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The euro fell across the board yesterday, following euro-zone interest rate cut which caused investors to shift their funds to safe-haven assets. The EUR/USD dropped to a one-month low, while the EUR/JPY fell some 140 pips during afternoon trading. Turning to today, all eyes are likely to be on the US Non-Farm Employment Change, scheduled to be released at 12:30 GMT. The greenback saw gains yesterday after a better than expected ADP Non-Farm Employment Change figure was announced. If today’s news also comes in above the forecasted 91K, the dollar may close out the week on a bullish note.
The US dollar saw significant gains against virtually all of its main currency rivals yesterday, as a euro-zone interest rate cut combined with better than expected American employment data caused investors to shift their funds to the greenback. The USD/JPY shot up to a two-week high after the ADP Non-Farm Employment Change figure was announced. The pair eventually reached as high as 80.08 before staging a minor downward correction. Against the British pound, the dollar gained over 100 pips for the day. The GBP/USD eventually fell as low as 1.5497.
Turning to today the US Non-Farm Employment Change figure is likely to generate significant market volatility when it is released at 12:30 GMT. The indicator is widely considered the most significant economic event on the forex calendar. Should today’s news come in above the forecasted 91K, the dollar could extend yesterday’s gains before markets close for the week. That being said, if today’s news disappoints, the greenback may take heavy losses against its main currency rivals.
The euro took heavy losses against its main currency rivals yesterday, following the European Central Bank’s decision to cut euro-zone interest rates to a record low 0.75%. The EUR/USD fell almost 170 pips after the rate cut was announced, eventually hitting the 1.2362 level, a one-month low. Against the British pound, the euro fell close to 80 pips for the day, eventually reaching as low as 0.7964. Meanwhile, the EUR/JPY was down around 140 pips for the day to trade as low as 98.78.
As we close out the week, traders should anticipate another volatile day for the euro, as the US Non-Farm Payrolls figure is scheduled to be released. Should the indicator come in above the forecasted level, investors may continue shifting their funds to the greenback, which could result in the EUR/USD falling further. At the same time, traders will want to recall that the US employment data has come in below expectations for the last several months. If it happens again today, the euro could recoup some of its recent losses.
he price of gold fell yesterday, after a euro-zone interest rate cut led to gains for the US dollar. A strong dollar tends to cause gold to turn bearish, as the precious metal becomes more expensive for international buyers. Gold fell be over $20 an ounce, eventually reaching as low as $1597.13 before staging a slight upward correction and stabilizing at the $1610 level.
Today, any movement gold sees is likely to be a result of the US Non-Farm Payrolls figure. If the news results in further gains for the greenback, gold may take additional losses before markets close for the week.
After falling just under $2 a barrel during mid-day trading yesterday, following the euro-zone interest rate cut, the price of oil was able to recoup some of its losses after the US Crude Oil Inventories figure was announced. US inventories fell by 4.3 million barrels last week, well below the forecasted 1.6 million drop. The news signaled to investors that oil demand in the US is increasing.
Closing out the week, crude oil could see additional gains if the US Non-Farm Payrolls figure comes in above the forecasted 91K. Any better than expected news may be taken as a sign by investors that the US economic recovery is gaining traction and that demand for oil will continue increasing.
The Williams Percent Range on the weekly chart is approaching oversold zone. If it continues moving down, it may signal a possible upward correction in the coming days. This theory is supported by the MACD/OsMA on the same chart, which has formed a bullish cross. Going long may be the wise choice for this pair.
Most long-term technical indicators place this pair in neutral territory, meaning that no defined trend can be predicted at this time. Taking a wait and see approach may be a wise choice, is a clearer picture is likely to present itself in the near future.
The MACD/OsMA on the daily chart appears close to forming a bearish cross, signaling a possible downward correction in the near future. That being said, most other technical indicators show this pair range trading. Taking a wait and see approach may be the best option at this time.
The Williams Percent Range on the weekly chart has almost crossed into overbought territory. Furthermore, a bearish cross has formed on the daily chart’s MACD/OsMA. Traders may want to go short in their positions ahead of a possible downward correction.
Technical indicators are showing that crude oil has entered overbought territory and could see a downward correction. The daily chart’s Slow Stochastic appears to be forming a bearish cross while the Williams Percent Range on the same chart has crossed above the -20 line. Forex traders may want to open short positions ahead of possible downward movement.
Forex Market Analysis provided by ForexYard.
© 2006 by FxYard Ltd
Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.
But based on the recent numbers from the 2011 census, it looks like the glory days of the Australian housing sector are over.
Two events over the past four weeks sum up the desperation in the Australian housing lobby. The government funded National Housing Supply Council (NHSC) tried to talk up the so-called Australian housing shortage.
It was a brave attempt, but just over a week later, their case was shot down. Here’s how Bloomberg News reported the NHSC update:
‘The revised national estimate of the housing shortfall at end-June 2010 is 200,000 dwellings, 13,000 greater than previously published.’
It was a gutsy move to revise the housing shortage numbers just two weeks before the release of the 2011 Census numbers. Too gutsy. We bet they wish they had waited.
Reporting on the Census statistics, a Bloomberg News article revealed what we’ve said for four years — the Australian housing shortage doesn’t exist…
‘Australia has almost 1 million fewer households than assumed in government forecasts of a housing shortage, raising doubts about a supply shortfall cited as the main reason the nation will avoid a U.S.-style crash.’
The article continued:
‘The Pacific nation had 7.8 million households, data released yesterday from the 2011 Census showed. That compared with estimates of 8.7 million as of June 2010, according to the latest figures used by the National Housing Supply Council, a group created by the government in May 2008 to monitor housing demand, supply and affordability. Australia’s population also grew by 300,000 less than previously estimated, to 21.5 million.’
Oh dear.
There are 300,000 fewer people in Australia than previously thought. That’s a big difference. In fact, it’s a huge difference. It’s roughly equal to one year’s immigration numbers.
Put another way, one whole year of new arrivals (a big argument used by the spruikers for an Australian housing shortage) didn’t happen!
As for household estimates, the NHSC estimated Australia had 8.7 million households. It turns out there are only 7.8 million. Chairman of the NHSC, Owen Donald told Bloomberg News:
‘On the face of it, 900,000 is a gigantic difference. We need to get to the bottom of what’s in the statistics bureau numbers.’
The entire Australian banking sector is built on a fallacy. The banks built the housing bubble on the false belief that the Australian population was soaring. The government even appointed a Population Minister!
Turns out there wasn’t and isn’t a population crisis. There are 900,000 fewer Australian households and 300,000 fewer people than previously thought. What a miss!
So now there’s no denying it, Australia has a gigantic asset and credit bubble, and the property spruikers can’t even use the excuse of high immigration to back their case.
You’ve seen the Australian housing and banking boom. Now get ready for the Australian housing and banking bust…the next part of the business cycle.
We’ve campaigned long and hard over the past four years, arguing that a Australian housing shortage never existed in reality. We were right. Those who called us mad are welcome to send their apologies to [email protected].
As we said at the top of this letter, credit and moneylending are vital to an economy. They enable the transfer of capital from those who don’t have a current need for their money (savers) to those who do have a current need but don’t have the capital (borrowers).
So, used in the right way (without artificially low interest rates), credit can boost an economy and help create innovation and progress. But used in the wrong way, it creates asset bubbles…and that creates problems.
Bottom line, the problem isn’t credit per se, but rather the central bankers and politicians who abuse it.
Cheers,
Kris.
PS. In the latest issue of Australian Small-Cap Investigator, we took a closer look at the Aussie lending market and discovered a company that not only has a sensible risk-weighted approach to setting interest rates, but is also an innovator in the market. To find out more about this company, click here to take out an obligation-free trial to Australian Small-Cap Investigator.
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Years ago I read The Great Depression by Lionel Robbins. He was an eminent British economist who took over the chair of the London School of Economics in 1929. A young Friedrich A. Hayek was one of his first appointments. Having experienced the Great Depression, he wrote about it without the benefit of hindsight or new economic theories. He published his work in 1934.
For some reason, a particular part of the book stuck with me. It was the part about Austria being the unlikely source of the real crisis in 1931. Up until the collapse of the Kredit Anstalt bank in that year, the world thought it was recovering from the 1929/30 stock market slump. In fact, it was just the beginning.
That in itself wasn’t a revelation. It was more in the language used by Robbins to describe Austria’s implosion. It fascinated me. Perhaps because when I read it I knew that same thing was happening again.
I’ll explain the modern day link, and what it means for Australia, in a moment. But first, a few snippets from the book:
‘Throughout the years since the war, the inhabitants of the Republic of Austria had been gradually consuming their capital…the expenditure of the Viennese municipality on its housing programme alone since the Armistice exceeded the total value of the capital of all Austrian manufacturing joint-stock companies.’
‘One by one, the financial houses in Vienna put up their shutters. The slump intensified the capital consumption. Early in May 1931, the Kredit Anstalt, which had taken over the bad debts of its predecessors, announced that it could not meet its liabilities.
The actual smash is sometimes attributed to the political tension aroused by the untimely proposals for an economic Anschluss between Germany and Austria. Whether this is so or not, there can be no doubt that the ultimate cause of the difficulty was the capital consumption of the years which had preceded it.’
The collapse of the Austrian banks started a domino effect that reverberated around the world. It was the start of the Great Depression.
I’ve been thinking a lot about the effect of ultra-low government interest rates around the world. As the financial crisis intensifies, capital flows into government coffers. I should say some government coffers. No one wants to give Greece a cent, but investors are happy to hand hundreds of billions to the US, UK, Japanese, and German governments, to name a few. Even Australia’s government can borrow for 10 years at less than 3%.
The thing is, governments consume capital. They do not produce anything. The more that private capital flees to the ‘safety’ of government bonds, the more that capital gets ‘consumed’ by the government.
How long can this go on?
Well, things have certainly changed since the 1930s. Central banks now openly monetise the debt created by governments. Government borrowing (and spending) requirements are so huge central banks need to print money to help them finance their deficits.
Bizarrely, this act ‘creates’ capital.
Let me explain.
Capital in the true sense of the word is accumulated savings. That is, an individual accumulates savings through hard work and consuming less than he or she produces.
In contrast, central banks create savings — or the appearance of savings — by printing money. They do this by buying a government bond with newly created cash. What they’re actually doing is taking a debt security out of the system and replacing it with an asset — money.
Someone in the system holds that money. If they ‘save’ it, it becomes a part of their capital. And they may even choose to buy government debt with that capital. That’s how a central bank can ‘create capital’ for the government to consume.
But it’s not real capital. It’s not the product of ingenuity and hard work. This has major implications for the global economy. The production of fake capital gives the impression of plentiful savings, which keeps interest rates low. Put another way, a low rate of interest is the result of an excess of money in an economy…itself the product of excess savings.
But in this instance, it’s the central banks who have manufactured the ‘savings‘.
The ‘consumer’ economies of the West (the adjective says it all) consumed a great majority of their capital prior to the credit bubble bust in 2008. To replace that bubble, governments are stepping in to fulfil the role of consumer of last resort. And to help them out, central banks produce fake capital for the governments to spend.
In Austria in the 1930s, the evaporation of real capital led to collapse. 80 years on, in a globalised world where the government/central bank/bank nexus seems unbreakable, it will lead — eventually — to currency crises, bond market meltdowns and soaring inflation.
This is a story for 2013 and beyond. And because Australia is an importer of capital, it’s a story that will have a major impact on your investments.
Greg Canavan
Editor, Sound Money. Sound Investments.
From the Archives…
The Hard Lesson of a Stock Trader: No Pain, No Gain
2012-06-29 – Kris Sayce
How Gold Prices Look Set to Climb As Banks Crumble
2012-06-28 – Peter Krauth
‘Big Wednesday’ For the Aussie Dollar
2012-06-27 – Dr. Alex Cowie
Three Reasons Why Silver Could Take Off in 2012
2012-06-26 – Dr. Alex Cowie
Who is Winning the Battle Between the Bulls and Bears?
2012-06-25 – Kris Sayce
The Austrian Banking Collapse That Predicts Trouble For Australia
Credit and money lending have gained bad reputations recently.
Yet, without them the economy would grind to a halt. Innovation would cease, and living standards would drop.
As long as it’s well managed, credit is a virtue.
But as we all know, sometimes it isn’t well managed. And that’s where things don’t always go to plan…
You see, when there’s too much credit, an economy booms. But if it booms too much, it can overheat. Of course, in a free market that shouldn’t be a problem, as an economy has a natural cleansing system.
Firms go bust, investors lose money, but the economy ‘refreshes’ and things move on. The result is capital flowing toward its most productive use. To where it’s useful, rather than being locked up in bad businesses or investments.
This process of boom, bust and recovery is the business cycle.
The thing is, those in government only like the booming part of the process. They aren’t keen on the bust. So as you’d expect, governments tend to interfere in the market to sustain booms and avoid busts.
That’s what the world economy is going through now. The latest European bailout package is a classic example — solving a debt problem by issuing more debt.
But it doesn’t solve anything. Consumers and businesses become too afraid to borrow. And banks won’t lend because they’re too busy shoring up their balance sheets…to make sure they don’t collapse under the weight of bad loans on their books.
That means banks worldwide are seeing their margins squeezed, and profit growth slowing…even going into reverse.
Last week The Age ran a story trumpeting the success of the major Australian banks. The article noted:
‘Australia’s big banks have been ranked the most profitable in the developed world for the second year running by the influential Bank for International Settlements…
‘Commonwealth Bank, Westpac, ANZ and NAB posted pre-tax profits equal to 1.19 per cent of their assets in 2011…’
Australian banks may be top of the pile, but there isn’t much to be proud of.
To put things in perspective, in order for Commonwealth Bank [ASX: CBA] to make a $6 billion profit, it needs a loan book of $500 billion.
That’s a lot of effort and risk to make a tiny 1.19% return on assets. And that’s the pre-tax number. After tax, the return on assets is less than 1%.
Even so, it wouldn’t be so bad, if not for the fact that this profit margin comes at the top of the Aussie banking business cycle.
And remember how the business cycle works. What comes after the boom? That’s right…the bust.
That’s what central bankers and governments the world over are doing their darnedest to avoid.
Cheers,
Kris.
PS. In the latest issue of Australian Small-Cap Investigator, we took a closer look at the Aussie lending market and discovered a company that not only has a sensible risk-weighted approach to setting interest rates, but is also an innovator in the market. To find out more about this company, click here to take out an obligation-free trial to Australian Small-Cap Investigator.
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AUDUSD’s upward movement extends to as high as 1.0328. Support is now at 1.0240, a breakdown below this level will indicate that a cycle top has been formed on 4-hour chart, then consolidation of the uptrend could be seen to follow, and the trading range would be between 1.0180 and 1.0328. On the upside, as long as 1.0240 support holds, the uptrend from 0.9968 could be expected to continue, and another rise towards 1.0400 is still possible.
By Central Bank News
Crack open a cold one, and watch Charles Sizemore give his thoughts on international beer stocks on Bloomberg TV.
If you cannot view the video, please follow this link to Bloomberg’s site: Playing the World of Beer Stocks
Stocks mentioned: Boston Beer ($SAM), Anheuser-Busch InBev ($BUD), Heineken ($HINKY), Molson-Coors ($TAP)
If you liked this article, consider getting Sizemore Insights via E-mail.
Related posts:
By Central Bank News
By Central Bank News
China’s central bank cut its benchmark rate by 31 basis points to 6.0 percent, the second time in a month that the People’s Bank of China (PBoC) has reduced its interest rates.
PBoC said in a statement that it also cut the one-year deposit rate by 25 points to 3 percent and lowered the floor for lending rates to 70 percent of benchmark rates from 80 percent.
The previous cut in rates by China’s central bank came on June 7 when the benchmark rate was cut by 25 basis points to 6.31 percent.
www.CentralBankNews.info
