Month: October 2012

Source: ForexYard

The euro rallied against most of its main currency rivals throughout the day yesterday, after an increase in investor risk taking due to better than forecasted news out of Spain and a positive Italian bond auction. The JPY also had a bullish day, following the Bank of Japan’s announcement of a smaller than expected monetary easing package. Today, traders will want to pay attention to updates regarding the aftermath of Hurricane Sandy. The full impact the hurricane has had on the US economy is still unknown. Should the damage the storm created be worse than expected, investors could shift their funds to safe-haven assets.

Economic News

USD – USD Tumbles amid Risk Taking

The US dollar took losses against most of its main currency rivals throughout the day yesterday, as the announcement of a smaller than expected round of monetary easing in Japan boosted the JPY, while positive euro-zone news helped riskier currencies. The USD/JPY tumbled more than 80 pips during the early morning session to trade as low as 79.26 before an upward correction brought the pair to the 79.55 level later in the day. Against the Swiss franc, the dollar fell over 70 throughout the European session, eventually reaching the 0.9300 level.

Today, dollar traders will want to pay attention to news out of the US, particularly with regards to the aftermath of Hurricane Sandy and its impact on the US economy. The hurricane brought widespread destruction to the eastern United States. Any signs that the damage will be long-lasting may result in investors shifting their funds to safe-haven assets. Additionally, a batch of euro-zone news, specifically the CPI Flash Estimate and Unemployment Rate, could influence risk sentiment among investors. Worse than expected data may give safe-haven currencies like the dollar a boost.

EUR – Euro Benefits from Spanish, Italian News

The euro rallied against several of its main currency rivals during European trading yesterday, after a better than expected Spanish Flash GDP figure, combined with high demand at an Italian bond auction boosted risk taking among investors. The EUR/USD advanced more than 90 pips over the course of the day, eventually trading as high as 1.2982. Against the JPY, the euro was able to reverse losses it took during Asian trading and move up some 89 pips throughout the mid-day session. The EUR/JPY eventually traded as high as 103.30.

Today, euro traders will want to pay attention to several potentially significant economic indicators out of the EU. Specifically, the CPI Flash Estimate and Unemployment Rate, both scheduled to be announced at 10:00 GMT, are likely to give investors a good idea about the current state of the euro-zone economic recovery. Any better than expected data could result in additional risk taking, which may help the euro extend yesterday’s gains.

Gold – Gold Sees Gains Following Euro-Zone News

Gold was able to benefit from positive euro-zone news during the first part of the day yesterday, but eventually staged a minor downward correction due to Hurricane Sandy and the closure of US markets. The precious metal traded as high as $1714.97 during morning trading, up close to $7 an ounce, before dropping down to the $1710 level later in the day.

Turning to today, gold traders will want to pay attention to the results of several economic indicators out of the euro-zone and their impact on risk taking in the marketplace. Better than expected data could turn gold bullish. In addition, any developments with regards to Hurricane Sandy’s impact on the US economy could also influence whether investors place their funds with safe-haven or riskier assets.

Crude Oil – Oil Gains Limited Due to Hurricane Sandy

The price of crude oil saw moderate gains during morning trading after better than expected euro-zone news caused investors to shift their funds to riskier assets. That being said, the commodity’s bullish movement was limited due to Hurricane Sandy’s impact on US refining capabilities. After advancing close to $1 a barrel during mid-day trading, gold began moving downward, eventually stabilizing at the $85.90 level.

Today, in addition to any developments regarding Hurricane Sandy’s impact on the US’s refining capabilities, oil trades will also want to pay attention to the US Crude Oil Inventories figure at 14:30 GMT. A higher than forecasted inventories figure could result in the price of oil turning bearish during afternoon trading.

Technical News

EUR/USD

The Williams Percent Range on the weekly chart has crossed into overbought territory, indicating that a downward correction could take place in the coming days. This theory is supported by the Slow Stochastic on the same chart, which has formed a bearish cross. Traders may want to open short positions for this pair.

GBP/USD

Most long-term technical indicators place this pair in neutral territory, making a definitive trend difficult to predict at this time. Traders may want to take a wait and see approach, as a clearer picture is likely to present itself in the near future.

USD/JPY

The Relative Strength Index on the daily chart is approaching the overbought zone, meaning that this pair could see a downward correction in the near future. Furthermore, the MACD/OsMA on the same chart appears close to forming a bearish cross. Traders will want to keep an eye on these indicators, as they may signal an impending downward correction.

USD/CHF

The Slow Stochastic on the weekly chart has formed a bullish cross, signaling that this pair could see an upward correction in the coming days. Additionally, the Williams Percent Range on the same chart is currently in oversold territory. Opening long positions may be the smart choice for this pair.

The Wild Card

EUR/AUD

The daily chart’s Bollinger Bands are narrowing, indicating that this pair could see a price shift in the near future. Furthermore, the Slow Stochastic on the same chart has formed a bullish cross, signaling that the price shift could be upward. This may be a good time for forex traders to open long positions ahead of a possible upward correction.

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.

By TraderVox.com

Tradervox.com (Dublin) – The loonie dropped below parity against the US dollar for the first time in two months as safety demand grew in the market. The Canadian dollar has fallen for the fifth day as Hurricane Sandy sweeps the East Coast causing the cancelation of trading of US stocks. The loonie has also been weakened by the Moody’s Investor Service comments that it will cut the ratings of six Canadian-based lenders.

Adam Button, a Montreal-based analyst at Forexlive.com indicated that the loonie is today’s pergola currency as it broke below parity. Button noted that there is a high risk-off tone in the market against analysts’ expectation of fairly quiet session due to the closure in New York. He added that the Canadian dollar is being affected by the comments by moody’s on Friday. The Canadian dollar has dropped as the Standard & Poor’s GSCI Index of 24 raw materials fell by 0.4 percent today.  The US stock and bond market have remained closed today as Hurricane Sandy bore down on New York.

The Canadian economic status is experiencing some shaky grounds as Kevin Page, the Parliamentary Budget Officer, reported on the office website that the government will post budget deficits for the next three years and will revert to surplus in 2015-16 fiscal year. Adam Button noted that such comments about the Canadian economy only weaken the loonie further. The Bank of Canada Governor Mark Carney, has stated that the case for higher interest rates has weakened. He gave these comments a day after proposing the removal of monetary stimulus. The emphasis on high debt levels were evident after the Moody’s Investor Service noted that it is considering downgrading Bank of Nova Scotia, Toronto-Dominion Bank and four other dominant financial institutions based in Canada, due to the high risk to Canada’s economy.

The loonie dropped by 0.4 percent to C$1.0010 per US dollar at the close of trading in Toronto yesterday.

Disclaimer
Tradervox.com is not giving advice nor is qualified or licensed to provide financial advice. You must seek guidance from your personal advisors before acting on this information. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. Opinions expressed at Tradervox.com are those of the individual authors and do not necessarily represent the opinion of Tradervox.com or its management. 

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By MoneyMorning.com.au

The Aussie dollar has been holding up remarkably well for the past couple of years in the face of a weakening commodity price environment.

If you look at the chart below you can see how high the correlation has been for the past six years between the Australian dollar and the CCI (Continuous Commodity Index):

Click to enlarge

I think it’s very interesting to note the large divergence that’s now opening up between the two. In today’s Money Morning I’ll explain why…

The CCI has been trending down steadily for the past two years, but the AUDUSD has broken away from that downtrend and is instead treading water.

The obvious answer is that Australia’s high interest rate environment is seeing money flow into the Aussie dollar, and that’s counteracting the selling force from weakening commodity prices.

But Australia has begun lowering interest rates aggressively and there will be more cuts in coming months. The way I see it, the interest rate differential will contract between Australia and elsewhere so the current buying support may not last much longer.

I would expect to see the divergence between the CCI and the AUDUSD to contract over the next few months. My guess is that the AUDUSD will sell off to meet the CCI rather than the other way around.

I think the long term chart of the Australian dollar is looking a little tired. I’ve circled on the chart below every time the 10 week moving average has crossed the 35 week moving average on the downside. You can see quite clearly that a multi-month sell-off often ensues after this long term trend signal is triggered:

AUDUSD Daily Chart

Click to enlarge

The uptrend from 2009-2011 has been broken since mid-2011, but the Australian dollar is still holding its head above the 2008 high of US$0.985.

I have mentioned this level a lot in the past. It really is the line in the sand for the Aussie dollar from here.

You can see quite clearly that it has bounced from this zone over the past few years. There are three instances where the Australian dollar looked to have broken beneath that level, only to shoot higher within weeks of testing this major support. I fear it will be fourth time unlucky the next time the Aussie dollar goes beneath US$0.985.

There will be two and a half years of buying that will be out of the money below US$0.985c. I could imagine seeing the AUDUSD falling quite quickly to the low 90′s or even high 80′s once the tide turns.

Obviously we would need some more negative news out of China, which would place some more downward pressure on commodities, before the AUDUSD snaps. My colleague Greg Canavan has been putting a huge amount of work into a new white paper on the upcoming china bust and the impact that will have on the Australian dollar. You should definitely have a look.

Murray Dawes
Slipstream Trader

From the Port Phillip Publishing Library

Special Report:
After the Bust

Daily Reckoning:
Riding out the Storm

Money Morning:
How the Aussie Dollar is Caught Up in Big Bankers’ Games

Pursuit of Happiness:
Look Out for Melbourne’s Body Snatchers

Has the Australian Dollar’s Luck Just Run Out?

By MoneyMorning.com.au

The next few weeks trading in the equity market will be worth keeping an eye on. As I mentioned last week, we have now received a couple of high probability sell signals on the US equity market.

As always the topping process can take weeks or months to form, so it may still be early days, but now that we have received a false break of April’s high in the S+P 500 and the intermediate trend signals have turned down we should be on high alert for lower prices ahead.

Europe has fallen off the radar over the past few months but there are a couple of things popping up over there that could flare up. Greek government debt has sold off about 10% in the past week alone. Also Italian and Spanish bond spreads have been widening and are up about 15bps in the past week.

It looks like the Greek ruling coalition is struggling to survive because the Samaras-led coalition just lost one of its three members, after the Democratic Left announced it would take its 16 votes and vote against any further austerity.

This may be posturing to soften some of the upcoming austerity moves but it does show you that the current stability is very tenuous. Another election in Greece would probably see the anti-bailout camp increasing their share of the vote dramatically. ‘Grexit‘ may still be on the way in the next year or so.

The fragile recovery taking place in Europe was shown in spades today when National Australia Bank [ASX: NAB] released their results. Full year net profit fell 22 per cent to $4.08 billion, with the great bulk of the problems stemming from their UK operations. Bad debt provisions rose 44% to $2.6 billion.

They had already flagged these issues in the past so their share price hasn’t taken a beating today, but it shows you quite clearly that all is not well in Europe.

The US election is the next big hurdle for the market to overcome. We may not see much aggressive selling in the market prior to the election but I’ll wager that things may be different once it’s out of the way.

A lot of economic figures lately have been remarkably sanguine. I think there has been a deliberate effort to dress up the figures ahead of the election to increase Obama’s chance of re-election. A bit of a conspiracy theory I admit, but I think politicians would do everything in their power to fudge data in their favour.

Once the election is out of the way I suspect the flow of data may not be so positive.

Murray Dawes
Slipstream Trader

From the Port Phillip Publishing Library

Special Report:
After the Bust

Daily Reckoning:
Riding out the Storm

Money Morning:
How the Aussie Dollar is Caught Up in Big Bankers’ Games

Pursuit of Happiness:
Look Out for Melbourne’s Body Snatchers

Europe Disappears and NAB Fades

By MoneyMorning.com.au

[From Kyoto] September’s anti-Japanese protests in China over the disputed Senkaku/Daioyu Islands may have come and gone in the Western press, but the real damage is only just beginning for investors who have piled into Japan in recent years.

With their focus on the U.S. fiscal cliff and ongoing EU banking problems, many investors just don’t understand how interlinked trade between China and Japan has become, nor the breadth of the damage this strained relationship can do to their portfolios.

But they’re about to.

The breaking news here in Japan is that Honda cut its full-year net profit forecast by 20% following a 40% drop in September sales. That marked a 16-month low in sales that is directly related to nationalistic friction between the two nations.

That’s adds up to a 95 billion Yen hit. To put this into perspective, Honda’s net profit last year was only 211.4 billion Yen, so we’re talking about a nearly 50% drop in the Japanese company’s bottom line.

Under the circumstances, I would be very surprised if other Japanese companies such as Nissan and Toyota, both of which also have significant operations in China, don’t follow with similar results when they report next week.

While I haven’t seen estimates from Nissan yet, Forbes reports that Toyota sales are off a staggering 49% over the same time frame.

That’s the biggest drop in a decade.

That’s not inconsequential considering that Chinese-Japanese trade accounted for more than $340 billion USD in 2011.

Japan is China’s fourth-largest trading partner after the EU, the U.S. and the ASEAN nations respectively. It accounts for approximately 10% of China’s total annual gross trade volume according to Xinhua.

On the other hand, China is Japan’s largest trading partner and has been since 2007 when Japanese corporations dropped the U.S. market like a hot potato. China is also Japan’s single largest export destination, accounting for nearly 25% of total export volume as well as the single-biggest source of its imported goods.

The damage won’t be limited.

 Big Trouble For a Wide Range of Players

I expect Japanese airlines and Chinese airlines to hit turbulence, too.

Since the widespread violence in China this fall, legions of tourists and business travelers alike continue to cancel trips. While Japanese travel agencies report a drop in bookings to China, Chinese agencies are getting out of the game altogether and it’s not just the bit players, either.

Xinhua reports that China International Travel Service Limited, China Comfort Travel and China CYTS Tours Holding Co., Ltd., have stopped selling travel to Japan entirely.

Reports here suggest that Nippon Airways Co., Ltd. and Japan Airlines Co., Ltd. cancelled upwards of 20,000 seats on routes into China in late September and early October. It is not clear if – or when – they will be added back into flight operations.

At the same time, Chinese airlines, including Air China, China Southern and China Hainan Airlines, have also cancelled flights and cut seats to Japan while also postponing valuable new routes to both Sendai and Okinawa.

Anecdotally, my friends tell me that many formerly full flights between the two countries are half full at best.

Japanese home appliance makers are not immune, either.

Panasonic, Sony, Hitachi and Sanyo are all likely to experience an earnings impact in the months ahead.

Executives I spoke with this weekend, who wish to remain anonymous because they are not authorized to speak on behalf of their companies, suggest that monthly sales in Chinese retail outlets could be off 45%-70% by the time the damage is “done.”

I pressed for clarification as to when that might be and didn’t get any officially. But their cold silence spoke volumes about what they expect through year end.

 Four Things You Need to Consider

 So what do you do about this? That depends on four things.

 First, the situation is unlikely to go away any time soon. Any Japanese company doing business with China is at risk.

Many are names you know, but if you have invested in Japanese ETFs like many investors have, there are a lot you don’t know, too. This is particularly true if you factor in the extensive supplier network of second- and third-tier Japanese companies behind such well-known names as Mitsubishi, Honda and Toyota.

Second, China plays the nationalist card at its discretion and tacitly fans the flames whenever it is convenient. Its citizens, many of whom have yet to grasp the subtleties of international politics because their view of the outside world is extremely limited, react predictably when they perceive they have been wronged. So the situation and its impact on earnings is unpredictable at best.

Third, there is the very real and growing possibility that China will use military force to take the Daioyu Islands back. Since 1949, China has been involved in 23 territorial disputes and has used force in six of them – all of which resemble the Senkaku/Daioyu dispute, according to M. Taylor Fravel, an associate professor of political science at MIT and the author of Strong Borders, Secure Nation: Cooperation and Conflict in China’s Territorial Dispute.

I agree. Beijing is under pressure to produce favorable results at a time when its leadership faces a complicated transition, slowing economic prowess, unprecedented fallout from the Bo Xilai situation and other prominent scandals that have rocked the very top of the Communist Party — including recent revelations that Premier Wen Jiabao appears to have amassed a $2 billion fortune illicitly, using his position to gain wealth and power.

Fourth, I am hard pressed to imagine how Japanese companies can come out on anything other than the losing end of the stick no matter how the Senkaku/Daioyu Island situation plays out.

And with more than 20 years of doing business in this part of the world, that’s not an easy conclusion for me to reach.

Japan has built its entire economy on exports for decades and the conscious shift to embrace China in the late 1990s will haunt Japanese corporations for a long time to come if Japanese and Chinese leaders cannot come to some sort of agreement.

 For Every Loser, There is a Winner

If there is a bright spot it is this: Capitalism works because there are ebbs and flows in capital markets that are caused, many times, by factors well beyond rational expectations.

That means there for every loser, there is a winner.

I expect German and Korean car makers to immediately fill any gaps left by pressured Japanese automakers. Both VW and Hyundai come to mind, for example. GM and Ford will both make competitive moves as well if they’re smart.

In like fashion, other non-Japanese, non-Chinese air carriers will move to service demand if it resumes. This will allow both nations to draw closer together without either losing face by directly “serving” the other.

Home appliance makers are more problematic in that both industries are effectively commoditized at this point. There is very little in the way of technology or other competitive advantage that can’t be taken up by local Chinese companies.

Perhaps that’s an opening for American manufacturers if the upcoming anti-Chinese presidential election rhetoric doesn’t effectively tank them, too.

By Keith Fitz-Gerald

Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in Money Morning (USA)

From the Archives…

 Does Excessive Government Spending Make You the World’s Best Treasurer?

26-10-2012 – Kris Sayce

Why a Return to the Gold Standard Could Actually Be Bad

25-10-2012 – Kris Sayce

A Safer Than Super Investment?

24-10-2012 – Nick Hubble

Agricultural Commodities – The Best Way to Play Rising Food Prices

23-10-2012 – Merryn Somerset Webb

Stock Market ‘Barometer’ Speaks: The Bulls Won’t Like it…

22-10-2012 – Kris Sayce

Investors in Japanese Companies are About to Get a Nasty Surprise

By MoneyMorning.com.au

Central bank money-printing ‘will destroy the world’.

Contrarian investment expert Dr Marc Faber, who writes the Gloom, Boom and Doom Report newsletter, came out with that one in a recent interview with Bloomberg.

It sounds extreme. But he might just be right.

Here’s why – and what you should hold onto to protect yourself in the meantime…

 A Debased Currency Leads to Social Upheaval

The idea that central bankers could destroy the world might seem a little strong. But they can certainly do a lot of damage to our social fabric.

In recent decades, as central banks have slashed interest rates and blown bubbles, we’ve lived through what Dylan Grice of Société Générale describes as a ‘credit hyperinflation’ – possibly the ‘largest credit inflation in financial history’.

While this inflation may not have shown up in consumer prices (so far), it has certainly shown up in asset prices.

Who benefits from rising asset prices? The people who have the most assets – the wealthy. This in turn has driven up wealth inequality to historic levels.

Record numbers of Americans are receiving food stamps, for example. Yet, as Grice notes, ‘the top 1% of income earners are taking a larger share of total income than since the peak of the 1920s credit inflation’.

This is a recipe for social turmoil. And central banks are aiding and abetting it by actively trying to encourage more inflation. They seem to believe that inflation can be controlled before it gets “out of hand”.

The hope is that the likes of Mervyn King and Ben Bernanke, and whoever takes over from them, can conjure up “just enough” inflation to make our debts go away painlessly, without ruining everyone in the process.

But central banks and mainstream economists don’t have a great track record on these things. They didn’t see the credit crunch coming. That suggests that they have no real idea of why it happened in the first place.

 Don’t Trust Central Banks With Inflation

So why should we imagine that their solutions will work any better? Why believe that they can somehow work out how to unleash inflation, then put it back in its box at exactly the right moment? That’s not a leap of faith I’m prepared to take.

As Grice points out, inflation is very socially corrosive. At heart, ‘economic activity is no more than an exchange between strangers. It depends, therefore, on a degree of trust between strangers.’ So if people can no longer trust the value of money – the medium of exchange – how can they trust one another?

As a result, he fears that we could see ‘a Great Disorder’ as inflation takes hold and people once again start to worry.

That’s why he’s still very bullish on what he describes as ‘safe havens’. We’re not talking about government bonds here – they’d be hammered by inflation. Grice likes gold, which should do well if inflation runs out of control.

But he’d also stick with ‘high quality’ stocks. These are the defensive blue chips. Although their popularity now makes us slightly wary.

Why would these stocks do well if inflation picks up? Grice’s point is that inflation would be bad news for government bonds. If they are no longer seen as ‘safe’, then money will flood out of them into other ‘safe’ havens.

And realistically, in such an environment, gold and resilient companies would be among the few things worth holding.

So when might we start to see the impact of all this currency debasement finally feed through to the price of everyday goods? It could be sooner than you might think.

John Stepek

Contributing Editor, Money Morning

 Publisher’s Note: This article originally appeared in MoneyWeek
From the Archives…

Does Excessive Government Spending Make You the World’s Best Treasurer?
26-10-2012 – Kris Sayce

Why a Return to the Gold Standard Could Actually Be Bad
25-10-2012 – Kris Sayce

A Safer Than Super Investment?
24-10-2012 – Nick Hubble

Agricultural Commodities – The Best Way to Play Rising Food Prices
23-10-2012 – Merryn Somerset Webb

Stock Market ‘Barometer’ Speaks: The Bulls Won’t Like it…
22-10-2012 – Kris Sayce

Inflation is the Reason You Should Bet Against Central Banks

By The Sizemore Letter

The New York Stock Exchange and other major U.S. markets are scheduled to reopen Wednesday after a two day hiatus—the first multi-day weather-related closure since the blizzard of 1888 and the first unscheduled closure since the September 11, 2011 terror attacks.

With much of the East Coast a wreck, what should we expect when trading resumes tomorrow?

Expect a wild ride.  Investors have a lot of information to digest, and two days’ worth of pent-up trading to do.

First to consider are the direct costs of the storm—the obvious damage done to homes, businesses and infrastructure of the Eastern seaboard.  Early estimates run the gamut.  Corelogic estimates that 284,000 homes valued at $88 billion were at risk, but this is a worst-case scenario.   Morgan Stanley estimates losses in the range of $5 billion to $10 billion to be picked up by insurance companies (as a point of reference, Hurricanes Irene and Katrina had insured losses of $7 billion and $62 billion, respectively).  Uninsured losses are harder to estimate but are significant to the households and businesses affected.

But more significant than the direct costs—which are largely offset by insurance proceeds—are the indirect costs of lost business and the psychological trauma to consumer confidence.  There are new TVs not purchased, flights not taken and restaurant meals not eaten by the 60 million Americans affected, let alone wages and tips not paid by those who miss work.  These are impossible to accurately gauge, but estimates  are in the ballpark of $10 billion per day.  Depending on how long it takes to get New York’s subway back on line, that number could get a lot higher or the length of time could be stretch a lot longer.

All of this brings us back to the stock market.  What should we expect when the market opens?

Over the next week, I expect stocks to drift lower in choppy trading as hurricane news continues to roll in.  Insurance stocks and construction related stocks will see the most speculation.

But ultimately, I expect investor preoccupation to shift relatively quickly back to earnings, the U.S. presidential election and the looming fiscal cliff.  Natural disasters—even big ones—usually do not correspond to major market shifts.  They create a lot of speculation and volatility in the immediate term, but the market generally gets back to whatever trend was in place before the disaster hit.

In our case today, U.S. stocks were going through a mild correction after a spectacular bull run.  By next week, I expect that we will be back to business as usual.

In the meantime, use any volatility as an opportunity to add to your core holdings.  If you liked it before as a long-term holding, chances are good that nothing has changed.  I am particularly looking for any weakness in high-end consumer stocks.  I see no lasting effects on luxury demand and advise buying on any dips.  Some names to consider: luxury goods sellers Coach (NYSE:$COH) and LVMH (Pink: LVMUY) and luxury automaker Daimler (Pink: DDAIF).

Again, not to make light of Frankenstorm or its aftermath; Sandy will make herself felt when GDP results are announced for the fourth quarter.  And the damage done is a major destruction of national wealth.

But fixing the damage and rebuilding will also be a source of growth over the next year and a much-needed jolt to the economy.

For now, it’s a matter of waiting for the flood waters to recede.

The post When the Market Reopens: What to Expect After Hurricane Sandy appeared first on Sizemore Insights.

Related posts:

• 3 Reasons to Expect a 4th Quarter Rally

By Central Bank News
    Hungary’s central bank, which earlier announced its third interest rate cut in a row, said weak domestic demand will soon restrain inflation and the bank will consider further interest rate cuts if financial market sentiment remains healthy and the inflation outlook remains stable.
    The Magyar Nemzeti Bank, which has cut its base rate by 75 basis points so far this year to 6.25 percent, said Hungary’s economy was in recession and weak corporate investment and persistently high unemployment suggests that the economy’s potential is “significantly below its pre-crises level.”
    With a “substantial margin of spare capacity in the economy,” the central bank said cost shocks hitting have “no adverse effect on the medium-term outlook for inflation, and the disinflationary impact of weak domestic demand will dominate as the effects of cost shocks wane.”
    “The Council will consider a further reduction in interest rates if data becoming available in the coming months confirm that the improvement in financial market sentiment persists and the medium-term outlook for inflation remains consistent with the 3 percent target,” the bank said in a statement.

    Hungary’s inflation rate rose to 6.6 percent in September, the highest since mid-2008, but the central bank said this was mainly due to higher food and fuel prices, along with increases in raw material prices and the effects of taxes and administrative measures.
    Inflation is likely to remain above the bank’s 3 percent target this year and next, and then gradually decline toward the target as the upward pressure of one-off price shocks fade.
    Hungary’s economy contracted by 0.2 percent in the second quarter from the first for an annual drop of 1.3 percent, slightly higher than the annual 1.2 percent drop in the first quarter.
    But an improved global financial market sentiment, along with the government’s commitment to cut its deficit has led to a sustained decline in risk premie for domestic assets, the bank said, urging the government to reach an agreement with the International Monetary Fund and the European Union.
    “Expected developments in inflation and financial markets as well as persistently weak demand warrant a lower interest rate level,” the bank said.
    www.CentralBankNews.info

By MoneyMorning.com.au

You may recall that several weeks ago investment firm Goldman Sachs said buying the euro and short-selling the Aussie dollar was one of the best long-term trades out there.

The Wall Street Journal even reported at the time that someone at Goldman Sachs tagged it ‘the trade of the century‘.

Well, on the other side of the trade they might find the team from Citigroup.

The investment bank said the Aussie dollar is on track to hit a new all-time high against the US dollar in 2013. This article quoted Steve Englander, head of a foreign exchange division at Citi, on why he is bullish on the Australian currency.

What’s interesting about the position is there was barely any mention of the fundamentals of the Australian economy driving the value of the Aussie dollar.

It appears to be a pure play on the liquidity that the US Fed and other central banks are pumping into global markets.

Englander has a point. The Aussie dollar has held steady despite the drop in iron ore and coal prices — two of Australia’s biggest exports. This was highlighted last week when Whitehaven Coal [ASX: WHC] released its quarterly report. The report notes:

‘Export coal prices have fallen substantially over the last six months and, after rallying mildly in July/August, have fallen to new lows over the last few weeks…After allowing for approximately 8% NSW royalty and 3% exchange rate loss, the net revenue for spot thermal coal is currently at or below the FOB cash cost per tonne of many producers.’

A Higher Aussie Dollar
Will be Betting on a China Rebound

The team at Citi are betting on a recovery. Englander’s argument for the Aussie to go even higher and break through its previous record of US1.1081 is a rebound in China’s economic growth. This will drive commodity prices higher and the Aussie dollar with it.

That seems like a pretty big bet to us. Chinese data isn’t exactly setting the world on fire right now. So it’s open to a lot of debate. We know one thing for sure. Sound Money.Sound Investments editor Greg Canavan would beg to differ. You can read his latest white paper on the future of China here…

So who’s right, Goldman Sachs or Citigroup?

Well, it brings to mind what analyst Jim Rickards told Port Phillip Publishing subscribers at an exclusive briefing in August. For the moment, his thesis is holding: capital flows are dominating trade flows and that’s being expressed in the high Aussie dollar.

Australia is seen as a ‘safe haven’ currency for now by the market. And higher interest rates have attracted capital from the US, China and Europe.

This is the type of external pressure that US Federal Reserve chairman Ben Bernanke’s policy of cheap money is pushing on emerging markets. Mainly China and Brazil. But it’s affecting advanced economies like Switzerland, Japan and Australia too.

If you look at the chart below you can see that even the interest rate cuts in recent months haven’t really done much to take down the high flying Aussie dollar either:

It’s easy to forget that since the Aussie dollar floated in the early eighties, its average exchange rate is 72 US cents.

The high Aussie dollar might mean the Reserve bank of Australia (RBA) will come under pressure to weaken the Aussie.

Central Banks are Trying to Steer the Aussie Dollar Up and Down

Maybe it has already started. Yesterday came news that the RBA was trying to deflate the Aussie in a ‘passive’ way by accumulating foreign exchange reserves. The Age reported that the central bank has ‘accumulated $863 million in August and September, compared to the post-January 2010 pace of $54 million a month.’

For the moment the RBA is one of the few central banks not openly interfering in the currency market. The same can’t be said of the Bank of Japan, which probably isn’t going to help the RBA’s cause when it releases its latest intervention this week as part of its Asset Purchase Programme.

According to this Financial Times report, analysts have tagged it ‘QE9′ — which probably gives the Bearded One, Ben Bernanke, all sorts of ideas. ‘The meeting will probably end with another round of increased asset purchases, lifting the BoJ’s total purchase program from Y80 trillion to around Y90-95 trillion.‘

The Bank of Japan wants a weaker yen.

When a market no longer acts and reacts according to fundamentals, it’s pretty hard to plan for the future. Do you buy an asset because you like it, or do you buy it because you think central banks could manipulate it?

But whatever you decide, one thing is certain. We don’t know which way the Aussie dollar will go next. But what we do know is that investors who have their wealth valued in one currency (the Aussie dollar), are taking a big risk.

With the Aussie still trading near a record high, it makes sense to look at diversification options. Greg Canavan has written about that in some detail this year. If you haven’t checked out his thoughts already, it’s worth re-visiting it now.

Callum Newman
Co-Editor, Scoops Lane

From the Port Phillip Publishing Library

Special Report:
After the Bust

Daily Reckoning:
Australia’s Asian White Policy Economy

Money Morning:
QE3 Program Could Double, Will it Take Gold With it?

Pursuit of Happiness:
Don’t be a Scavenger, Juice Up Your Savings

How the Aussie Dollar is Caught Up in Big Bankers’ Games