishi Financial Group show they each hold 23% of total assets in Japanese national government and a variety of government agency bonds.
As that debt vacillates in price so do the banks’ Tier 1 capital asset ratios and presumably their ability to lend and create loans. Japanese banks would face 6.6 trillion yen in losses should interest rates rise broadly by one percentage point, according to the Bank of Japan.
One week into 2013, 10-year government bonds climbed in yield to nearly 0.85% from early December lows of 0.69%. They then fell dramatically to 0.44% in early April only to climb again violently to the 12-month high on Thursday. All that interest rate volatility and so far, no inflation in sight.
Recent gross domestic product figures from Japan showed growth of 3.5% on an annual basis but the GDP deflator, a measure of inflation printed at a decline of 1.2% from a year earlier. That is 14 consecutive negative quarters.
If these government bond yields continue to gyrate beyond the central bank’s control and no inflation comes, the government stands to lose credibility domestically.
That credibility is already somewhat in question given during his first term as prime minister, Shinzo Abe lacked the political power to follow central bank action with his own government reform. Without that reform, Abe’s goal of 2% inflation within two years is in grave peril.
If he has any doubts about the need for government action, look no further than U.S. Personal Consumption Expenditures, the Federal Reserve’s favorite indicator for inflation, was 2.5% in 2008 before the global financial crisis took hold. Now almost five years later and massive quantitative easing from the Fed, the PCE is just 1.1% because there has been no help from fiscal policy.
The importance of credibility is even greater in Japan, where local investors finan.
Signs of inflation will raise the stakes for the Fed’s policy communications. Favorable conditions for leveraged strategies could reverse quickly. Reasonable valuations and the Fed’s policy goals continue to support risk assets.
Trade negotiations and renewed dollar strength is key this weekHantec Markets
The weekly outlook report provides an overview of key economic events and indicators for the coming week, as well as analysis of currency, equity, commodity, and bond markets. Key events include Eurozone flash PMIs on Thursday and US existing home sales data on Tuesday. The report notes renewed US dollar strength and risks to growth from an escalating US-China trade dispute. It recommends using rallies in sterling and the euro as selling opportunities given political and growth risks.
Will US stronger US relative economic performance continue? Hantec Markets
With the US Government shutdown coming to an end, delayed US data will begin to filter through and after the dovish shift from the Fed it will be interesting to see if US economic outperformance continues to show and how this impacts on the dollar. We look at the key factors impacting on forex, equities and commodities this week.
US dollar bulls looking closely at trade talks this weekHantec Markets
The outcome of the US/China trade negotiations remain key for the near to medium term outlook on markets. The US dollar is a key mover on this. We look at how this is impacting on the outlook for forex, equities and commodities.
Watching for FOMC minutes and yield curves this week Hantec Markets
The recent plummet in bond yields has hit risk appetite. What are yield curves telling us about about the prospects of the US economy? We look at the key factors impacting across major forex, equities and commodities markets.
The document discusses the investment outlook and portfolio positioning of Fasanara Capital. It states that despite weak economics and high valuations, the path of least resistance for markets in the short term is higher, as long as tensions in Ukraine do not escalate. Within equities, the portfolio prefers Italy, Greece, and Japan over US markets. The portfolio is positioned for a scenario where Russia de-escalates tensions in Ukraine, allowing markets to rise to new highs, especially in peripheral Europe. However, it remains hedged for a potential escalation causing a more significant market correction.
Investor Pessimism Fertile Ground For The Next Leg UpDanionescu
Investor pessimism is currently high despite signs of steady economic growth in North America. Stock prices have declined significantly over the past year and experts are divided on whether the market will continue to decline over the summer or resume rising. However, the high level of negativity and skepticism from investors suggests the conditions are ripe for a significant market rally, as periods of widespread pessimism have often been followed by rises in the past. Financial and technology stocks may outperform if interest rates rise.
Trump/Kim, the FOMC and ECB all crucial this weekHantec Markets
After the acrimonious culmination of the G7 meeting at the weekend, financial markets are already looking forward to a hectic few days ahead. A crucial geopolitical summit between the US and North Korea, in addition to crucial central bank decisions from the FOMC and ECB. We consider the outlook on forex, equities and commodities markets.
- Global stock markets rose strongly in the third quarter of 2010, with the S&P 500 experiencing its best September performance since 1939 due to gains in the telecommunications sector.
- Commodity prices also increased, with base metal prices leading gains, while bond markets were boosted by strong investor demand that pushed yields lower.
- By the end of the third quarter, fears of a slowdown in China's economy, a double-dip recession in the US, and the European sovereign debt crisis all subsided, helping fuel the stock market rebound.
- Global stock markets rose strongly in the third quarter of 2010, with the S&P 500 experiencing its best September performance since 1939 due to gains in the telecommunications sector. Commodity prices also increased.
- Materials stocks performed well, particularly in fertilizer, metals and mining, as Chinese economic indicators exceeded expectations, calming fears of an Asian slowdown.
- Investor demand for fixed income remained strong despite low bond yields, as flows continued into government and corporate bonds seeking stability and income. However, bond prices may fall as money rotates to equities.
Brexit chaos continues with the can kicked further down the roadHantec Markets
The Brexit can has been kicked down the road for a couple of weeks at least, but we are not out of the woods yet. We look at the latest developments and the impact on markets. The increased market fear over an inverted US yield curve is impacting on the outlook for forex, equities and commodities.
The legacy of the dovish fed is set to continue this weekHantec Markets
After the FOMC monetary policy decision and Yellen’s press conference, the Fed made a staggering climb-down on its monetary policy. Has the Fed now got a credibility issue?
- The document discusses the minutes from the recent Fed meeting which revealed divisions among members on the outlook for inflation. This caused increased division among investors as stocks and bonds both rose, seen as a contradiction.
- It suggests the Fed is actually more worried about inflation than they state publicly. Their divisions may be an attempt to cover up these underlying concerns.
- Looking ahead, it says the upcoming ECB minutes could confirm the euro's downtrend or spark a breakout to the upside, completing a triple bottom pattern. It argues Draghi may have misled euro investors about the ECB's intentions.
1) Greece passed austerity measures to receive EU aid and avoid default, relieving investors and sending markets soaring last week.
2) Positive manufacturing and earnings reports from companies like Nike also contributed to the market gains.
3) Sentiment can change quickly in financial markets, as the market had fallen for seven of the previous eight weeks but then surged last week.
The document provides an overview and analysis of recent developments in equities, fixed income, currencies and commodities markets. It discusses the following key points:
- Equities were flat with the S&P 500 rising 0.1% and developed markets down 0.5%. The US PMI came in at 48.6 indicating contraction and weakness in the machinery and metals sectors due to a weak Eurozone and slowing China.
- Bonds were flat with US Treasury yields falling 4 basis points. The Japanese government bond yield sits at 0.3% with its 2-year yield in negative territory, prompting the shift to equities.
- The US dollar strengthened on expected rate hikes while the Euro faces
Politics and major central banks are key this week Richard Perry
Politics and central bank is high on the agenda this week as markets continue to react to protectionist moves from Donald Trump, the Italian election over the weekend and look forward to four major central banks announcing their latest monetary policy decisions. We consider the outlook for forex, equities and commodities markets in the coming days.
Greece negotiations and tier one US data key for traders this weekHantec Markets
Negotiations between Greece and its creditors (the IMF and the EU) continue, but as yet there is no deal. Greek claims
that a deal was close were swiftly rebuffed by the IMF, leaving Greece still without the final €7.2bn bailout tranche it
needs to pay €1.6bn of debt repayments owed to the IMF in June. However, it would appear a 5th June deadline (for a €300m repayment) is not actually a deadline at all. There is an IMF technicality that allows a lumping together of all
payments, to then be paid at the end of the month.
US dollar strengthening once more as focus remains on the data this weekHantec Markets
Are we set for another improvement in the dollar? There continue to be market reactions to the negative surprises, but there now seems to be a different mind-set to positive data surprises and this is showing in a turn around in sentiment on the greenback. Last week there was a sharp pick up in the Home Starts and Building permits which...
Bonds included on the list are for inspirational purpose only and liquidity will vary. None of the suggested bonds constitute any form of trade recommendation to sell or buy.
Pricing source: Indicative prices from Bloomberg
Bonds included on the inspirational list are selected based on market liquidity. None of the suggested bonds constitute any form of trade recommendation to sell or buy.
Pricing source: Indicative prices from Bloomberg
Bonds included on the list are for inspirational purpose only and liquidity will vary. None of the suggested bonds constitute any form of trade recommendation to sell or buy.
Pricing source: Indicative prices from Bloomberg
Saxo Fundamental FX Portfolio for March 2011Trading Floor
This month the basis of the Saxo Fundamental FX Portfolio model, the proprietary macro strength indicators, have been revised to make them more comparable across economies. There is also a change to how funds are allocated in the portfolio model – from an absolute value to a percentage allocation, making the portfolio easier to use. Next month there will be an additional table detailing the changes to the portfolio allocation.
Back-test performance (December 1994 – February 2011)* EUR USD GBP
Stock market analysis: Apple, eBay INC,Google,Morgan Stanley,Western Digial Corp. and more. In the several sectors like finance, technology & basic materials. #stocktrading #stocks. By Saxo Bank's Tradingfloor.com team.
Global Value Equity Portfolio (March 2011)Trading Floor
This month we have adjusted our Global Value Equity Portfolio to include the reinvestment of gross dividends and introduced dynamic weights for the constituents. This reduces transaction costs, enhances excess return and makes the portfolio easier to replicate for investors.
Fibonacci analysis is the study of identifying potential support and resistance levels in the future based on past price trends and reversals. Fibonacci analysis is based on the mathematical discoveries of Leonardo Pisano—also known as Fibonacci. He is credited with discovering a sequence of numbers that now bears his name: the Fibonacci sequence.
Forex traders have to not only compete with other traders in the forex market but also with themselves. Oftentimes as a Forex trader, you will be your own worst enemy. We, as humans, are naturally emotional. Our egos want to be validated—we want to prove to ourselves that we know what we are doing and we are capable of taking care of ourselves. We also have a natural instinct to survive.
This document summarizes various technical analysis price patterns that provide insight into trader sentiment and expected currency pair movements. It describes continuation patterns like pennants, flags, wedges and triangles that signal a trend may continue, and reversal patterns like double tops/bottoms, triple tops/bottoms, and head-and-shoulders patterns that indicate a trend reversal. Each pattern is defined by characteristics like resistance and support levels, flag poles, breakout points and expected price targets. Recognizing these patterns can help traders identify entry points and projection targets.
FOREX - TECHNICAL ANALYSIS: TRENDS, SUPPORT AND RESISTANCE (1.4)Trading Floor
Charts, charts, charts. When most people think about trading Forex, they think about watching price movements flash by them on the charts and making money as they jump in and out of profitable trades. This is where traders show whether or not they have what it takes to be successful in Forex market.
FOREX - FUNDAMENTALS MAKE CURRENCY PAIRS MOVE (1.3)Trading Floor
The key to making money in the Forex is understanding what makes currency pairs move. Ultimately, it is investors who make currency pairs move as they buy and sell different currencies, but these investors buy and sell for a reason. Either they see something happening fundamentally in the global economy that makes them believe a currency is going to get stronger or they see something happening fundamentally that makes them believe a currency is going to get weaker. In other words, they watch the fundamentals and make their decisions according to what they see
Everything is relative in the forex market. The euro, by itself, is neither strong nor weak. The same holds true for the U.S. dollar. By itself, it is neither strong nor weak. Only when you compare two currencies together can you determine how strong or weak each currency is in relation to the other currency.
Earnings Releases 21.February - 27. February 2011Trading Floor
Stock market analysis: Apple, eBay INC,Google,Morgan Stanley,Western Digial Corp. and more. In the several sectors like finance, technology & basic materials. #stocktrading #stocks. By Saxo Bank's Tradingfloor.com team.
Commodities on the radar - Weekly Commodity Update 1.2.11Trading Floor
- Speculative futures positions across sectors increased by 5% or 94,000 lots last week as hedge funds and money managers added to long positions.
- Investors added to short dollar positions, with the accumulated dollar short now at $30 billion, close to last year's peak of -$35.16 billion.
- Long positions in WTI crude oil rose by 21k contracts and positions in grains, which make up 56% of total speculative positions, rose significantly.
Earnings releases 7. February - 11.February 2011Trading Floor
Stock market analysis: Apple, eBay INC,Google,Morgan Stanley,Western Digial Corp. and more. In the several sectors like finance, technology & basic materials. #stocktrading #stocks. By Saxo Bank's Tradingfloor.com team.
Stock market analysis: Apple, eBay INC,Google,Morgan Stanley,Western Digial Corp. and more. In the several sectors like finance, technology & basic materials. #stocktrading #stocks. By Saxo Bank's Tradingfloor.com team.
Earnings releases 17. January - 23. January 2011Trading Floor
Stock market analysis: Apple, eBay INC,Google,Morgan Stanley,Western Digial Corp. and more. In the several sectors like finance, technology & basic materials. #stocktrading #stocks. By Saxo Bank's Tradingfloor.com team.
The Forex Portfolio remains firmly negative towards the USD and to a lesser extent towards the EUR though both net short positions have been reduced in January. The net short exposure to GBP is nearly negligible now
The Forex Portfolio remains firmly negative towards the USD and to a lesser extent towards the EUR. Both net short positions have not changed much in December, but the model has also turned quite bearish on the GBP
1. January 18, 2011
FX Monthly – January 2011
John J. Hardy
Consulting FX Strategist
jjh@saxobank.com
+45 3977 4000
FX month(s) in review: Wild transition to the New Year
The two months since our November report saw remarkable developments in FX. The post QE2 announcement
environment saw a sharp reversal in some of the correlations we’ve been so used to, particularly the US
dollar’s correlation with risk and even correlations across markets in general. Other key developments included
a strong rise in interest rates and risk appetite into year end. Then to start the year, someone pressed the “all
change” button in FX and we’ve seen a sharp reversal in many of the trends that persisted into year-end –
particularly a sharp weakening in both the Swiss Franc and Australian dollar. Below are a few highlights of
what has transpired since our last report.
What goes up must come down? We saw a sharp rally into year-end by both the Swiss Franc and the
Australian dollar, both (with some measure of 20-20 hindsight) clearly driven to some degree of fixing
interest or positioning squeezes aggravated by thin liquidity in the close of the year. The strong franc was
also driven by the renewed EuroZone sovereign debt pressures and the Australian dollar rally by the
commodity rally that ended the year with a flourish with copper, for example, trading to new all time
highs. Then, after the calendar rolled into 2011, these two currencies were the weakest of the G-10 by
mid-month, with Australia suffering from a commodity sell-off and a series of flood disasters and the franc
consolidating on European attempts (though somewhat feeble) to get ahead of the curve on its sovereign
debt crisis.
Interest rates higher. At the time of our last report in mid-November, the US treasury market had
consolidated sharply from its heady gains going into the November 3 FOMC meeting – a move that was
clearly (with the wonderful aid of 20-20 hindsight) a buy-the-rumor, sell-the-fact reaction to the
confirmation that the Fed planned to move ahead with the QE2 policy of massive renewed bond purchases.
But in December, we were faced with a treasury sell-off that looked more like a rout than a mere
consolidation and this begs important questions for the USD and for major FX pairs. One the one hand,
higher interest rates in the US are a fundamental support for the currency on interest rate spread
comparisons, which in the past only favoured the USD when interest rates were falling because US rates
were almost as low as they could theoretically go and other countries’ rates generally fell faster. On the
other hand, if the higher interest rates are a reflection of bond buyers going on strike, we have an entirely
different scenario – one that is far more sensitive to the credit worthiness of the various nations and their
sovereign debt. The Japanese Yen could be particularly vulnerable in such a scenario.
A USD/risk divergence. This is related to the point just above on interest rates. The market is a bit
confused as to what to do with the USD as interest rates in the US have risen faster than for some of the
other countries (at least at times – in the final days ahead of this report, some of this effect was fading).
This is a USD positive. But equity markets – at least in the US and Germany and a few other countries –
have marched to new highs for the cycle, which has time and time been associated with USD weakness
over the last couple of years or more of the USD carry trade. We’ve been so trained to see all markets as
one hyper-correlated mass that moves like a school of fish that this new divergence in the USD and risk
2. January 18, 2011
FX Monthly – January 2011
appetite is a signal event we must pay close attention to in coming weeks. See more on the USD and risk
divergence in our Carry Trade Model article below.
Themes for 2011
As this is our first monthly of the New Year, we try to look at the bigger perspective and mull some of the
biggest issues that that the market will be chewing on this year:
To QE or not to QE? – It is abundantly clear from the latest batch of rhetoric that even the new purpoted
hawks among the voting FOMC members (Kocherlakota, Plosser, Fisher) expect for the QE2 program to run to
completion. The degree of dissent within the FOMC is so far less than we imagined would be the case, but the
more important question going forward is whether the Fed’s QE policies will end with QE2. If the economy
weakens again, Bernanke and company would likely feel the itch for another round of QE, perhaps aimed at
buttressing local and state finances, but we suspect that would be a political impossibility and that the Fed’s
maneuverability from here on out is extremely limited. Alternatively, if the US economy performs relatively
well, the Fed won’t find the justification for moving in the first place. We are expecting that this will eventually
support the USD, both because it is a sign that the Fed will be halted before it prints the greenback into
oblivion (just yet. anyway). We maintain the simultaneous assumption that growth expectations elsewhere
may fall relative to those for the US. These two factors, combined with at least a sideways if not falling risk
appetite in the months ahead are the preconditions for a stronger dollar.
Equity Markets since Fed QE2 Announcement
110
105
100
95
Shanghai Composite
90
US S&P500
MSCI Emerging Markets
85
Chart: Shanghai composite vs. MXEF vs. S&P500 – Since the QE2 announcement of early November, the
divergence in equity market performance around the world and correlations across markets in general has
been disrupted relative to the past couple of years. Are China and the emerging markets the leading indicator
here on risk?
China and Emerging Markets/Commodities: Here we throw a few themes together, but they are all
related. China is clearly grappling with problematic inflation levels from its property bubble and hot money
inflows aggravated by its dirty peg to the US dollar and the implications of hyper-easy Fed monetary policy.
Meanwhile, external demand is not growing at a rate sufficient to pass on strong price increases and domestic
consumers risk getting squeezed by commodity price rises and a high cost of rent from the property bubble.
3. January 18, 2011
FX Monthly – January 2011
This margin squeeze for companies and on consumer is going to mean increasingly inferior growth rates with
every uptick in cost push inflation and every tightening of the screws on credit. In 2011, will China move more
forcefully to avert inflation risks by slowing credit markets and economic growth and overinvestment in real
estate projects? It will be tough for the country to engineer a soft landing and as China goes, so goes the EM
trade. Another issue for China and many other EM countries like Korea and Brazil is the inconveniently large
inflows of capital that are making life difficult, though these problems could quickly reverse a la late 2008 as
capital flows will take flight and could aggravate a sell-off.
Euro PIGS crisis – our forecasts for the Euro generally suggest that the Euro crisis will come to a head sooner
rather than later in 2011. A crisis meeting will apparently be held by EU leadership in February to discuss ways
in which to get ahead of the curve on the sovereign debt problem as it is widely agreed that a Spanish default
would be too large for the current rescue funds and EFSF to handle. There have been signs of a softening
stance from Germany on the idea of expanding EU commitments, but the efforts thus far from EU leadership
have underwhelmed and the German politicians are fully aware of the political suicide that awaits any carte
blanche approach to bailing out the periphery.
One of the next key events will be the Irish election, possibly as early as late March. Ireland has no incentive
to live with its current bailout arrangement other than pride and the inertia of the EuroZone experiment and
the political opposition in Ireland is virtually guaranteed a victory. Will Ireland reschedule its debt already by
mid-year or even threaten to leave the EuroZone somewhere down the line? Credit default swaps on Irish
sovereign debt are trading higher and higher as the markets ponder this question – they were in the high 600’s
at the time of this writing compared to sub-300 levels last summer and are sharply higher even since the
EU/IMF arrangement was agreed on back in late November. (see a chart in the Forecast section for the Euro
below).
Carry Trade Model – coming unhinged
This time around, we note that the market correlations seem to be shifting more profoundly than we have seen
in some time – at least the kneejerk correlation in the USD and risk appetite. Our model clearly shows that risk
appetite remains very strong globally, but that the USD has failed to fall to new lows. There are a couple of
explanations or potential predictions we can try to extract from this:
The USD is no longer the ideal funding currency – this is a bit of a tough one to argue for. As long as risk
appetite remains robust (which favours being long carry trades), there is plenty of evidence to argue that the
US currency is an ideal funding currency, considering that it still has a very low interest rate, that the market
expects it to move very slowly to raise rates considering that the Fed is still in quantitative easing mode while
other banks have been raising rates for some time, and due to its lack of fiscal discipline. Still, US interest
rates have jumped sufficiently higher to improve its standing in spreads versus some of the other major
currencies, and this has clearly been instrumental in some of the USD’s relative resilience in this market. Also,
US economic fundamentals have perked up somewhat. Theoretically, if the US recovery blossoms from here,
then the popularity of using the USD as a funding currency could fade and other currencies, potentially the
Japanese Yen or Swiss franc could become more popular funding currencies if interest rates head higher.
The stronger USD is a leading indicator on the direction of risk - When we say “stronger USD” here, we
merely mean relative to its past correlation with risk appetite, as the USD has yet to consistently rally versus
the market, though it has been relatively stable while risk appetite has gone into overdrive (at least in the
developed equity markets – some divergences exist elsewhere). Since the Fed’s easy money policies have
provided the liquidity for a good portion of the rally in risk appetite since the anticipation of QE2 set in, one
4. January 18, 2011
FX Monthly – January 2011
could argue that the anticipated withdrawal of that liquidity as June approaches means a stronger USD and
lower risk appetite and the unwinding of some of the huge short USD/long risk trades out there.
The weak Euro is grabbing the spotlight – this is one of the more likely explanations for the relative USD
strength and certainly explains some if not all of the greenback’s relative resilience. Flows into the Euro have
doubtless slowed from the largest potential buyers – central banks, who are likely having a hard time justifying
Euro purchases as the continent is racked with its sovereign debt convulsions. The Euro has been the only
plausible alternative to the USD as a major reserve currency, so any Euro weakness will inevitably be
expressed to some degree as USD strength.
Carry Trade Outlook – the cart leading the horse?
Again, we wonder here whether the USD has become a leading indicator on risk appetite. We would suggest
that to some degree it has, as the Fed’s very loose monetary policies have been a key element in keeping
global risk appetite at the boil - particularly in the last huge rally from late August of last year, when it became
clear that QE2 was on the way – and now that it is rather clear that the Fed plans on carrying the debt
monetization program to completion. Eventually, however, the market will move on to focus on other drivers of
global risk. While the USD still plays a prominent part in setting the agenda, commodity prices and interest
rates will exercise increasing influence if they continue to head higher from here as risk appetite can’t possibly
like the thought of a margin squeeze and decrease in liquidity.
If, on the other hand, commodity and interest rate prices fail to head higher, it is likely due to an increasing
worry that China will suffer a setback and that global growth will disappoint on weak end demand. If those
themes begin to dominate, carry trades will likely suffer steep losses, since they are generally a pro-cyclical
barometer to begin with. There are signs that worries in China are growing, but major equity markets and
many of our risk appetite measures have failed to pick up on this consistently. This scenario is USD bullish if no
sovereign debt worries come into play. The truly chaotic scenario would be risk aversion combined with
sovereign debt worries, a scenario that is less USD bullish if those worries affect the assessment of the US’
ability to ever pay back its debts.
As for the components of the carry trade model, all of them are in relatively risk-willing territory – not a huge
surprise considering the very positive reading for the carry trade index. There are a couple of laggards, though,
including a emerging market bond spreads, which are well off the lows of the recent range, and FX volatility,
which has decreased somewhat, but not to the kind of extremely low levels we are seeing in equity market
volatility indicators
5. January 18, 2011
FX Monthly – January 2011
Saxo Bank Carry Trade Model Chart
Saxo Bank Carry Trade Model
3 115
2 110
105
1
100
0
95
-1
90
-2
85
-3
80
-4 Carry Trade Index
75
USD no carry added
-5 70
Chart: Saxo Bank Carry Trade Model- Longer term view. This time around, we decided to display the
longer term perspective, which shows that global risk appetite, as measured by our Carry Trade Index, is
still very much in risk hungry terrain. The last time it was near this high was in March-April of this year,
which preceded the May 6 “flash crash” and weak equity market of the early summer. (The Sample US
Carry Trade shows the carry-less performance of a basket of 7 currencies (AUD, NZD, PLN, TRY, MXN,
IDR, BRL) vs. the USD and JPY.) Chart derived from data from Bloomberg.
6. January 18, 2011
FX Monthly – January 2011
Central Bank Watch: Expectations shifting higher
Central Bank Rate Expectations
6.00%
Rate Now (17 Jan. 2011)
5.00%
1-yr. Forward Exp.
4.00% Expected Change
3.00%
2.00%
1.00%
0.00%
USD EUR JPY GBP CHF AUD CAD NZD NOK SEK
Chart: Central Bank expectations have certainly shifted higher since our last couple of reports, with the
market beginning to price in non-trivial moves from a number of banks – even the ECB, after Trichet
turned hawkish on inflation despite all of the sovereign debt woes facing the Euro Zone.
G-10 CB Rates and Expectations
1600
1200 1500
1400
1000
1300
800 1200
1100
600
1000
400 900
800
200 Forward CB Expectations 1-yr. (bps - left axis)
G-10 Total CB Overnight Rates (bps - right axis) 700
0 600
Chart: G-10 CB rates and rate expectations in aggregate: We’re seeing a sizable increase in
expectations for the G-10 central banks in aggregate as the blue line above indicates. The market is
looking for some 500 bps of rate hikes in aggregate for the year forward on top of recent hikes. Charts
above derived from data from Bloomberg
7. January 18, 2011
FX Monthly – January 2011
Saxo Bank G-10 FX Forecasts
Base Case: Our basic premise that the post QE2 announcement would see a continued retrenchment in risk
appetite was more or less wrong, as the adjustment higher in interest rates and the US dollar rally after the
announcement proved indecisive and as risk appetite charged higher once again (with a couple of notable
exceptions – especially China, which is a critical driver of the future of global growth). China should be getting
a lot of focus now and in the months ahead, as the regime is trying to engineer a soft landing in the country’s
overheating, inflation-ridden economy. China is the lynchpin of the emerging market trade, and the US dollar
as well, due to carry positions and capital flows out of the US and into emerging markets. As China slows and
grapples with its economic imbalances, this could severely affect the trajectory of risk appetite as it impinges
upon the major currencies. A weaker EM trade would like be USD supportive. Also USD supportive would be a
significant consolidation in risk appetite in general – something we have yet to see since last summer. Such a
development is overdue. The question, as always, is one of timing.
Alternative Scenario(s): The alternative scenario is that we have an incipient bubble in equities and
particularly in commodities in progress and that we may have reached a point where the market boils over into
a full-blown bubble mentality of price gains feeding further price gains. In this kind of market, all attempts to
fight the trend are futile and this could go on for another one week, one month, or three months. The
persistence in the price action in US equities of late argues in favour of this view. It must be noted that the
climax and reversal off of such non-consolidating rallies is often spectacular, if not fearsome. Until the
EM/Commodity/major equity markets consolidate more convincingly, the USD will have a hard time achieving
any altitude and most of the alternative scenarios below for each currency discuss the potential for the existing
market environment to persist for a time.
Table: Saxo Bank G-10 FX Forecasts
Currency Pair 1M 3M 12M Alternative (1-2M)
EURUSD 1.3000 1.1800 1.1400 1.3400
USDJPY 85.00 89.00 100.00 80.00
EURJPY 111.00 105.00 114.00 107.00
EURGBP 0.8500 0.8000 0.7800 0.8650
GBPUSD 1.5700 1.4800 1.4600 1.5500
EURCHF 1.3000 1.3400 1.3700 1.2400
USDCHF 1.0000 1.1400 1.2000 0.9300
AUDUSD 0.9300 0.8200 0.7500 1.0200
AUDJPY 79.00 73.00 75.00 82.00
AUDNZD 1.2700 1.2600 1.2100 1.3100
NZDUSD 0.7200 0.6400 0.5800 0.7800
USDCAD 1.0200 1.1000 1.1500 0.9600
EURNOK 8.00 7.75 8.00 7.50
EURSEK 9.00 9.25 9.00 8.75
8. January 18, 2011
FX Monthly – January 2011
Currency Pair 1M 3M 12M Alternative (1-2M)
EURPLN 4.00 4.50 4.75 3.75
USDZAR 7.00 7.50 8.00 6.75
Saxo Bank G-10 FX Outlook
Note that all of the charts below show the currencies versus an evenly weighted basket of the remainder of the
G-10 currencies with an Index of 100 approximately 10 years before the present date. All chart content is
derived from Bloomberg data
USD – US Dollar
USD
90
USD
85
200 SMA
80
75
70
65
60
In the post QE2 environment of November, the USD saw a relief bounce. Since then the USD
has been largely mixed – still a relatively strong performance as we have also seen a
continued surge in risk appetite, suggesting that the market is giving the rising interest
rates in the US some credibility and that the use of the USD as a funding currency for carry
trades is waning in popularity.
Over the last couple of months, the USD’s behaviour versus other markets has changed drastically. That is at
least partially due to some signs of improvement in US data and a strong move higher in US interest rates all
along the yield curve, a move that has outpaced the moves higher in interest rates in some of the other major
economies, which improves the appeal of the greenback against their currencies. Among the G-3, the USD has
more or less won out in recent weeks as the Euro is mired in yet another spasm of sovereign debt worries, and
the JPY has a hard time maintaining any measure of credibility when interest rates are on the rise.
Still, strong risk appetite has been almost as much of a drag on the US currency as higher interest rates have
supported the currency’s case. (see our monthly look at our Carry Trade Model for more on this) For the
greenback to escape new multi-year lows here, we will need to continue to see an improvement in US
fundamentals relative to other countries, or we will need to see a strong bout of risk aversion that sees the
9. January 18, 2011
FX Monthly – January 2011
market unwind still very large outstanding USD shorts. In the past, our outlook has favoured USD strength
through risk aversion, but the merciless charge of the bulls has made that proposition appear hopeless for the
time being. Going forward, however, we wonder how long the market can continue to bid commodities and
equities higher simultaneously, especially in an environment of rising interest rates. At some point, the
pressure of a rise in commodity prices will be felt in margins and in end demand – particularly in the emerging
market trades – many of which are funded in part with short USD positions.
Outlook
We assume the economic trajectory for the US will look better than that of the G-3 and perhaps better than
many other countries as well after the Obama administration primed the pump even further with the extension
of jobless benefits and the payroll tax exemption, not to mention the extension of the Bush tax cuts that would
otherwise have expired. By the same token, those latter measures make us worry about the longer term
prospects for the USD when the federal government has failed to show the least whiff of the kind of austerity
we are seeing Europe attempt (although this is happening at the local and state level in the US by necessity in
many instances). This has us adjusting our USD forecasts for the longer term a bit lower than they were
previously.
Ahead of 2011, we speculated that the Fed would find more dissent within its ranks than it saw previously with
the yearly shuffle in voting member composition. But so far, the rhetoric from two of the expected hawks is far
more cooperative than we imagined, with even Plosser saying that he was all for keeping QE2 on schedule
even though he is not sure that it will help. So the only apparent forces keeping the Fed from moving again to
keep the liquidity gravy train rolling will be the new Congress just convened on Capitol Hill and positive
economic data. Even without major dissent within the Fed, we suspect the political environment will keep the
Fed more sidelined than the market is counting on, even if the US economy proves weaker than currently
expected.
The other major force acting on the USD is the direction of risk appetite – which has only been up, up, up since
last summer. Our assumption is that a more two-way market for risk develops soon at minimum as the market
is getting ahead of itself with interest rates on the rise and margins getting squeezed.
Next FOMC Meeting: January 26
Alternative scenario: the USD makes a serious attempt at its lows for the cycle amid an attempt by the
market to get back on the rally train as the risk bulls and growth Pollyannas talk up global growth prospects
10. January 18, 2011
FX Monthly – January 2011
EUR – Euro
EUR
130
125
120
115
110
EUR
105
200 SMA
100
The Euro dropped to the lowest level vs. a basket of the rest of the G-10 since 2002 before
rallying strongly in the wake of a couple of “successful” sovereign debt auctions from
Portugal and Spain. Has the market priced in too much pain in the short term for the single
currency?
The Euro weakened anew in recent weeks on “Take Three” of the PIGS debt crisis as we have progressed from
Greece to Ireland and now Portugal, which is in the throes of rumors on whether it will also require a bailout
sooner rather than later. While the situation in Euroland looks dire and sovereign debt spreads and default risk
measures are at close to their widest ever, there are a few rays of light for the Euro in mid-January. After very
little progress from EU leadership on addressing the issues back in December, we have a few signs that
Germany’s stance on the idea of expanding the rescue facility is softening. We also have the odd couple of
China and Japan willing to sink funds into the Titanic of PIGS sovereign debt. This will not end well further
down the road (as we discuss below), but the question, considering where Euro is trading in some of the
crosses (particularly EUR/commodity currencies, EUR/SEK, etc.) is how much pain is already priced in and
whether we might have enough positive news in the short term to at least put a floor under the Euro for a
while. Indeed, in the final days of our preparation of this report, the Euro was sharply stronger across the
board. Another round of broad Euro weakness may have to wait another couple of months, depending on the
news flow.
While growth is struggling in Europe at the periphery as austerity measures bite on the need to confront the
public debt situation, the growth in Germany continues to astound – to such a degree that further upside
surprise from current activity levels and survey readings will be hard to come by from here on out.
11. January 18, 2011
FX Monthly – January 2011
Ireland Debt Spreads vs. CDS Prices
8
Ireland/Germany 10-year 700
7
spread 600
6 Ireland CDS Price
500
5
400
4
3 300
2 200
1 100
0 0
An intriguing divergence: while German-Irish debt spreads appear somewhat under control
in mid-January as the ECB and possibly China and Japan prop up the debt “market” for Irish
debt, the fear in the CDS market is clearly that the risk of an Irish default remains on the
rise. CDS prices may be a better measure of Euro sovereign debt stress than interest rate
spreads.
Outlook
We continue to expect that the longer term solution for Europe to its sovereign debt challenges – whether it’s a
massive increase in bailout funds combined with new ECB easing, or we see PIGS countries themselves
throwing up their hands and demanding a restructuring of their debt – will mean either easier monetary
conditions in Europe relative to the US or chaos – effectively a lose/lose situation for the Euro regardless of the
path taken. Outside the EURUSD cross, we also expect EURGBP to fall in coming months for the same reason.
But against the more pro-risk currencies, we wonder if most of the downside potential for the short to medium
term is fully priced in. Only a really chaotic scenario for the Euro combined with an extension of this very long-
toothed rally in risk appetite would justify a further stretching of valuations in crosses like EUR/AUD, EUR/NZD,
EUR/SEK and possibly even EUR/CHF.
While the EU leadership may manage to move ahead with a new and bigger bailout package in the weeks to
come (which could give the Euro some very temporary relief), we have to ponder the concrete risk from a Irish
election (possibly as early as late March) and its potential to produce a new government and political process
that aims at throwing the yoke of the Euro and the impossible burden of public debt (much of it bad debts
unwisely transferred from the private sector topped off now with high interest-bearing EU/IMF bailout-related
debt). If the Irish move to default, it is quite possible that the other PIGS countries – and perhaps even Italy –
eventually begin to look at Ireland with envy and consider the wisdom of a EuroZone exit themselves.
Next ECB Meeting: March 3
Alternative scenario: With the involvement of China and Japan in propping up public debt markets across
Europe, the bearish bets on the Euro and its debt are squeezed mercilessly and EUR rallies strongly across the
board in the shorter term.
12. January 18, 2011
FX Monthly – January 2011
JPY – Japanese Yen
JPY
120
110
100
90
JPY
80
200 SMA
70
The JPY is on a road to nowhere, which is actually a fairly strong performance, considering
the degree to which interest rates have risen in the US and elsewhere and the strong
continued rise in risk appetite (mostly concentrated in the US, we must note). The direction
in interest rates may dominate the JPY outlook going forward.
US interest rates rose sharply in late November and into December, but have since range traded – and in
USDJPY this has resulted in a solid bounce off a throwback sell-off toward the 80 level. Elsewhere, the JPY has
largely been a passive participant in the currency market and hardly cut a profile as the market has failed to
find any strong new Japanese theme.
The economic outlook for Japan is not particularly encouraging, with deflation still in full swing while higher
commodity prices and a still fairly strong currency are crimping Japanese profits. With China on a policy
warpath aimed at breaking the back of the inflation threat and the property bubble, the outlook for Japan and
its export economy aren’t particularly encouraging. Unlike the US Fed, which may find itself facing increasing
headwinds on further action from an irate Congress in the coming year, the Bank of Japan would be happy to
throw another log on the QE fire after already having practiced a round of unsterilized currency intervention
and other easing measures. The political environment in Japan is also so shaky that at some point, if the
economy dips again, we can’t rule out more drastic measures. Meanwhile, the debt continues to accumulate on
an already world-beating debt load with no credible program for bringing public sector revenues in line with
costs. When do we get the wake-up call? Credit default swaps on Japanese public debt are rising in price, but
not to a sufficient degree to show up on the market’s radar screen. Watch for this possible eventuality by the
end of this year.
Outlook
Japan’s debt is a time bomb with an unknown trigger date – a date that will move closer if interest rates
continue to rise from here and that will be delayed if interest rates fall again. Higher rates even bring the risk
of a disorderly decline in the JPY under the right circumstances as loss of confidence can be a sudden thing, as
we experienced back in the fall of 2008. In the longer term perspective, the government has soaked up as
much of the country’s domestic savings as it can and new debt will have to be printed into existence or funded
13. January 18, 2011
FX Monthly – January 2011
from beyond Japan’s borders. This does not add up to a bullish scenario for the country’s currency. Any
strength in the currency will likely be relatively fleeting, even if we can’t rule out one more sizable surge in the
JPY if we see a government bond rally sometime this year as the world goes into risk aversion mode and
possibly unwinds some of its bets on emerging markets. The repatriation trade could provide a temporary
resuscitation of the JPY before it heads weaker.
Next BoJ Meeting: January 25
Alternative scenario: Bonds make a strong stand while risk appetite shows signs of rolling over into a major
consolidation. This kind of scenario could see the JPY make one more dash to the strong side and USDJPY
headed below its all-time low in 1995 of 79.95.
GBP – British Pound
GBP
100
GBP
95
200 SMA
90
85
80
75
70
After dipping yet again to an all time low heading into 2011, sterling has since risen very
sharply, driven by a combination of tighter liquidity conditions perhaps as well as a “good
thing it’s not the EuroZone” mentality. Has the currency finally put in a real low for the
cycle?
The pound was sharply weaker heading into year-end for no particular apparent reason, but has since
rebounded. A couple of possible reasons included far tighter liquidity conditions for the currency relative to
recent moves elsewhere as 2-year interest rates have increased more sharply than for any other currency in
recent months. Some of that has to go down to the apparent tightening in bank credit. As well, the renewed
woes in the EuroZone meant that the pound found strength in the important EURGBP pair. Finally, many of the
new austerity measures are set to take effect this year, and the market is perhaps rewarding the currency for
the government’s fiscal probity. The latter is an important feature missing in the US picture.
On the negative side, the ugly trade balance numbers keep getting uglier and mean that the UK will have to
find a way to attract capital flows to offset such a large trade deficit. After the implosion of the UK financial
services sector and so many of the nation’s banks, will the country ever be able to rebuild what it once had?
These are important questions for the longer haul, as is the question of whether the paradox of savings means
14. January 18, 2011
FX Monthly – January 2011
that austerity measures end up meaning a shortfall in tax revenue and fail to improve the country’s fiscal
imbalances. Also pulling to the negative side are signs that consumers are increasingly negative on the future
and that housing faces gathering declines.
GBPUSD vs. CDS Spread
10 1.65
0
1.6
-10
1.55
-20
1.5
-30
CDS Spread 1.45
-40
GBPUSD
-50 1.4
Charting GBPUSD versus the spread of the UK vs. the US CDS prices shows us an interesting
divergence of late – a divergence explained in part by interest rate spreads widening as
well in favour of the UK. The 2-year swap spread favors GBP by almost 90 basis points – the
most since January of 2009. Which development wins out?
Outlook
Our assumption is that the pound will continue to trade more or less in correlation with the USD due to the
similar themes the two currencies face (twin deficits, post bubble banking sector, lower interest rates and
relatively active central banks). The currency may find a tailwind this year due to its very cheap valuation and
as the EuroZone must work its way through a sovereign debt crisis. The highest volatility may be seen in
crosses like GBP/AUD and GBP/NZD if the commodities rally comes undone at some point during the year. If
risk aversion strikes especially hard, however, the pound will have a hard time keeping up with the US dollar.
The currency is entering an important period as the world waits and watches to see how deeply austerity
measures, tighter control of bank credit, and a rise in the VAT affect the country’s growth and markets.
Considering where the currency is coming from, it is tough to find a downside scenario unless the wild global
bullishness continues unabated or the sovereign debt theme becomes applied more generally.
Next BoE Meeting: March 10
Alternative scenario: Wild bullishness keeps up a head of steam, which sees the market looking elsewhere
for better yield.
15. January 18, 2011
FX Monthly – January 2011
CHF – Swiss Franc
CHF
140
CHF
135
200 SMA
130
125
120
115
The Swiss Franc saw a spectacular spike into year-end with the renewal of the EuroZone
PIGS and EURCHF selling as well as USDCHF selling, possibly on the fiscal profligacy of the
new stimulus measures from the Obama administration. But the franc has started the year
on a very weak footing – perhaps due to excessive valuation and higher interest rates
elsewhere moving against the franc’s favour?
The Swiss franc outperformed until the beginning of the year, when it went from profound strength to profound
weakness. Some of the move lower was in the days before this report, when the Euro was also surging, as the
CHF seems to trade as a kind of anti-Euro, trading exceptionally weak when the Euro is strong and vice versa.
That “Anti-Euro” trade seems to be the main theme going for the franc, though we wonder if some measure of
its weakness in the beginning of the year may be on the realization that it yields virtually nothing and interest
rates and commodity prices have been heading higher, giving it the appearance of a tempting funding
currency. Also, at some point, a currency’s strength becomes an economy’s weakness, particularly an economy
that is highly reliant on exports.
Outlook
The highs may be in now for the Swiss franc versus the broader market. While another round of the Euro crisis
could potentially see the EURCHF pair to new lows, we have technical signs of trend exhaustion in the crosses
like USDCHF and GBPCHF, which may have now put in significant lows. For EURCHF, the move back higher (a
couple of days before this report was published) through 1.2765 is promising for those looking for a reversal,
though eventually the pair needs to work north of the 200-day moving average (currently around 1.3475) as a
stronger indication that the franc’s strength is fading against the single currency as well.
The Swiss government has expressed profound concern about the level of the currency’s strength, though
recent history suggests there is little the government can do about it as the market has overwhelmed previous
attempts by the SNB to manage the currency. Rather, the natural forces of the market may be the only thing
that can see the franc weaker in the months ahead. It’s behaviour certainly seems to suggest that it is far from
16. January 18, 2011
FX Monthly – January 2011
being the safe haven currency of yore – we suspect that any potential for risk aversion will do little to help the
currency in coming cycles.
Next SNB Meeting: March 17
Alternate scenario: EURCHF collapses back towards the lows on renewed PIGS sovereign debt worries and
CHF heads to a new high versus the G-10.
AUD – Australian Dollar
AUD
145
AUD
135
200 SMA
125
115
105
95
The Aussie outdid itself with a new all-time peak right at year-end. But with the transition
to the New Year, the currency is struggling from a batch of weak data and a flooding
disaster. Has the miracle currency had its last hurrah?
AUD defied gravity yet again, riding the enthusiasm for precious metals and other industrial commodities and
risk appetite into year-end. The currency touched a new multi-decade high against the USD and the EUR. A
good portion of the strength has faded since the beginning of the year, however, as commodity market
performance has turned patchy, but also as a number of Australian economic activity surveys (the AiG surveys
for Manufacturing, Services and Construction) suggest a strongly slowing non-mining economy. Finally, after a
string of very positive employment reports, the December employment report showed virtually no payroll
growth.
The catastrophic Queensland floods are a one-off development that risk warping data both ways in coming
months (to the downside due to interruptions and then possibly some measure of upside activity down the
road on rebuilding). The worst damage besides the immediate human and residential costs are that key mining
areas for coal and iron ore have been affected. This could even have implications for Chinese growth if coal
prices spike further as the country is a huge consumer of these Australian imports.
On the housing front, which is one of the country’s main vulnerabilities (outside of potential for commodity
price drops), activity remains sluggish with very high, but stagnating prices, a classic sign of a peaking market.
The RBA has been removing accommodation for 15 months now and may nudge the rate to 5.00% at its
February meeting.
17. January 18, 2011
FX Monthly – January 2011
Outlook
After the ramp up into year-end and subsequent drop (the most significant drop in the Aussie since last
summer), it appears we have a significant area of resistance for the currency. We can buttress this argument
with clear evidence that yield expectations for Australia are beginning to underperform a majority of other G-
10 currencies.
Going forward, there are two main threats to the Australian economy: a correction in commodity prices, which
is inevitably a question of Chinese demand, and the threat of an unwinding in the Australia housing bubble,
which by itself could see the country’s banks in sufficiently dire straits to require the RBA to change course
(and if the RBA does not change course, it could be because of high inflation elsewhere, making the threat one
of sharply inferior growth). Either way, the currency is still priced for perfection, and only a sharp renewal in
commodity prices and risk appetite would see the AUD making another ascent to the strong levels at which it
closed 2010. (We argue elsewhere in this publication that at some point not terribly far from where we are now
in energy prices in particular, a rally in both commodities and risk appetite are incompatible on the implications
for margins from cost-push inflation).
In China, authorities are concerned about recent inflation rates and are cracking down on credit and bank
reserve requirements, both to cool inflation and the risks of a housing bubble (too late, actually, but zero cost
of carry on Chinese apartments and local officials neck deep in a personal financial interest in keeping the
bubble alive will make the price discovery mechanism very tricky indeed). The Chinese regime is also
concerned with keeping their economy growing strongly at all costs and shifting growth over to the consumer,
which it will be hard pressed to do with consumers handing over an increasing percentage of their earnings to
food and rent. Australia trades like a China derivative in many ways.
Next RBA Meeting: February 1
Alternative scenario: The goldilocks scenario for Aussie continues and it has another go at its highs as
natural resource prices arch higher again.
18. January 18, 2011
FX Monthly – January 2011
CAD – Canadian Dollar
CAD
120
CAD
115
200 SMA
110
105
100
95
The broad comeback in CAD faltered somewhat just ahead of this report, perhaps as the
rally in the US dollar also failed to follow through by mid January. The currency may keep
its weak correlation with the USD, outperforming other commodity currencies when the
USD is strong and underperforming when the USD is weak.
The fundamental position of the Canadian currency looks rather strong, with its strong mix of commodities
(energy in particular) in an environment of strong commodity price increases and with the much touted
“world’s most solid banks”. These qualities as well as the improvement in some of the US data has seen the
currency tracking generally higher for the last few months versus the broader market, though it has seen a bit
of a swoon by mid January on the spike in European currencies after the January ECB meeting. Against the
USD, the currency was able to take out the parity level and USDCAD remained below that psychological
threshold for a number of days ahead of this report. An additional factor in favour of the currency includes the
pro-business plan to ratchet corporate tax rates lower in coming years, already starting this process with a
drop in corporate tax rates to 16.5% this year from 18%. Compare that to 35% in the US.
While most factors look positive for Canada and its currency if current conditions continue, particularly if crude
oil prices can rally and stay above 100 dollars per barrel, we are concerned about a number of factors that may
see the currency lower versus the USD and other currencies in coming months. Eventually, the commodity rally
will become self-correcting on the destruction of demand from higher prices (and we are particularly concerned
about China’s potential for a rough ride in coming months as authorities there try to engineer a soft landing).
In addition, while the Canadian government has been very prudent since its fiscal crisis of the 90’s and its
public debt loads are very modest by US and other standards, the private sector in Canada is the world’s most
leveraged, as a housing bubble has taken house prices into extremely unaffordable territory and private debt
loads are very heavy from housing and other types of consumer credit. Any bump in the road on real estate
prices and suddenly the “world’s most solid banks” will appear far less sturdy. It is remarkable that the housing
market is already showing signs of topping out and correcting despite Canadian interest rates having only been
hiked to 1.00% . On the downside of a housing bubble, this also shows how little easing the BoC will have to
work with compared to the US, where the Fed was able to drop rates 500 basis points to ease the pain. (In the
19. January 18, 2011
FX Monthly – January 2011
day head of this reports publication, the government announced important new measures aimed at reducing
mortgage credit and we are reminded that the CMHC is much like the US’ Fannie Mae, meaning that price
declines on the order of those in the US after its housing bubble could suddenly make the entire country’s
balance sheet look completely different in a year’s time).
Outlook
Previously, we expected that the Canadian dollar would be unlikely to trade as a particularly high beta currency
on the expectation that it would tend to follow the lead of the US dollar. But the extreme swings in the Euro
and a sudden reassessment of Canadian fundamentals in light of the continued strength in risk appetite and
commodity prices has seen plenty of volatility and USDCAD has headed below parity again.
We would still expect that the Canadian dollar has more middle-of-the pack potential going forward: it’s
overvaluation versus the market is less stark than that for Australia (AUDCAD shorts are an interesting idea on
this theme and have shown a lot of traction over the last month) and its exposure to China is far less direct,
but an eventual correction in the bubble-like commodities markets (an eventual expectation) would weigh
heavily on the currency, as would the threat of an unwind of the country’s housing bubble. The market is
expecting more than 80 basis points of tightening from the Bank of Canada – so if conditions fail to continue to
improve to the degree expected, USDCAD’s stay below parity could prove a short one.
Next BoC Meeting: March 1
Alternative scenario: Oil goes to 110 dollars a barrel and the market believes that this won’t lead to any risk
of a slowdown as CAD rallies sharply across the board.
NZD – New Zealand Dollar
NZD
140
NZD
200 SMA
130
120
110
100
NZD has pulled higher once again versus the broader market on still buoyant expectations
for RBNZ rates and the commodities (particularly food commodities) rally has helped boost
the currency. But should we really be closing in on an all time high for the currency
considering the potential risks out there?
20. January 18, 2011
FX Monthly – January 2011
The kiwi had a roller coaster ride since our November report – weaker for a time perhaps on the New Zealand
drought and a muted view on the potential for the RBNZ to hike going forward, but then stronger as
commodity prices – and particularly milk prices - have rebounded strongly and risk appetite has maintained a
strong head of steam in to mid January. AUDNZD flows may have also heavily influenced the currency’s overall
level, as a strong new high in that pair in December above 1.35 was roundly rejected as Australia hit a few
speed bumps to start the year.
The domestic economy is not performing particularly strongly, but the market may not be focusing much on
the basic growth data as it is on commodity prices – particularly for foodstuffs, which have risen to high
enough levels to trigger riots in some food insecure countries like Tunisia and Jordan. This may mean that the
currency is becoming a bit one-dimensional in its behaviour and may correlate with food commodity prices
going forward – for better or worse. Elsewhere in the economy, house prices are in a persistent, if slowly
grinding, downtrend, and could continue to weigh on growth, as will the currency’s strength.
Outlook
NZD and AUD look overvalued, but both will require a more persistent correction in risk and perhaps on top of
that, signs of a real slowdown in China before any lasting sell-off can develop. In the kiwi’s case, a slowdown in
key food commodity prices will also be a necessary component of a further search for lower valuation. We
stated back in mid-November that “the NZD may act as a kind of lower beta version of the Aussie – the one G-
10 currency it is likely to appreciate against if risk appetite/competitive devaluation trades beat a hasty retreat
due to the Aussie’s poster child status in this market” Since then, the NZD weakened a bit against the Aussie
into December, but then came storming back due to problems special to Australia, but also possibly because of
the increased focus on food prices, which are so important in New Zealand’s export mix. From here on out,
NZD may continue to outperform the Aussie for the same reason. Elsewhere, the currency is overvalued and
may be set for a fall once food prices hopefully revert back to the mean.
On the interest rate front, the RBNZ is clearly uncomfortable with the strong currency and complained strongly
about it strength preventing a “rebalancing” of the economy back toward stronger exports. As long as the
currency continues to see the kind of strength we have seen lately, the bank is unlikely to change its tune
much on a cautious approach to further rate rises, and if rate expectations head lower (regardless of the
currency level), that would likely only be on fears of slower economic growth generally, usually a kiwi-negative.
Next RBNZ Meeting: January 26
Alternative scenario: Food prices continue to ratchet higher and equity markets arch to new highs, taking
NZD to a marginal new high versus the rest of the G-10 currencies.
21. January 18, 2011
FX Monthly – January 2011
NOK – Norwegian Krone
NOK
120
115
110
105
NOK
100
200 SMA
95
The Norwegian krone greeted its new central bank chief (who took office at the first of the
year) with its weakest levels since late 2008, but the currency has since rallied on the
strength in crude oil prices and renewed projections that the Norges Bank leadership may
move again to raise rates.
The Norwegian krone finally bottomed out around the time of our last report and has been generally stronger
since then. The persistent rise in oil prices back to 90 dollars per barrel has been the critical factor in that
renewed strength, as well as perhaps a focus on its solidity relative to the fragility of other European
sovereigns at the EuroZone periphery. Important as well, interest rate expectations from Norges Bank have
moved from a near complete lack of expectations for the last several months to now looking for slightly more
than 50 basis points of tightening in the coming 12 months. The expectation is that strength in the economy
and the continued risk of overheating in the housing market will mean that Norges Bank may raise rates
despite EURNOK trading close to its lowest levels of the last five years (in the past NB chief Olsen has stated
that the currency’s strength or weakness would be instrumental in setting interest rate policy. Watch the next
Norges Bank meeting for any follow up on that rhetoric or lack thereof.)
Outlook
Now that the Norwegian krone has rebounded from levels we considered undervalued the last time around, our
outlook is a bit more neutral. We are still generally positive on the currency as the only significant downside
scenario for the krone is a market in which risk appetite and commodity prices are collapsing in an absence of
sovereign debt worries. Such a scenario will be difficult to come by in this world of enormous debt public debt
burdens. On the upside potential, we have to consider what happens if oil goes to well over 100 dollars per
barrel.
Perhaps the most interesting scenario for NOK is an investment environment in which the market worries about
sovereign credit ratings again, in which case NOK has few peers. At the extreme, an out-and-out global
sovereign debt crisis could mean that JPY and NOK become the two poles of the G-10 universe - NOK on the
strong side and JPY on the weak.
22. January 18, 2011
FX Monthly – January 2011
We reiterate our view that long NOK versus the most overvalued corners of the market – particularly Aussie,
but possibly also NZD and SEK, could be an interesting way to trade relative valuation. We mentioned this idea
two months ago and the NOK was weaker still against these currencies into December but now seems to have
turned the corner – quite significantly in the case of AUDNOK. NOK still looks relatively attractively valued
versus the pro-risk currencies almost regardless of whether things turn out well or poorly down the road.
Next Norges Bank Meeting: January 26
Alternative scenario: oil accelerates to well over 100 dollars per barrel and the market starts to heavily
favour any currency with a positive correlation with energy prices.
SEK – Swedish Krona
SEK
110
105
100
95 SEK
200 SMA
90
The krona was back on the up-and-up with a steady stream of robust data, a central bank
that continues to hike rates, and on renewed Euro woes. As well, the krona’s general
positive correlation with risk appetite has seen the currency remain relatively strong while
major global equity markets have been very strong. But is it reaching the top of its
potential against the rest of the major currencies?
After a period of consolidation against the broader market late last year, the krona regained its legs and has
rallied back towards its 2010 highs against the rest of the G-10 currencies. Against the very weak Euro, the
currency touched its strongest level in almost 10 years. The country is in a remarkably strong position relative
to the weaker countries of the EuroZone periphery and almost has the fundamentals of booming Germany, but
with better demographics and lower debt levels. Also, the Riksbank is looking to continue its hiking ways due
to the strength in the economy and in housing prices in particular.
Outlook
Everything looks great for the Swedish krona at present, but this is more or less fully priced into the currency
now that it has rallied back to the top of the longer term range – particularly in light of its valuation against the
Euro, which is at longer term highs. Down the road, the risk of a weaker European economy has to rate as one
of the larger risks to continued strength in the currency due to potential implications for the exports.
23. January 18, 2011
FX Monthly – January 2011
Eventually, as well, the country will need to confront its housing bubble, though the question is how much
more accommodation (or alternative policies aimed at clamping down on credit related to real estate
purchases) will need to be removed before this really bites into home prices. Another potential overhang is the
selling of the country’s currency by the Swedish National Debt Office, which acquired billions of SEK in an effort
to smooth the currency’s decline during the 2008-09 crisis. The currency will likely find a more permanent top
around the time the Euro finds a bottom and/or when risk appetite goes at least sideways and stops its
seemingly ever-upward spiral.
Next Riksbank Meeting: February 15.
Alternative scenario: if Europe manages to stave off sovereign debt worries for another quarter or two and
equity markets fail to blink, the currency could post new highs versus the rest of the G-10 currencies before
fading again.
24. January 18, 2011
FX Monthly – January 2011
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