Heightened Volatility Highlights Today’s FX Trading

Source: ForexYard

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The first two days of this week’s trading have been extremely volatile with negative headlines driving the direction of the majors in an absence of economic data. The threat of a Greek default is weighing on the EUR while French banks continue to face pressure over funding concerns.

The EUR/USD bounced 200 pips yesterday in the North American trading session only to shed most of those gains this morning after continued pressure from Italy, France, and Greece. Support for the EUR that was seen after the FT reported Chinese interest in Italian faded this morning after a disappointing Italian bond auction. Italian 5-year debt yielded 5.59% vs. 4.93% at the previous sale in August. The auction also had a weak bid to cover ratio of 1.28 from 1.93.

French banks continue to be pressured from downgrade concerns and a WSJ article cited a lack of dollar funding facilities for some French banks. The French CAC40 is the weakest European bourse, trading lower by 2.20%.

The pressure on the French banks is a direct result of default fears by Greece. The 2-year Greek note yielded for the first time above 75% while the 10-year bond was yielding 25%. These levels show the incredible amount of stress on Greek paper and market expectations of a Greek default.

Due to the pressures in Europe the EUR has been volatile the last two days but the EUR/USD failed to make a new low below 1.35 and moved back to even on the day. The pair has traded between 1.3700 and 1.3550. Short term technical indicators are oversold, much like many French banks, though headline risk is the key in this trading environment. Additional resistance is found at 1.3835 while a break of this week’s low may have scope to 1.3430.

Read more forex trading news on our forex blog.

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.

Belarus Central Bank Hikes Rate 300bps to 30.00%

The National Bank of the Republic of Belarus raised its refinancing rate by 300 basis points to 30.00% from 27.00% on the 14th of September.  The Bank said [translated]: “The consistent increase in the cost of borrowed money in the economy is intended to provide a further deterrent effect on customers’ demand for credit resources of banks for the period of release on a single course.  At the same time, increasing the refinancing rate will be an additional factor in stimulating processes of savings in Belarusian rubles and reduce pressure on the exchange rate”.  

The latest move marks a continued string of aggressive rate increases, with the Bank raising the refinancing rate by 500 basis points to 27% and 200 basis points to 22%.  Belarus reported consumer price inflation of 36.2% in the year to June, according to the National Statistic Committee, meanwhile the government is forecasting 2011 inflation of as much as 39%.  The USD-Belarussian ruble exchange rate has double on the black market, rising to as much as 7,000 per dollar (approx. 6,000 in July), and currently trades around 5350 against the US dollar.

www.CentralBankNews.info

Bank of Mozambique Holds Interest Rate at 16.00%

The Bank of Mozambique held its standing facility lending interest rate at 16.00%.  The Bank said [translated]: “The Monetary Policy Committee believes that the Mozambican economy progresses in line with the main macroeconomic targets set for 2011, to evaluate reported interim results for the first half of the year and the projected short- and medium in which the analysis is based, even if the risks outweigh global economic slowdown. The exchange rate developments that the country notes in the last 12 months and its recent situation reinforce the predictions of a more favorable inflation… the Monetary Policy Committee decided to keep interest rates unchanged… and to intervene in the interbank markets, to ensure that the monetary base does not exceed 33,800 million MT at the end of September 2011.”

Previously the Bank cut its key lending rate by 50bps to 16.00% at its August meeting, after raising the rate by 100 basis points to 16.5% at its January meeting this year, where it also raised the interest rate paid on deposits by 100 basis points to 5%, and lifted the required reserve rate by 25 basis points to 9%.  Mozambique saw inflation in it’s largest city, Maputo, of 7.9% in August, up from 7.7% in July, but lower than 9.3% in June.  Mozambique’s economy expanded 6.8% in the June quarter, compared to GDP growth of 8.1% in the March quarter, meanwhile the IMF is forecasting economic growth of 7.5% in 2011 and 7.8% in 2012.  The Bank of Mozambique next meets to review monetary policy settings on the 12th of October.

A Bright Future for Destruction

By MoneyMorning.com.au

What drives progress?

The answer is simple. And it probably won’t surprise you.

But it’s hard to focus on progress when all you see is regression.

The Financial Times headlines, “Italy turns to China for help in debt crisis”.

The Age says, “Retailing to go from ‘bad to worse’”.

And Bloomberg News reveals, “BofA [Bank of America] to Slash 30,000 Jobs in Cost-Cutting Plan”.

Every way you look, you see destruction… job cuts, companies going bust and countries borrowing and begging from other countries.

Things look bad. And if we’re honest… it is bad.

But among the gloom, there’s something to look forward to.

It’s this…

No progress without destruction

Progress needs destruction. We know that may sound weird, but it’s true. Throughout history all improvements to human life have come as a result of destruction.

We’re talking about entrepreneurs coming up with new ideas, products and services that replace existing ways of doing things.

It’s destruction caused by creation.

In this case it’s where the destruction hits an established business. Now, the business isn’t necessarily doing something bad. It’s just that entrepreneurs always look for ways to make a profit.

If there’s no way for new firms to make a profit with an established product, an entrepreneur will find a way with another product.

The technology sector is a perfect example.

When new technology is introduced it will typically have high profit margins. This is because it’s new and the firm has invested a lot of money in it. So, in order to make money the firm charges a high price.

It’s a risk, because there’s no guarantee consumers will pay the high price. But if they do, the technology firm is on a winner… and the profits start racking up.

But there is a downside for technology leaders. High profits act as a signal to competitors. This causes competing firms to enter the market to get a cut of the action.

And because the established and new firms want to gain market share (and profits), the inevitable result is a race to the bottom as they undercut each other… prices and profits are slashed. This is, of course, great news for the consumer.

And it’s good news for progress and creative destruction too.

Why?

Searching for profits

Because at some point it becomes unattractive for new players to enter the market. Start-up costs and low profit potential means entrepreneurs will look elsewhere. Simply put, the “high profit signal” isn’t flashing anymore.

But that doesn’t mean progress stops. Entrepreneurs will just look for other ways to make money. And so the search for profits leads entrepreneurs to come up with newer ideas… something else that could shake up the same or a different industry.

Take television manufacturing as an example. The last 10 years has seen the industry go through several phases: old style CRT… rear projection… plasma… LCD… LED LCD… 3-D LED LCD… Smart 3-D LED LCD… what comes next?

For all we know, the “next” may have already happened but we haven’t seen it yet!

As each technology appears you see a wave effect in prices. Plasma TV prices were high until LCD TVs came on the scene… then they dropped. But as soon as LED LCD TVs appeared, standard LCD prices fell too… LED had become the new premium product.

We use this example because it’s the most obvious and visible. But this is what happens all the time. And not just in the technology sector. It happens with any industry.

But in order for progress to advance, you need an environment where entrepreneurs can flourish. Without it progress stops.

For years, Western governments have meddled with the free market. Erecting barriers to entry to keep entrepreneurs from destroying established businesses with new innovations.

That doesn’t mean entrepreneurialism is dead. It’s just harder to find.

But maybe it won’t be that way for long.

Looking forward to the future

A positive from the disaster happening in Europe and North America is the experiment of allowing governments to steer national economies is proving more of a failure as each day passes.

The destruction of national economies in Europe is painful. But the upside is it’s purging economies of welfare dependency and that should result in smaller governments.

And that’s why, in the long run we’re positive about the future.

The reversion to smaller governments will allow an altogether more positive type of destruction to take hold – creative destruction.

Old ways of doing things – ways created by the State – will be cast aside and replaced by the next breed of entrepreneur. One who can make profits without fear of government taxing away their gains.

This won’t happen overnight. But ultimately, we’ve greater faith in the abilities of entrepreneurs than we’ll ever have in the abilities of meddling bureaucrats.

Cheers.
Kris


A Bright Future for Destruction

Why Brazil’s Fuel Needs Will Drive Up Aussie Food Prices

By MoneyMorning.com.au

Did you know that more than 20% of ice-cream is made of sugar?

Not only is it the sweetener of choice when it comes to your favourite junk foods. It’s also nature’s natural preservative.

Australia is well known as the third largest exporter of raw-sugar. But we will see a dip in production this year.

Heavy rains, cyclone Yasi and floods in the Sunshine State meant the sugarcane recently harvested is too wet to crush.

This means Australia will produce just 30 million tonnes this year. Last year it was between 32-35 million tonnes.

But the Australian weather isn’t the main reason for the rise in raw sugar prices…

Sugar No. 11 futures have recently come off two-year highs of 30.4 cents per pound.

Sugar price chart
Click here to enlarge

Source: ICE Futures

Brazil is the world’s largest exporter of sugarcane. And because of lousy weather, it will produce 5% less than it did last year. (Around 498 million tonnes.)

That doesn’t seem like a big drop. But, Brazil doesn’t just use sugarcane as a food source.

In fact, 60% of its sugarcane production is used in ethanol-based fuels.

Last year Brazil produced 26 billion litres of sugarcane-based ethanol fuel. The shortage of raw sugar has seen ethanol futures prices climb…

BMF chart
Click here to enlarge

Source: barchart.com – BM&F Ethanol ETH FUT X11

The October 2011 futures contract is currently trading at USD$1286.50 (AUD: $1,245.17).

Ethanol is such an important fuel in Brazil. And the less sugar Brazil produces, the higher the ethanol futures price will climb.

Bad weather will affect this year’s planting season too. This is why ‘normal’ production levels aren’t expected to return to normal until 2013. In fact, the price per pound of sugar isn’t expected to dip below USD25 cents until 2012.

Normally, Australia would be unaffected by the short supply of Brazilian sugar. As we consume our locally produced sugar. But because of the bad weather and the smaller harvest size, the increase in the spot price is set to have a big impact on Aussie consumers for another two years.

Shae Smith
Editor, Money Morning

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From the Archives…

HarveyNormanomics in One Lesson
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2011-09-08 – Kris Sayce & Dr. Alex Cowie

Manipulation on a Grand Scale
2011-09-07 – Kris Sayce

Three Steps to Wealth: Leverage, Volatility and Risk
2011-09-06 – Kris Sayce

Why it’s Not Too Late to Avoid This Investing Mistake
2011-09-05 – Kris Sayce

For editorial enquiries and feedback, email [email protected]


Why Brazil’s Fuel Needs Will Drive Up Aussie Food Prices

USDCAD remains in uptrend from 0.9725

USDCAD remains in uptrend from 0.9725, the fall from 1.0025 is treated as consolidation of uptrend. Support is at the rising trend line on 4-hour chart, as long as the trend line support holds, uptrend could be expected to resume, and another rise towards 1.0200 is still possible. However, a clear break below the trend line could indicate that the rise from 0.9725 has completed at 1.0025 already, then pullback to 0.9750-0.9800 area could be seen.

usdcad

Forex Signals

Bank of Mauritius Holds Repo Rate at 5.50%

The Bank of Mauritius held its benchmark interest rate unchanged at 5.50%.  The bank said it “noted that global economic activity is expected to recover more slowly than had been anticipated at its last meeting due to heightened uncertainty over the growth outlook.  While the threat of a new round of rapidly rising international commodity prices has lessened, there are still significant concerns that supply constraints could continue to pose upside risks to the inflation outlook, especially in fast-growing emerging economies.  The MPC has also noted that, against the background of weakening global growth prospects, a number of central banks in advanced and emerging economies have maintained interest rates at current levels.”


Previously the Bank of Mauritius raised its repo rate by 25 basis points to 5.50% at its June meeting, after raising 50 basis points in March this year to 5.25%.  Mauritius reported inflation of 6.5% in August, down slightly from levels seen earlier in the year e.g. 7.2% in March, and 6.8% in February, meanwhile the bank expects inflation to decline to around 5.1% by June 2012.  The Bank revised its forecasts downward slightly and now expects the economy to grow about 4.4% this year (4.6% previous forecast), having recorded annual GDP growth of 4.4% in 2010.

Harcourt Says Strong Aussie Hasn’t Affected Employment

Sept. 12 (Bloomberg) — Tim Harcourt, the chief economist of the Australian Trade Commission, talks about the nation’s trade surplus, which was little changed in July from a month earlier as an increase in metals exports helped offset a decline in coal shipments. Harcourt speaks with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.” (Source: Bloomberg)

Will British Inflationary Data Hold as Expected?

Source: ForexYard

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Tuesday’s publications of heavy inflationary figures from Great Britain are by and large forecasting stability. Set to be released tomorrow are the data on CPI, RPI, and DCLG’s HPI. The market is already pricing in a solid uptick in British pound (GBP) values, highlighting a general mood of agreement with the forecast for stability.

Britain’s core consumer price index (CPI) is the only figure anticipating a decline (albeit of a meek 0.1%), while the house price index (HPI) being released by the Department for Communities and Local Government (DCLG) is foreshadowing a much shallower decline in home values from last month. The retail price index (RPI) is expected to stay at 5%, and the nominal CPI data is set for an increase in similar size to the decrease predicted to come in the core data. Will traders be surprised after tomorrow’s inflationary releases?

Read more forex trading news on our forex blog.

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.