Month: October 2011

By ForexYard

Data on confidence yesterday also signaled a mild downtick in outlook from the previous month. The news has had some impact on the forex market, though it could magnify through longer-term analyses on US financial markets should increases in investment and spending increase over the coming months.

Economic News

USD – Dollar Trading Bullish as Pessimism Dominates Trading

The US dollar (USD) was seen trading mildly bullish Tuesday as investors weighed the impact of recent consumer confidence and investment reports from the American economy. A sudden wave of risk appetite last week seemed to have pushed down on the USD, but pessimism emerging early this week held back some of those losses.

Data on confidence yesterday also signaled a mild downtick in outlook from the previous month. The news has had some impact on the forex market, though it could magnify through longer-term analyses on US financial markets should increases in investment and spending increase over the coming months.

As for today, there will be a string of reports on housing and industrial orders. Liquidity will likely be higher in today’s afternoon trading as these releases begin to get published. With consumer confidence, inflation, and industrial production in focus this week and next, the picture on future demand and growth levels is expected to become moderately clarified and this could weigh heavily on currency direction in the short- and mid-term.

GBP – Pound Sterling Gaining as Data Supports Expansion

The Great Britain pound (GBP) is expected to be seen trading with bullish results this week after reports on the country’s inflation revealed a mild uptick this past month. Against the US dollar (USD) the pound has been trending upwards as the greenback’s bearish moves help other currencies rise.

With recent inflationary data out of Britain, it seems the pessimism in Europe isn’t trickling across the English Channel, at least for now. Holiday spending and recent upticks in manufacturing should shore up the pound’s advances this month. Moreover, though housing data seemed a bit pessimistic, consumer prices are indeed growing at a healthy rate in the UK.

Sentiment across the region may have turned slightly away from negativity, with many analysts and economists expecting moves towards safety by traders later this week, but the GBP could see a solid weathering of this financial storm so long as data remains bullish. Great Britain appears positioned for a relatively better quarter than its southerly neighbors. The pound could see some bullish movement this week as a result of this overall sentiment.

JPY – Japanese Yen Consolidating as Traders Weigh Global Sentiment

The Japanese yen (JPY) was seen trading mildly lower versus most other currencies this morning as its value as an international safe haven was being challenged by an air of impending intervention by the Bank of Japan (BOJ). Being linked to international risk sentiment, the yen has experienced an expected uptick during a period when shifts away higher yielding assets became prominent. The JPY has been experiencing several long strides lately from the various shifts into riskier assets.

The latest moves of the yen are causing some concerns, however, as many speculators are anticipating another round of intervention by the BOJ. With industrial production data out this week, traders are waiting to see what the BOJ will do in the face of a downturn. A strengthening yen has benefits for the buying power of the island economy, though its dependence on exports makes a strong yen unfavorable for longer-term growth in Japan’s current financial model. As the island currency remains bullish, the pressure begins to mount for the expected bank move to lower its currency strength.

Crude Oil – Crude Oil Trading Flat with Dollar in Ascent

Crude Oil prices held steady Tuesday as sentiment appeared to favor a mild uptick in global stocks following reports of monetary moves being made by several central banks. Data releases out of Europe and the US last week are still driving many investors back into safe-haven assets as many reports suggested a surprise downtick in growth among global industrial output and consumer spending.

An expected spike in dollar values due to this week’s risk sensitive environment has prevented many investors from taking positions on physical assets, creating a consolidation pattern on oil charts. As such, sentiment appears to have the price of crude oil holding steady. Should Crude Oil sentiment continue to flatten this week, oil prices may reach a decision point which forces a wide swing later in the trading week.

Technical News

EUR/USD

The EUR/USD has moved above its consolidation pattern from the previous week and has a technical retracement towards 1.4040, the 50% Fibonacci retracement off of the move stemming from the 1.4940 high in May to the October low of 1.3145. Both daily and weekly stochastic oscillators are moving higher and as such further resistance is located near 1.4100 where the 100 and 200-day moving averages rest. To the downside support is seen at last week’s low of 1.3650.

GBP/USD

Cable has jumped out to new 6-week high to its 50% Fibonacci retracement at 1.6010 from the move lower covering the April high to the October low. A break of this retracement level would put in play the 1.6110 resistance from the August low followed by the 61% retracement level at 1.6180. 1.5850 can be eyed as the first significant support line followed by 1.5630.

USD/JPY

Last Friday the sleepy USD/JPY awakened from its slumber and quickly set a new all-time low of 75.78, triggering a plethora of stops before moving back above the 76 yen mark. While the range trading environment may continue, a quick move below the 75 yen level could invite an additional round of intervention from the Ministry of Finance which would likely take out the initial resistance levels at 77.85. The post intervention high of 80.25 may find willing sellers of the pair at more attractive levels.

USD/CHF

The one way price move in the USD/CHF has ended with the pair forming what looks to be a falling wedge pattern. The chart pattern typically brings about a breakout to the upside but forex traders should follow the price action. The consolidation pattern has resistance at 0.9025, a level that coincides with the rising trend line from the August low which was broken last week. Additional resistance is located at 0.9340-0.9315. Support is found at 0.8640 and 0.8550.

The Wild Card

Gold

Gold prices recently performed a ‘bear trap’ when the price of spot gold fell below its rising support line from the September 28th low only to pull higher the same day and continue to advance higher to test the $1,695 level. Forex traders should note that if the price continues to move higher there are retracement targets located at $1,725 and $1,771. Support comes in at the October low of $1,603.

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.

Source: ForexYard

The economic calendar is full today with data from the US and the Monetary Policy Report from the BoC but traders will be squarely focused on news coming from the EU economic summit.

Expectations are for an agreement to be hammered home today regarding new capital injections into the European banking system but up until now the parties (in particular Germany) have been unable to agree to the respective haircut on Greek debt and just how the EFSF will be leveraged. One thing is for certain that Germany is dead fast against continued ECB involvement in EFSF. These decisions will likely be delayed until the next G-20 meeting on November 3-4 or the Ecofin meeting on the 7th. Today’s announcement coming from the EU economic summit is expected around 17:00 GMT.

Currently the EUR remains in a tight trading range though a positive press release from today’s meeting could change all that. The big round number of 1.4000 is only a stone’s throw away and the 50% Fibonacci retracement from the May high to the October low coming in at 1.4040. Should the market be disappointed by today’s events the downside may offer 1.3820 as initial support followed by 1.3650 where the 20-day moving average lies.

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.

The Magyar Nemzeti Bank kept its central bank base rate unchanged at 6.00%.  The Bank said: “In the Council’s judgement, the outlook for growth has worsened significantly recently. Consumption demand is likely to be persistently low, reflecting the protracted process of balance sheet adjustment by households, uncertain income prospects and the further tightening in credit conditions. Significant fiscal adjustment next year is also likely to act as a brake on domestic demand growth.”

The Bank of Tanzania increased its repurchase agreement (repo) interest rate, placing the weighted average rate into double digits, with the rate last printing at 11.59% at the 25th of October auction (which compares to 8.24% at the start of the year, and a low of 0.93%).  Tanzania reported inflation of 16.8% in September, compared to 10.9% in June.

Inflation has been driven upwards by food supply variation, electricity shortages, and a weak shilling. The Tanzanian economy has grown between 6 and 7.4 percent over the past 6 years in real terms, and grew 7% in 2010.  The Tanzanian shilling (TZS) last traded around 1,768 against the US dollar, with the TZS weakening about 17% since March this year.

By MoneyMorning.com.au

You may have noticed we have a habit of banging on about something until we’ve bled it dry. We know we should try and mix things up… give you more variety… but, well, that’s just the way we are.

When we get our teeth into a subject, it’s hard to let go.

Yesterday we noticed this story from Bloomberg News:

“China, the world’s second-biggest economy, is heading towards a soft landing, speakers at the Bloomberg Link China Conference in Hong Kong said.

“A hard landing is a ‘distant scenario,’ Liu Li-Gang, head of Greater China economics at Australia and New Zealand Banking Group Ltd., said at the forum today. China’s consumption is ‘very strong’ as wages jump, backing economic expansion, said John Tang, China strategist at UBS AG.”

Funny that. Speakers at a “China Conference” claiming the Chinese economy won’t crash.

But that’s fine. Just as we don’t expect too many speakers at the Sydney Gold Symposium to say we should sell gold because it isn’t worth anything.

[Ed note: If you haven’t registered for the Sydney Gold Symposium on 14/15 November, you can register by clicking here…]

While our view is gold will go higher, we’ll still be sceptical if someone claims gold will reach $40,000 by the end of next year…

In the same way we were sceptical when Royal Bank of Scotland and Goldman Sachs analysts told the Australian Financial Review in January that the Aussie S&P/ASX 200 index would be higher than 5,600 points by the end of the year.

Today the index is around 4,200 points. It needs to gain 33.3% between now and 31 December to reach that target.

That’s why it always pays to listen, but do some of your own homework on the subject as well.

After all, saying China will keep growing because it’s still growing is like saying a balloon won’t pop because it’s still expanding! Both statements are only true until they’re no longer true.

But now we’ve got a new ally. Dr. Nouriel Roubini has joined the China “hard landing” crowd. Dr. Roubini is one of the few economists who correctly predicted the global financial meltdown in 2008.

And now he says Australia will be in trouble if (or in our opinion, when) the Chinese economy crashes. According to the Australian, Dr. Roubini said:

“If China has a hard landing, for a period of time that’s going to hurt growth and reduce commodity prices until China recovers and until the rest of the world recovers.”

Of course, just because Dr. Roubini says it, it doesn’t mean it’s true. But it adds weight to the argument that China can’t avoid a big economic downturn… and if that happens, Australia will suffer.

But what of the idea that China has a whole bunch of savings to draw from?

Money Morning reader, Peter sent us a note a couple of days ago. He wrote:

“Chinese save a significant portion of their salary, and now they are allowed to buy gold and silver, a considerable amount of wealth is literally going under the bed and not into bank accounts.”

It’s true the Chinese are buying gold. Our old pal, Diggers & Drillers editor, Dr. Alex Cowie has written to his subscribers about it. But it’s still a tiny proportion of saving.

Let’s put it in perspective. China’s official gold reserves are 1,054 tonnes. At today’s gold price it’s valued at USD$57.6 billion. By contrast, China holds USD$1.1 trillion of U.S. Treasury bonds…

In other words, China’s official holding of U.S. paper assets is more than 20 times larger than its gold assets.

Also, let’s not forget that for every dollar saved in a Chinese bank account, thanks to fractional reserve banking, there are many more dollars issued in loans on the other side of the ledger.

And if Satyajit Das, author of Extreme Money: Masters of the Universe and the Cult of Risk is right, China’s savings may not be as secure as most think. Asked by a Bloomberg News reporter, “How can a land as large as China run such a surplus?” Das replied:

“It’s unsustainable. That’s the lesson we should have learned from 2007. We instead shovelled everything under the carpet, and it’s going to come back to haunt us. China’s going to have to write off its $3 trillion.

“…Why wouldn’t they [the Chinese] suddenly turn around and say, well, we lent you $3 trillion and you’re not going to pay us back. So we’ve written it off and we won’t buy any more U.S. Treasuries until the U.S. reforms its fiscal position.”

Will anything that extreme happen? It seems unlikely. But then again, according to the U.S. Treasury, China’s holding of U.S. Treasuries was the same in August 2011 as it was one year before… USD$1.137 trillion.

Of course, China hasn’t had to buy Treasuries this past 12 months… because the U.S. Federal Reserve has been in the market as the biggest buyer of government bonds.

So let’s not get too excited about China’s savings. Most savings in the modern banking system aren’t backed by anything other than someone else’s debt.

If the savings really were “under the bed” in gold bars then we’d happily accept China’s savings could cushion it from an economic downturn.

But it’s not. China is no stranger to debt. Its banks have used debt to fuel land, construction and commodities speculations. None of those are safe bets.

Put simply, while Chinese savers may think their savings are held safely in a bank, in reality they’re putting their cash into what are little more than highly leveraged and speculative hedge funds.

And as you’ve learnt before – as recently as 2008 – there’s no way such risky investments will result in a happy ending.

Cheers.
Kris.

Dr. Doom’s Warning for Aussie Investors

By MoneyMorning.com.au

I’m writing this letter to you from the road in France.

After months of headlines focused on Europe’s demise, it is good to get over here and have a look at what’s really going on in Europe from street level.

Frankly, you’d never know anything was wrong. The shops in Paris were busy, nothing was reduced in price, and service was just as snooty as it has always been. Grand French dames were walking down the street with enough pearls to pay off the Greek debt. Everyone was so dolled up that when I saw my reflection in the mirror I thought I was looking at a homeless person.

We also went to see the Red Hot Chilli Peppers concert while we were in Paris. Even though they are pushing 50 and tour with their kids these days, the band put on a hell of a show. And despite the ridiculous price of the tickets, the place was still packed to the rafters.

La Economie?

It seemed fine from what I could see.

But so much hangs on the resolution from the meetings taking place. The markets have essentially been treading water most of the week in anticipation of some ‘big bazooka’ solution.

According to ANZ Commodity Research:

“Risk appetite for commodities has sharply improved… [but last night] commodities ended the session mixed, as sentiment-driven buying on hopes that the European package can stabilise non-core Eurozone sovereigns ran out of steam. Markets remain nervous ahead of tonight’s EU summit, with negative European headlines and downbeat US releases driving a negative market tone in a risk-off session…

“Markets were initially buoyed by news that German policymakers had supposedly agreed to vote on a joint motion for the EFSF tomorrow, and that it would likely pass. However, a subsequent headline about tomorrow’s EcoFin meeting being cancelled (meeting of the EU’s finance ministers) was then misinterpreted as a cancellation of tomorrow’s entire debt summit, illustrating just how fragile market sentiment is.”

Indeed, commodities were up 3.72% since Friday at last night’s close.

But as investors got twitchy last night we saw a couple of big moves in gold and silver…

This probably signals investors are moving back into gold and silver as a safe haven asset and hedge against a currency collapse, just in case the leaders of the European Union fail to come up with a plan to contain the European debt crisis. Or worse, stuff it up.

There isn’t much firm news from these meetings to go on yet. We’ll have to wait and find out what that resolution will be tomorrow morning…

Until then, I’ll continue to watch the market (and mining and resources stocks) with interest… But things are more than ever still in the hands of a few European politicians. And it’s worth waiting to see what we’re up against before making any big moves.

Dr. Alex Cowie
Editor, Diggers & Drillers

P.S. Despite the current climate, I’m convinced you can still track down profitable small-cap resource companies in this market. In fact, I’m REALLY bullish about three current picks I found using a unique method I devised especially for Diggers & Drillers. I’ve honed this technique over the last couple of years to help identify the best diggers and drillers on the ASX for my readers.

To find out what it is and how it could help you track down profitable small-cap mining stocks (before the rest of the market finds out), click here…

Related Articles

Why Chinese Monetary Planning Means More Volatility for You

Australia: The World’s Investing Casino

Why China’s Hidden Debt is Bad News for Aussie Stocks

The Great Indian Coal Rush

The Other Side of Short Selling

From the Archives…

If Demand is High, Why has the Price Dropped?
2011-10-21 – Kris Sayce

China’s Hard Landing is Certain
2011-10-20 – Kris Sayce

Money is Worth Nothing and Ships are Free
2011-10-19 – Kris Sayce

The Gold Bubble and China
2011-10-18 – Dr. Alex Cowie

Why You Wouldn’t be a Millionaire if Investing Was Easy
2011-10-17 – Kris Sayce

For editorial enquiries and feedback, email [email protected]

Grand Dames, European Debt and the Red Hot Chilli Peppers

USDJPY’s downward movement from 77.48 extended further to as low as 75.74. Key resistance is at 76.47, as long as this level holds, downtrend could be expected to continue, and next target would be at 75.00 area. On the upside, a break above 76.47 will indicate that a cycle bottom has been formed at 75.74 on 4-hour chart, and the fall from 77.48 has completed, then another rise to test 77.85 resistance could be seen.

Just one day before a summit of the Eurozone leaders where it is expected the details of the second attempt to save Greece will be finalized, Italy has announced it is unable to reach a consensus regarding its own austerity requirements. Among the measures rejected by Prime Minister Silvio Berlusconi’s much-divided coalition government was a bid to raise the retirement age from 65 to 67 years of age.

Italy has been under pressure for months to reduce its spending in the face of an estimated 600 billion euros ($833.1 billion) in debt scheduled to mature over the next three years. Italy desperately needs to raise capital to meet these expenditures and European Union leaders have pledged to continue to buy Italian bonds to ensure Italy can raise sufficient capital. In return, however, the EU expects Italy to address its chronic budget deficit.

It is not clear yet how EU leaders will respond to Italy’s failure on this front, but for now, there are greater worries.

In a bit of drama earlier today, German Chancellor Angela Merkel bluntly rejected the wording of a leaked draft of the communiqué to be issued as part of Wednesday’s summit. According to the media source, the message will include a line pledging the Eurozone leaders’ agreement with the ECB continuing its plans for “non-standard measures”.

“Non-standard measures” is code for the ECB’s recent practice of buying Italian and Spanish sovereign bonds in the secondary market. By buying bonds at market value in this way, it is hoped that this will be seen by investors as a sign of support and confidence in the ability of the two nations to repay this new debt.

It did not take long for Merkel to respond. Arguing that she did not support politicians dictating policy to the ECB, Merkel flatly stated that the comment was “not accepted” by Germany.

In the early stages of the Greek debt crisis, the yield on Greek debt skyrocketed in response to investor demand for a premium in exchange for assuming the extra risk of investing in Greece. By buying debt in the market in this manner, the ECB is hoping to prevent a similar fate for Spain and Italy.

Since implementing the program some eight weeks ago, the ECB has amassed more than 170 billion euros ($236.1 billion) in Greek and Italian debt.

Scott Boyd is a currency analyst and a regular contributor to the OANDA MarketPulse FX blog

Oct. 25 (Bloomberg) — Georg Grodzki, global head of credit research at Legal & General Investment Management, talks about the effectiveness of Europe’s bailout fund to fight the region’s debt crisis. He speaks with Owen Thomas and Linda Yueh on Bloomberg Television’s “Countdown.” (Source: Bloomberg)

By Mike Conlon, ForexNews.com on Oct 25, 2011

Well it looks like the market is unaware that there is major risk potential in the marketplace as stocks and commodities took off yesterday and it was “game on” for risk appetite. As a result, the Euro as well as the commodity bloc currencies moved higher despite the Euro debt decision due out tomorrow.

Does the market know something that we don’t? As often is the case, the answer is simply “no”. What the market does know is that it wants to take on risk and wants to buy stocks (especially large fund managers who have posted less than stellar returns) as corporate earnings have been largely better than expected. Throw in higher Chinese PMI data that showed that they aren’t slowing entirely and you have a recipe for gains.

But should the market be paying more attention to the risk? I think the answer is a resounding “yes”. For the devil is in the details, as they say, and what we may hear from the EU tomorrow could be detrimental to market stability. For example, how big of a voluntary haircut will Greek bond holders have to bear? 50? 60? At what point does it no longer become voluntary and trigger a technical default which in turn triggers Credit Default Swaps and then starts the game of musical chairs that is inevitably going to leave someone exposed and with massive losses?

How large does the EFSF have to be to handle these problems and prevent contagion? How will they get it there? Leverage? Partial guarantees?

The point I am trying to make here is that there are MANY questions that need to be answered and I’m not certain that there is a “right” answer. It is more likely that we are at acceptable and unacceptable viewpoints and how the market reacts will be telling. But don’t forget, the market has been rallying in a big way heading into this news. Its not like it is unaware of the issues. Yet people are buying like its just another day. And by and large it is, and I believe the hope is that the cloud of uncertainty we have been dealing with will be lifted.

What is exactly is going to happen tomorrow is anyone’s guess, but the contrarian in me tells me that when everyone is bullish, I should be bearish. We are reaching certain price levels on many currency pairs that will likely induce volatility heading into tomorrow’s announcement that is showing to be released at 10EST, though not confirmed.

If I had to guess what is going to happen (and I hate to do that because I am a trader and not a prognosticator), I think the markets will spike higher on the news, and then start a sell-off as the news trickles out. This will likely represent a pullback on what has become a “ V-bottom” reversal into an up trend for most of the pairs. However, I am going to trade what I see and not what I think will happen and I advise you to do the same.

In other news, last night New Zealand reported CPI data that was lower than expected, showing 4.6% inflation vs. the expected 4.9% which may mean that the RBNZ will be on hold for tomorrow’s rate policy meeting.

Later this morning, the Bank of Canada will issue its rate decision and are not expected to change rates, which could mean a bounce off of parity vs. USD.

In the US, home prices and consumer confidence figures are likely to have little impact, and recent rumors being floated that there could be “QE3” in the works may have been the catalyst for the market’s recent rise.

While the Fed has a dual mandate to contain inflation and promote job growth, they may feel compelled to act if nothing comes out of the Super-committee in Washington that is charged with reducing our deficit.

However for now, I am waiting on tomorrow and will not be taking any positions into the release of the “resolution”. There are just too many uncertainties at this point.

Regards,

Mike Conlon,
Senior Forex Mentor
Forexnews.com