Month: August 2011

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Major Says ECB Must Push Spain, Italy Yields Below 5%

Aug. 9 (Bloomberg) — Steven Major, global head of fixed-income research at HSBC Holdings Plc, talks about the European Central Bank’s purchase of Italian and Spanish bonds. Major, speaking with Owen Thomas on Bloomberg Television’s “On the Move,” also discusses the outlook for U.S. and U.K. bond yields. (Source: Bloomberg)

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How Will the Fed Respond to Yesterday’s Stock Plunge?

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The fallout from the US rating downgrade hit equities the hardest with the S&P 500 falling 6.6% and the pain has continued today with the German DAX down 5.9%. In contrast to yesterday the USD is lower versus the majors. With the Fed due to release its FOMC Statement today market players are speculating just how the Fed will respond to the market turmoil.

The ECB continued to buy Spanish and Italian bonds for the second consecutive day and has helped to stabilize European bond markets, albeit temporarily. Trichet was quoted by Reuters saying, “We are in the secondary market”. Yields for the Spanish 10-year bonds are trading below 5% while Italian 10-year yields are slightly above this level. Germany reported a smaller than expected trade surplus and a contraction in exports. Both data points hint at slower growth in Q2 for Germany.

UK manufacturing production was far from consensus forecasts with a contraction of -0.4% on expectations of 0.3% growth. The UK trade deficit was also noticeably weaker but the GBP has been resilient. A break above 1.6475 would likely take the GBP/USD to 1.6550. Today’s low was halted at the 20-day moving average at 1.6267. A break below here could test 1.6230 near the 55-day moving average.

Later today the Fed will release a statement from its FOMC meeting. Given the turmoil in the market expectations are for the Fed to take action. Announcing QE3 today could cause a panic from market players and reduce confidence in the Fed’s ability to control the economy. However, the Fed could change the wording in its statement to reflect its intention to hold interest rates at lows for a longer period of time. The Fed could also signal its intention to hold longer maturity assets on its balance sheet. All of these would be a USD negative. A failure by the Fed to act may also unnerve investors which could be positive for the dollar. Yesterday’s low at 1.4130 is the initial support for the EUR/USD followed by Friday’s low at 1.4050. The August high of 1.4450 is the first resistance.

Read more forex trading news on our forex blog.

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Why the U.S. Downgrade Matters

By Kris Sayce
Money Morning Australia

The global economy is descending into a tailspin… mainstream share portfolios have been hammered… and the Aussie dollar has dropped 10% in less than two weeks.

Just when you thought things couldn’t get any worse…

Get ready, dear reader…

Because tonight the busy-bodies and sticky-beaks are set to descend in hordes… sticking their noses in where they’re not wanted or needed.

We refer, of course to the Census.

Fortunately, your editor and family won’t be at home tonight, so we don’t need to fill out their intrusive form.

Yet, the little Oompa Loompas bashing on millions of doors tonight aren’t the only busy-bodies straying where they shouldn’t.

We noted with amusement the joint statement from the G-7.  You can read the full text here.  But here are a few choice snippets:

“In the face of renewed strains on financial markets, we, the finance ministers and central bank governors of the G7, affirm our commitment to take all necessary measures to support financial stability and growth in a spirit of close co-operation and confidence…

“We are committed to taking co-ordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth.”

Despite everything that’s happened, they still don’t get it.

The whole reason the market is in such a mess is because of “finance ministers and central bank governors… taking co-ordinated action…”

They’ve fiddled with the market for decades and what you’re living through now is the result of that meddling.

Looking to divert the blame

Not that they’ll ever admit it.

There are others to blame… apparently.

Such as… Standard & Poor’s – the ratings agency.

As you know, we’re no fan of ratings agencies.  But it’s pleasing to see they’ve finally done their job – downgrading U.S. debt.  It follows the downgrade of European sovereign debts – Greece, Ireland, Portugal, etc…

But certain people aren’t happy.  As Dan Denning, editor of the Daily Reckoning noted this morning:

“In Italy, prosecutors have raided the offices of Moody’s and S&P and seized documents.”

Meanwhile, in the U.S., the Washington Post reports:

“A Senate Banking Committee aide says the Democratic-led panel is gathering information on Standard & Poor’s decision to issue the first-ever downgrade of the government’s credit rating.”

Hmmm, perhaps the government is getting revenge on S&P for getting revenge on the government!

All we know is it’s a stinking great mess with governments and central bankers doing all they can to hold on to power.  Trouble is, the more they tighten their grip, the more pain is inflicted on the average Joe and Joanne Punter.

Zombie commentators still don’t get it

But don’t worry.  According to the zombie mainstream Australian press, there’s nothing much to worry about.

Our old pal, Michael Pascoe at the Age wrote yesterday:

“The single-notch downgrade of the United States’ long-term debt by Standard and Poor’s makes for lots of impressive headlines, but it doesn’t actually mean all that much in the short-term – just a historic market along the way of a great power’s slide.”

His Fairfax Media buddy, Jessica Irvine must have attended the same briefing yesterday morning.  She wrote:

“So in the short term, the credit downgrade potentially means next to nothing.”

And finally, over at Business Spectator, Alan Kohler had this to say:

“It’s impossible to predict how markets will react to the huge psychological element of Saturday’s downgrade, but the reality is somewhat less huge.”

Since the “Australia is different” crowd published their thoughts yesterday morning, the Aussie stock market has officially crashed.  Let’s not beat about the bush here.  Stocks have taken an almighty beating.

In fact this morning, the S&P/ASX 200 index is at 3,781.  The market is now just 16% above the March 2009 lows.

Make no mistake, the downgrade of U.S. debt is important.  No investment is isolated.  Every investment anywhere in the world is risk-rated to every other investment.

Normally, when one asset class is re-rated it doesn’t make much difference to other sectors (although it still makes some difference).  But when the re-rated asset is the global benchmark for all other assets, contrary to mainstream opinion, it’s a huge deal.

This is Investment 101 stuff.  To say the rating on the benchmark asset class can change without it causing ructions is simply wrong.  The action you’ve seen in the market the past two days proves that.

Investors now have to figure out the relative risks of every asset and work out if it’s overpriced or underpriced.  They have to decide if the U.S. bond market is still a haven for investors.

Some will decide it is.  But others will decide it isn’t.  In that case, where do they go for safety?

We don’t know the answer to that.  We do know two things: first, it creates huge volatility as investors reassess the market.  And second, we can sure say they won’t flock to the Aussie dollar.  The price action in the Aussie dollar versus the U.S. dollar is proof of that – it’s back to parity as we write.

And that’s not all…

Early warning signals going mad

Our Early Warning Signals have gone berserk… the U.S. VIX index soared 50% last night to end the day at 48 – a level not seen since early 2009.

The Aussie dollar has continued to slump against the Swiss Franc – the Aussie dollar’s supposed haven status is looking weaker (and sillier) by the minute.

And the gold price has taken off.  Not only has the U.S. dollar gold price surged through $1,700, but the Aussie dollar gold price has quickly followed.

It’s a good job the U.S. downgrade isn’t significant!  And it’s a good job Australia has China to fall back on!  Not.

Yesterday we wrote to you saying to get set to buy cheap stocks.  This morning, those stocks – including the ones we’ve got on our watchlist – have gotten much cheaper.

The market remains as risky as heck.  And just as we’ve warned for the past two years, it’s not the place to store your life’s savings.

But now you’re flooded with cash, buying a select number of cheap stocks over the next few weeks makes a lot of sense.  But only if you’re comfortable taking risks. If not, stay in cash and bullion and wait for the volatility to ease.

The way we look at it, if you don’t like taking big risks there’s no harm staying on the sidelines.  If you miss the first 5-10% of a rally, it’s not a big deal.  At a time like this, capital preservation is more important for the risk averse.

Cheers.

Kris Sayce
Money Morning Australia

Why the U.S. Downgrade Matters

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Moody’s Defends US AAA Debt Rating

By ForexYard

Moody’s Investor Services defended the AAA rating of US debt yesterday, attempting to forestall a sharper decline on Wall Street and justify the USD and US Treasury notes as stable stores of value in this shaky global market.

Economic News

USD – USD Holding Fast Against Strong Market Bears

The US dollar (USD) was seen struggling to hold its value yesterday amid severe market pessimism due to a downgrade of US debt by S&P’s ratings agency. The value of safe-haven assets like the Swiss franc (CHF) and Japanese yen (JPY) have been buoyed by a shift away from higher yielding assets, though the CHF has seen only mild gains and the JPY was brought to bear by an intervention by Japan’s central bank. The greenback appears to be holding strength despite the downgrade as it remains a central store of value for most investors.

China unleashed a lengthy diatribe against the US on Monday during the emergency G20 summit as a reaction to S&P’s historic move. The talk was aimed at the loss of value China foresees as impending due to what it viewed as fiscal irresponsibility on the part of Congressional leadership. Moody’s Investor Services, however, did defend the AAA rating of US debt yesterday, attempting to forestall a sharper decline on Wall Street and justify the USD and US Treasury notes as stable stores of value in this shaky global market.

With a heavy news day expected today, traders are sure to see heightened volatility with potentially wide swings in value from the plummeting stock market. The US economy will be publishing several reports on productivity, labor costs, and the latest decision on short-term interest rates, known as the Federal Funds Rate. The Federal Funds Rate announcement will be of prime importance today considering its timing in relation to these other historic events. How the Fed portrays itself this week may be key to determining the USD’s value in the weeks and months ahead.

GBP – British Industry and Manufacturing under Review Today

The British pound (GBP) has been seen trading with largely bullish results so far this week as traders assess the risk sentiment across the region. The Cable was seen trading bullish in late trading as shifts away from the greenback, due to uncertainty surrounding US markets after an historic downgrade by S&P of US debt led many to favor sterling in early week trades.

News of debt contagion spreading across the euro zone, however, has also led several economists to worry that a toppling of consumer confidence may be up next. Whether Britain is affected by this regional tug is a matter for speculation at the moment, but one traders should bear in mind considering the wide spill-over effect running through global markets this week. Should today’s reports on industrial and manufacturing output indicate a downturn in productivity, and thus growth, there is a chance that traders will take the news to mean the pound sterling could meet resistance in the near future.

On tap today, traders will witness the release of a highly significant monthly report on manufacturing production in Great Britain at 9:30 GMT, concurrent with the nation’s less important industrial production and trade balance data. Should the figures reveal stagnation in manufacturing and industry growth, we could see heftier flights to safety in the days and weeks ahead. This would likely push the value of the GBP lower over the long-haul as traders continue to flee risk in larger numbers.

AUD – Aussie Trading Lower as Housing Data Comes Into View

The Australian dollar (AUD) was trading mostly weaker versus its currency counterparts yesterday after data releases have begun to shift traders back into safety. The Aussie has been losing momentum these past few weeks as risk aversion becomes predominant in the global market. Fears emanating from the recent downgrade of US debt have made the forex market jittery so far this week, leading many to seek safety.

This movement has gouged the AUD against all of its currency rivals, especially against safe-havens like the Swiss franc (CHF) and Japanese yen (JPY). With further housing reports getting released this morning, forex traders are highly likely to see heavy movement by the Aussie in today’s trading hours. News out of China today is also expected to hike volatility throughout the Pacific countries of Japan, New Zealand and Australia. Pacific traders should be cautious in today’s trading.

Oil – Crude Oil Prices in Steep Decline as Futures Tumble

Crude Oil prices dropped sharply Monday as sentiment appeared to favor a massive downturn in global stocks following a downgrade of US debt by S&P’s ratings agency this weekend. Data releases out of Europe and the US last week are still driving many investors back into safe-haven assets, but dominating sentiment this week has been the debt downgrade in the US, widening bond yields in Spain and Italy, and a sharp decline in stocks and futures as a result of portfolio shifts and pessimistic forecasts.

An expected dip in dollar values due to market outlook has caused oil futures to plummet, driving many investors away from such physical assets. Should Crude Oil sentiment continue to flop this week, oil prices may fall well into $80 price range. Traders appear weary of the value of oil as its volatility has increased these past several trading weeks. Should the stock market fail to find support in the days ahead, oil futures will likely remain bearish, pulling prices lower over the next few days.

Technical News

EUR/USD

An opening gap higher on Monday morning took the pair above its current downward sloping channel that contained the EUR/USD since late July. Selling into EUR/USD gains may be the right play as the pair has been unable to hold a bid above the 1.45 level. Initial resistance comes in at 1.4540 though a break above the June high of 1.4700 would likely reverse the negative technical tone. To the downside support comes in initially at last Friday’s low of 1.4050 followed by the 200-day moving average at 1.3940 and the rising trend line from June 2010 which comes in at 1.3840.

GBP/USD

Cable looks to be supported after moving lower and receiving a bounce at 1.6220. This level holds the 55-day moving average and a 38% retracement from the mid- July low to the late July high. Resistance is found at 1.6475 followed by 1.6550. A break here and sterling could test the April high of 1.6750. 1.6220 is initial support followed by the 200-day moving average at 1.6085, 1.6000, and the July low of 1.5780.

USD/JPY

The spike higher in the value of the USD/JPY due to Japanese government intervention was short lived as the 80 yen level was eagerly sold into. The pair has retraced 68% of its move from the August low to the post intervention high and may continue to move lower. A previously broken trend line from the late July move lower may be supportive but most likely only a short term pit stop on the way back to the all-time low at 76.25. Resistance is found at 79.50 and the post intervention high of 80.22. An additional round of FX intervention could take the pair to the long term trend line off of the 2007 high which comes in at 82.00.

USD/CHF

Even measures undertaken by the Swiss National Bank to weaken the Swiss franc have failed to give the USD/CHF a bid. On Monday morning the pair gapped lower to a new all-time low. Momentum is steadily falling and traders may want to continue to hold their shorts. Initial resistance stands at 0.7800 followed by 0.8080 and the downward sloping trend line from the February low at 0.8270.

The Wild Card

S&P 500

Yesterday was a brutal day for stocks all-around with the S&P 500 plunging 6.66%. The US stock index has moved through its 1,131 target from the head and shoulders pattern. Forex traders should note the next support level on the daily chart comes in at 1,037, a level not seen since August of last year. A breach here could take the pair to the July 2010 low of 1,004. Resistance is found at 1,170.

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.

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Indonesian Central Bank Holds Reference Rate at 6.75%

Indonesia’s central bank, Bank Indonesia, kept the BI reference rate on hold at 6.75%.  The Bank said: “Bank Indonesia views that the current BI rate level is still consistent with efforts to maintain macroeconomic and financial stability as well as to support stronger economic growth. Bank Indonesia is confident that the impact of the recent turmoil in the global financial markets because of the U.S. credit rating downgrade to the domestic financial market is limited, and can be contained with continuous monitoring of market development and coordination with the government”.

At its July meeting, the Bank also maintained the key monetary policy rate (the BI Rate) unchanged at 6.75%.  Previously the Bank raised the BI rate by 25 basis points to the current 6.75% in February 2011.  Indonesia reported annual inflation of 5.98% in May, compared to 6.16% in April, and 6.65% in March, and just inside the inflation target of 5% +/-1% in 2011 (which changes to 4.5% +/-1% in 2012).  Bank Indonesia is forecasting GDP growth of 6.3-6.8% in 2011 and 6.4-6.9% in 2012 for the Indonesian economy, meanwhile Indonesia reported economic growth of 6.5% in the June quarter this year.

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Rwanda Central Bank Holds Repo Rate at 6.00%

The National Bank of Rwanda held its key repo rate unchanged at 6.00%.  Bank Governor, Claver Gatete, said: “Considering current developments and outlook in economic fundamental, central bank monetary policy will remain accommodative to sustain lending to the economy consistent with the growth objective in 2011,”.  The IMF previously noted that it is forecasting inflation of 7.5% for 2011 and cautioned the East African nation to tighten monetary policy in order to avoid second-round inflation effects of higher food and energy prices. 

At its April meeting the Bank also held the key monetary policy interest rate unchanged at 6.00%, meanwhile the bank last reduced the interest rate 100bps to 6.00% in November last year.  Rwanda has seen inflation pick up to 5.82% in June, compared to 4.54% in May, 4.98% in April, and 4.11% in March, and 1.09% in January this year.  According to IMF data Rwanda saw annual GDP growth of 5.39% during 2010, meanwhile the IMF recently scaled down its growth estimate for Rwanda to 7% for 2011, from a previous forecast of 7.5%.  

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Forex daily review- 09.08/2011

Important announcements for today:
09.30 (GMT+0) GBP – Industrial production
13.15 (GMT+0) CAD – Housing starts
17.15 (GMT+0) USD – Federal Funds Rate
17.15 (GMT+0) USD – FOMC Statement

USD-CHF

Time: 05:26 (GMT+0) rate: 0.7510
Strategy: Short
60 minutes chart
The price performing a descending price structure (a series of descending highs and lows), we believe that a break of the last low at the 0.7484 price level will continue the move downwards, with first target at the 0.7398 price level.

You can see the chart on the link below:
http://www.real-forex.com/charts-daily/r/09.08.2011/7.jpg

EUR-AUD

Time: 05: 33 (GMT+0) rate: 1.4107
Strategy: Short
60 minutes chart
The price reached to the 1.4260 resistance level which can be seen at the daily chart. We believe that a brake at this area will lead to a correction of the last continuous ascending move (blue broken line), the size of the correction is assumed to be between a third and two thirds of the move. Meaning between the 1.3758 and the 1.3446 price levels

You can see the chart on the link below:
http://www.real-forex.com/charts-daily/r/09.08.2011/8.jpg