Month: May 2011

A strenghtening USD meant that the commodity market was hit hard last week. What about the coming week?

Senior Strategist Ib Fredslund Madsen gives his view.

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Video courtesy of en.jyskebank.tv

By Money Morning

Today and for the next two weeks your editor will write to you from the US east coast city of Baltimore, Maryland.

Or, as the cab driver insisted on calling it, Balymore.

But even though we’re 16,467 km from our usual writing hovel in St Kilda, we’re still keeping track of what’s happening back home… and what’s happening elsewhere.

Such as 8,192 km to our east where the outlook for Europe’s debt problems is worse than it’s ever been.

As we’ve pointed out before, one of the most effective indicators of risk and uncertainty is the level of interest rates.

If you look at the chart below, you’ll see Greek bond yields are higher than at any point since financial markets imploded in 2008:

Source: Bloomberg

Right now investors demand a 15% yield on 10-year Greek government bonds.

That’s much higher than the rate demanded 12 months ago when Europe’s debt problems started to make front-page news.

In other words, for all the talk about Europe working together and multi-billion-dollar bailouts, the problem has only gotten worse.

Another Euro bailout looms

So now Bloomberg reports:

“European Union officials may require Greece to provide collateral for aid as policy makers struggle to prevent the euro area’s first sovereign debt restructuring…”

“Debt restructuring” is the polite word for default.

It means one of two things.  Bond holders either take a hit on the principal repayment, or the coupon (interest payment) is adjusted.  Either way it means bond holders will get back less than they thought.

As an investor that’s bad news.

But as bad as it may be, it’s better than forcing taxpayers to foot the bill again for the Greek government’s spending extravagance… especially when the taxpayers footing the bill didn’t get the benefit of the spending… because it’s the German, Fins and other European taxpayers who are paying for it.

Yet it’s not just the Greeks or the Americans with debt problems.  Xinhua.net reports:

“[Treasurer, Wayne] Swan is due to release the budget on Tuesday, and some economists are predicting that it will include a deficit of about 56 billion U.S. dollars, compared with the 45.6 billion U.S. dollars predicted at the time of the mid-year budget review last November.”

While The Australian reports:

“One measure to be announced tomorrow will be a 60 per cent increase in skilled migrant intakes under the Regional Sponsored Migration Scheme, whereby employers can sponsor a skilled migrant on the condition they live and work in the area for at least two years.”

According to Mr. Swan this will be part of his grand plan to “convert a mining boom into an opportunity boom.  The whole theme of everything I do is that we create prosperity to spread opportunity.”

Australia’s debt burden

When, we wonder, will the politicians figure out they’re the cause of economic problems, not the solution?

But that’s not his only idea.  Again according to Xinhua.net:

“He [Swan] added that the budget would provide up to 5500 U.S. dollars write-off on the purchase of a new vehicle by small businesses.”

Hmm.  Who does that help?  Non-unionised small businesses or unionised car manufacturers?

It’s typical for a politician to think that pure spending is the answer to economic woes.

And don’t for a minute think Australia is fine, just because government debt is low compared to other nations’ levels.  Australia has a whopping great private sector debt – as you know.

A debt that’s getting more expensive to service.

Money Morning reader Brett sent us the following news link:

“ANZ Banking Group boss Mike Smith warns banks’ borrowing costs may spike due to ‘massive’ credit market volatility as Europe’s debt crisis progresses.”

After the Christchurch earthquake and Queensland floods, you might remember your editor pointed out these events wouldn’t be good for either economy.

Many disagreed with us.  They said it would be good for the economy because insurance companies would foot the bill.

As usual, those who argued the point couldn’t see what isn’t seen.  They didn’t take into account that insurance companies and reinsurers would seek to recover their costs by increasing premiums.

Something insurance companies and reinsurers have already started doing.

While it’s not directly related to Europe’s debt problems, the point is interest rates in Australia aren’t just determined by what happens in Australia.  Interest rates will rise here if investors can get better yields elsewhere.

Just as banks need to increase rates to compete for investor funds in the Aussie market, banks will need to increase the rates offered to bond investors in order to compete for funds.

Not only that, but it’s a poke in the eye to those mainstream economists who claim interest rates are at a new “structural low”.  In other words, interest rates are low and will stay low… not so.

Anyway, back to our point.  Look, your editor isn’t about to speak for Australia’s hundreds of thousands of small businesses.  But we doubt if there’s more than half a dozen small business owners who believe buying a new car will increase business revenue and profits.

The only boost it’ll provide is to the unionised car manufacturers.

And the only small businesses that will benefit from it are those that will take the tax break on the car for “business use” but will most likely use the car for personal use.  And fair play to them.

Redistribution of wealth

This shows the redistributive nature of taxes.  Taxing individuals or businesses that don’t use a car for work – even though they may use a car to get to work – while giving a tax break to someone who can claim they use the car for business purposes.

In a nutshell, we’re not talking about government creating new opportunities. We’re talking about the government stirring the tax pot.  We’re talking about taking food from Peter to feed Paul.

Peter starves. Paul becomes obese.

And as for the idea of funding immigrants to work in regional areas, again the government is trying to take credit for fixing a problem it caused.  That is the abandonment of regional Australia by younger generations.

Why do younger Australians leave regional areas?  A lack of job opportunities is one reason.  But that’s only because red tape and regulations makes it hard for regional businesses to compete.  And those businesses that take the biggest hit are typically those in the non-services sector.

Not only that, but it’s partly to do with the obsession with getting kids to university when they may be better suited to entering the workforce.  That hurts small and large businesses.

Think about it. A kid who may be prepared to do blue-collar  or white-collar work straight from school in his or her regional home town is less likely to consider it once they’ve got a degree to their name – that goes for city kids too.

In other words, government incentives and programmes designed to address so-called skills shortages are only required because the government distorted the market in the first place.

But again, it’ll just result in further distortions to the economy.

If Mr. Swan really wants to “create prosperity” and “spread opportunity” all he needs to do is get out of the way… left to the free market, prosperity and opportunity are automatic.

It just happens.

And for the next two weeks your editor is in the nation with one of the best historical records of free market prosperity and opportunity.  A record that has been tarnished since the early twentieth century when Progressive politics took hold.

The fact is, prosperity and opportunity don’t need a helping hand from politicians.  Especially not from a former lecturer at a second-rate Queensland university.

Back to the beginning

Which brings us back to where we started.  Europe’s and the US’s debt problems.  These debt problems were caused by programmes intended to “create prosperity” and “spread opportunity”.

And they’ve just ended up creating debt and spreading despair.

Think about it.  When the US and Greek governments went on their spending binges, what was their justification for doing it?  Did they say from the outset that all the lovely government-funded programmes would be squandered on short-term benefits that would result in long-term problems?

Or did they say they were creating prosperity and opportunity?

Some will claim politicians have good intentions.  That they’re just trying to do the best for the people they represent.  We disagree.

We believe they either knowingly implement unaffordable policies that result in future taxpayers footing the bill, or they’re just incompetent fools… or both!

So the idea of giving a tax break so small businesses can buy a new car or truck will lead to prosperity and opportunity is just ridiculous.

Just as ridiculous as the idea that giving a tax break to property investors leads to prosperity and opportunity.

Of course the property spruikers like to claim it leads to both, because without negative gearing investors wouldn’t invest in property and therefore there would be fewer properties available for rent.

In a word: nonsense.

Negative gearing just takes from one bunch of taxpayers and gives to another.

Just like any other form of government interference it distorts the economy and destroys prosperity and opportunity.  However, unlike most, your editor doesn’t believe negative gearing should be outlawed.

That may surprise you.  But it shouldn’t.  We’re in favour of anyone reducing their tax bill.  The last thing we’d want is for more cash to end up in the hands of federal politicians.

The only thing we object to is someone paying for someone else’s tax cut.

What we’d prefer to see is tax breaks for everyone.  A better – but still flawed – option would be to make owner-occupied mortgage repayments and rent payments tax deductible.

But even that would create distortions in the economy, and would likely result in a further inflation of the property bubble.  But it just goes towards making our point.  That any interference designed to close loopholes only results in more loopholes.

That’s why free markets are best.  The market decides what works rather than relying on political intervention.

And so, the only answer is to eliminate the single cause of these problems – interventionist governments.  Simple eh!

Anyway, we’ll be back tomorrow with more from the US.  In the meantime, as we write it’s Sunday afternoon and so we’re going to take in what Baltimore has to offer.  Including a visit to Camden Yards to see the Baltimore Orioles in action.

Cheers.

Kris Sayce
Money Morning Australia

How to Create Prosperity and Opportunity

Video courtesy of ForexCT – A leading Australian forex broker, liscensed by the Australian Securities & Investments Commission, offers the MetaTrader4 and PROfit Platform to retail traders. Other services include Segregated Accounts, Trading workshops, Tutorials, and Commodities trading.

Video courtesy of ForexCT – A leading Australian forex broker, liscensed by the Australian Securities & Investments Commission, offers the MetaTrader4 and PROfit Platform to retail traders. Other services include Segregated Accounts, Trading workshops, Tutorials, and Commodities trading.

By CountingPips.com

The latest Commitments of Traders (COT) report, released on Friday by the Commodity Futures Trading Commission (CFTC), showed that large futures speculators increased their short positions of the US dollar against the other major currencies last week. Non-commercial futures positions, those taken by hedge funds and large speculators, were overall net short the US dollar by $35.01 billion against other major currencies as of May 3rd. The data is a rise from the total short position of $27.75 billion on April 26th, according to the CFTC data and calculations by Reuters which calculates the dollar positions against the euro, British pound, Japanese yen, Australian dollar, Canadian dollar and the Swiss franc.

This week’s notable changes were euro positions increasing to the highest level since July 2007 while Japanese yen positions continued to improve and were short by 18,819  contracts.

EuroFx: Currency speculators increased their net long positions for the euro against the U.S. dollar for a second straight week to their highest level since July 2007. Futures positions in the euro rose to a net total of 99,516 long positions as of May 3rd following a total of 68,279 long positions on April 26th.

The COT report is published every Friday by the Commodity Futures Trading Commission (CFTC) and shows futures positions as of the previous Tuesday. It can be a useful tool for traders to gauge investor sentiment and to look for potential changes in the direction of a currency or commodity. Each currency contract is a quote for that currency directly against the U.S. dollar, where as a net short amount of contracts means that more speculators are betting that currency to fall against the dollar and net long position expect that currency to rise versus the dollar. The graphs overlay the forex spot closing price of each Tuesday when COT trader positions are reported for each corresponding spot currency pair.

GBP: British pound sterling positions edged lower as of May 3rd to a total of 30,807 net long positions after rising the week before to a total of 33,583 long contracts on April 26th.

JPY: The Japanese yen net contracts improved to a total of 18,819 net short contracts reported on May 3rd. This is from 36,997 short contracts on April 26th.

CHF: Swiss franc long positions moved higher for a fourth straight week to a total of 18,381 net long contracts following a net of 17,841 long contracts on April 26th.

CAD: The Canadian dollar positions moved lower for a second consecutive week to a total of 54,041 contracts as of May 3rd after CAD net contracts had fallen to a total of 59,063 net long contracts on April 26th.

AUD: The Australian dollar long positions declined for the fourth straight week to a total net amount of 73,421 long contracts as of May 3rd. AUD positions had totaled 80,867 net long contracts on April 26th.

NZD: New Zealand dollar futures positions increased higher for a seventh consecutive week. NZD contracts increased to a total of 12,800 long positions as of May 3rd from a total of 11,457 long contracts on April 26th.

MXN: Mexican peso long contracts dipped for a second week after reaching the highest level in at least a year. MXN contracts fell to 124,260 net long contracts as of May 3rd from a total of 131,806 long contracts as of April 26th.

COT Data Summary as of May 3, 2011
Large Speculators Net Positions vs. the US Dollar

EUR: +99516
GBP: +30807
JPY: -18819
CHF: +18381
CAD: +54041
AUD: +73421
NZD: +12800
MXN: +124260

Further COT Resources from around the web:

• Forecast The FX Market With The COT Report

• The Only Indicator You Will Ever Need

Source: ForexYard

The German newspaper der Spiegel noted a rumor that was floating around last Friday which said Greece had considered exiting the 17-nation euro zone during one of its recent policy meetings. Though profusely denied by German and Greek officials, the powerful force of the rumor in speculative circles has drastically pulled down on the strength of the EUR.

Economic News

USD – Traders Bullish on USD as Euro News Hastens Flight to Safety

The US dollar experienced strongly bullish results since last Friday as traders began to shift away from the euro following the European Central Bank’s (ECB) announcement to hold rates steady and rumors that Greece may quit the euro zone. The result has been for the value of the euro to drop like a stone versus its currency counterparts, and the US dollar looks poised to capture much of the beneficial side-effects.

With Friday’s Non-Farm Payroll (NFP) figure revealing surprise growth in the US employment sector, traders appear less reluctant to go into the greenback in order to stave off further losses in their portfolios. The US economy has so far benefited from this shift as a stronger dollar should give Americans more buying power in the days ahead. The issue of interest rate differentials has generated market tension over the past two weeks and, indeed, the shift in value among the safe-havens and the EUR has made currency forecasting a much more difficult profession.

As for today, traders will focus more attention on Europe and Canada given the US economy is not scheduled to publish any news or data releases. Japan’s monetary policy meeting minutes were published this morning and are in the process of being digested by investors. The Canadian economy will also be releasing its latest findings on housing starts. With increased risk aversion since last Friday, traders appear to be anticipating a continuation of the USD’s recent bullishness.

EUR – Rumors of Greece Exiting Euro Zone Gouges EUR Values

The euro appears to have lost substantially against its primary currency rivals since Friday following the European Central Bank’s (ECB) rate statement on Thursday and rumors that Greece may consider exiting the euro zone. The data releases published over the last several days have pushed many traders away from riskier assets as well. So far the shift in risk sentiment has favored the US dollar over its European rival.

The German newspaper der Spiegel noted a rumor that was floating around which said Greece had considered exiting the 17-nation euro zone during one of its recent policy meetings. Though thoroughly denied by German and Greek officials, the powerful force of the rumor in speculative circles has drastically pulled down on the strength of the EUR. Many analysts have also noted that ECB President Jean-Claude Trichet’s remarks during last Thursday’s rate policy statement made predicting the next rate adjustment far more difficult than they have been in the past. The value of the EUR/USD, as a result, has shifted from its recent high near 1.49 to a current price around 1.44.

As for today, the euro is largely absent from the calendar, but with a few reports which should not have much impact overall. Germany will publish its trade balance, which has largely already been priced in to the value of the region’s currency. The euro zone will also release its Sentix Investor Confidence report which tends to have little impact on the 17-nation bloc’s currency; as such, present trends established last Friday appear to be dominant in Monday’s market environment.

JPY – Japanese Yen Mixed as Investors Digest Policy Minutes

The JPY has been trading with largely positive results since Friday as investors turn their focus towards news out of Europe. After a week of ups and downs, the Japanese yen appears set to make gains today as investors largely flee riskier assets. The low interest rates of the Japanese economy have helped pull many investors into the safety of the yen following Thursday’s rate announcement by the ECB. Rumors of Greece’s exit from the euro zone have also sent traders on a hunt for safer assets.

With Japan’s economy coming back online from a week of holiday celebrations, the market should receive a modicum of additional liquidity from the return of this island giant. The impact may be felt in today’s early hours, but the news emerging out of Europe about last week’s rumors will likely lead today’s market environment. Traders should tune in to any comments made by European officials as these are likely to drive today’s more important portfolio shifts and adjustments.

Oil – Crude Oil Prices Still Falling, Can this Decline Continue?

The price of Crude Oil ended Friday significantly lower as traders largely began to pull out from their investments in physical assets while the US dollar made a rapid jump. The result has been a sharp drop in oil prices reaching as low as $96 by end of trading Friday. Will the fall continue through this week?

Recent events have made speculating about oil prices more difficult. The plummeting value of the US dollar through the early days of last week should have helped lift oil prices, but the commodity remained in free fall for the fourth consecutive day as of this morning. Rising stockpiles in the United States, reported Wednesday, may have helped fuel the shift away from oil as rising inventory tends to suppress price hikes. As for the rest of today, oil prices appear heavily leaning towards the downside, with technical support targets near $88 a barrel coming into view.

Technical News

EUR/USD

This morning the EUR/USD gapped higher by 60 pips after last week’s 6 cent decline which closed below the January trend line. Weekly stochastics are now falling after remaining oversold for some time. Daily stochastics are also showing signs of divergence and traders should keep an eye on this potentially bearish signal. If the EUR/USD fills the gap, the pair could target the support at 1.4150, a level that coincides with the 38.2% Fibonacci retracement from the January to April move. The 100-day moving average also could come into play at 1.4020. To the upside, the previous trend line should turn into resistance and comes in today at 1.4450. Friday’s high of 1.4585 is 2nd resistance level.

GBP/USD

Last week’s low for Cable at 1.6340 coincides with a 50% retracement from the March low to the April high. Should this support level hold, 1.6600 would be eyed followed by the April high of 1.6745. To the downside the mid-April low at 1.6160 stands out as a support, as does the rising trend line off of the May 2010 low which comes in this week near 1.6000.

USD/JPY

Weekly stochastics are rolling lower, indicating the momentum is to the downside on the pair. First support is last week’s low at 79.50 with an initial target for the pair at the lower channel line from the December 2008 low which lines up this week at 78.40. A breach here would target the pre-intervention low at 76.40. Resistance comes in at 81.20 from the trend line off of the April high.

USD/CHF

After making a new all-time low last week at 0.8553 the pair found resistance at the 20-day moving average at 0.8800. A continuation of the move higher would run into the trend line off of the April high which comes in at 0.8850. A breach there would target 0.8900 off of the mid-April low.

The Wild Card

Oil

A sharp decline in commodity prices last week and crude oil shed 17% in a week. Last week’s low coincides with a 61.8% retracement from the February low. Should the price continue to fall forex traders could target the rising trend line from the August lows at $90.10. A move higher would first target the mid-April low at $105.25 followed by last week’s high at $114.81.

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.

More …

USDJPY broke above the downtrend line on 4-hour chart, suggesting that the short term downtrend from 82.76 has completed at 79.58 already. Now the bounce from 79.58 is treated as consolidation of longer term downtrend from 85.51. Range trading between 79.58 and 81.50 would likely be seen in a couple of days. As long as 81.50 resistance holds, downtrend could be expected to resume after consolidation, and another fall towards 78.50 area is still possible.

Daily Forex Analysis

Bullish Dollar Price Action Suggests Correction Underway

The outlook has been pretty bad for the dollar recently.  The forex markets, however,  have a habit of turning just when everybody decides on a certain direction.

The US Dollar has been under the hammer for a while now but this week gave the dollar bulls something to cheer about.  Commodities were extremely volatile and were sold of with massive volume which suggests the smart money was dumping inventory.

If commodities are sold then the dollar benefits and it certainly has this week.  Aside from the commodities element there was the ECB and Trichet giving the markets a reason to be less focused on buying the euro; this has obviously benefited its main trading partner – the greenback.  

The main reason for my attention being drawn to further dollar upside potential is the weekly bullish engulfing candle on the dollar index (see below).  This combined with an equally pro-dollar candle on the EUR/USD gives me reason to believe there is a reasonable probability of more dollar upside over the coming sessions – if some initial follow through can break last weeks ranges.

Further Dollar Gold Silver analysis available at www.forex-fx-4x.com

USDJPY stays below a downtrend line and remains in downtrend from 85.51. As long as the trend line resistance holds, downtrend could be expected to continue, and next target would be at 78.00-79.00 area. However, a clear break above the trend line resistance will indicate that a cycle bottom is being formed at 79.58 on daily chart, then the following upward move could bring price to 82.50-83.00 area.

For long term analysis, USDJPY is in consolidation of long term downtrend from 124.16 (2007 high). Range trading between 76.40 and 90.00 is expected in next several months.

Weekly Forex Forecast