Month: December 2011

Dec. 19 (Bloomberg) — Oh Suk Tae, an economist at SC First Bank Korea Ltd. in Seoul, talks about the death of Kim Jong Il, the second-generation North Korean dictator who defied global condemnation to build nuclear weapons while his people starved. Oh speaks with Rishaad Salamat on Bloomberg Television’s “Asia Edge.” (Source: Bloomberg)

A Christmas rally is not very likely but markets might be stabile during the final weeks of the year, says the Senior Strategist Ib Fredslund Madsen.

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As the holiday season approaches liquidity in the FX markets typically dries up as trading desks operate on skeleton staffs. However, with the European debt crisis coming to a head, the last two weeks of the year may not allow traders to step away from their trading terminals. This past week’s fall in the value of the EUR/USD below some important technical levels may hold the key.

Economic News

USD – A Working Holiday Season

As the holiday season approaches liquidity in the FX markets typically dries up as trading desks operate on skeleton staffs. This year Christmas falls on a Sunday which may help to keep traders at their trading terminals during the week. With the European debt crisis coming to a head the last two weeks of the year may not allow traders to step away from their desks as market volatility continues despite the approaching holidays.

US data releases will be almost nonexistent over the next 2-weeks. This should be a negative for market sentiment as we have begun to see a turnaround in US economic data for the past 2-months. US economy data has been one of the few bright spots in the financial headlines. The strong Philly Fed Manufacturing Index highlights this run of positive data as the survey now stands at its highest level since April.

Last week’s FOMC statement highlighted the positive economic numbers but the Fed kept its standard statement unchanged regarding additional steps to loosen monetary policy, “The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”

The reduced market liquidity may have the effect of pushing the current FX trends further. Given the EUR/USD has broken below the October low as well as 1.3050, the 61% retracement of the 2010 low to the 2011 high the pair could encounter additional selling towards the 2011 low of 1.2870.

EUR – EUR Struggling but Still Supported

Despite the first half of last week’s across the board selling the EUR continues to garner support. However, this support may prove to be only temporary. The European economy is slowing as shown through weaker industrial production numbers and below 50 PMI surveys. It should be noted that German PMI numbers still remain robust. Given the push by European leaders to implement harsh austerity measures to battle the debt crisis (Italy is currently debating cuts up to EUR 33 bn), growth may slide further as the European economy slips into a recession. This will likely keep pressure on the ECB to further ease monetary policy in the near-term, a negative for the EUR.

The EUR/GBP has moved sharply lower and is currently testing a trend line from its 2008 and 2010 lows at 0.8390. A dive below this support could find additional support at the 2010 low of 0.8285.

JPY – No Relief for JPY

The USD/JPY has been trading in a tight range since the last government intervention while the EUR/JPY has been less cooperative. As the European debt crisis continues on without an end in sight, the JPY will likely garner additional safe haven status. With gold’s 7% fall this week it shows the only real safe havens these days are the USD and the JPY. Thus the JPY could stay bid as risk appetite remains tepid.

While the USD/JPY could continue its move higher to its 2007 falling trend line on the back of USD strength, the EUR/JPY is inching towards its October low of 100.75.

Gold – Gold Prices Fall below 200-day Moving Average

The price of spot gold broke below its 200-day moving average for the first time since early 2009. The 200-day moving average is considered a significant technical indicator by chartists. There have been many who have called for an end to the long-term bullish trend only to have their claim rebuffed upon a renewal of USD weakness. While the short-term trend has stalled, any further bond buying from the Fed (QE3) will likely increase demand for gold while reducing demand for the USD.

Technical News

EUR/USD

On a weekly basis the EUR/USD broke some important technical barriers, closing below the rising trend line from the January and October lows. The weekly close 1.3045 was also in-line with the 61% Fibonacci retracement from the 2010-2011 bullish trend. While weekly stochastics are currently oversold the monthly stochastics may have room to run lower. The January low of 1.2870 is the near-term support with additional support coming in at 1.2665 from the monthly chart off of the 2008 and 2010 lows. Resistance is back at 1.3140 and the 20-day moving average of 1.3275, followed by the December high of 1.3550.

GBP/USD

Sterling has consistently been sold at previous resistance levels and with falling weekly and monthly stochastics this strategy could remain intact. Initial support is found at Friday’s high of 1.5560 and the pair may have scope back to the range between the 55-day moving average at 1.5740 and the late November high of 1.5775. Any rally could be capped at 1.5890 from the falling trend line off of the August and October highs. The test for sterling shorts will come at the October low of 1.5270. A break here may find support at the trend line stemming from the January 2009 low which is found at 1.5100.

USD/JPY

The USD/JPY is encroaching on its trend line from the 2007 high which comes in at 78.30. Weekly and monthly stocahstics are both moving higher and a break above the trend would expose the post-intervention high of 79.50 and the August high of 80.20. A failure to make a significant close above the trend line could have the USD/JPY testing the December low of 77.50 and the November low of 76.55.

USD/CHF

Last week’s break above the 0.9330 resistance opens the door to this year’s high of 0.9782 as well as the December high of 1.0065. The falling trend line from the 2003 trend line comes in at 1.1165 and makes for a long term resistance level. To the downside 0.9330 will now act as a support followed by the late November low of 0.9065 and the 200-day moving average at 0.8925.

The Wild Card

AUD/NZD

After multiple failed attempts to close above 1.3265, the 61% Fibonacci retracement from the March to August move, the AUD/NZD has tumbled and gapped lower to open the week. Forex traders should note that the first major support is found at the November low of 1.2930, followed by the September high of 1.2830.

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The Riksbank, Sweden’s central bank, will meet on Tuesday for its latest interest rate decision and could surprise investors. Consensus expectations are for only a 25 bp rate cut. This is despite a larger than forecasted reduction in the Norwegian interest rate by the Norges bank who cut rates by 50 bp last week.

In light of the spillover effects of the European debt crisis and lower inflationary pressures the Riksbank is expected to provide a bit of monetary policy easing with a 25 bp rate cut. There is the possibility the Riksbank could surprise investors with 50 bp of easing as CPI has steadily declined to 2.8% y/y in November from a high of 3.4% in August. Swedish growth forecasts are also likely to be trimmed as well given the expected slowdown in European.

Despite the possibility of additional easing of Swedish monetary policy the SEK has strengthened versus the EUR with the EUR/SEK falling to support at 8.9800. A break here would then find support at the September low of 8.8600, followed by February’s double bottom reversal at 0.8700. Turning to the USD/SEK the pair has surprisingly been unable to sustain a bid above the September high near 7.0000. The 50% Fibonacci retracement of the 2010 high to the 2011 low rests at 7.0500. Support is found back at the December low of 6.6890.

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.

By MoneyMorning.com.au

[Ed note: The following story comes from the 1 December issue of Diggers and Drillers… If you’d like to see more stories and insights Alex has published recently, click here…]

In the first week of December, there was some big news for commodities: China’s economy loosened its banks’ purse strings, lowering the reserve requirement rate (RRR) from 21.5% to 21%.

Right, I know. It’s just numbers. And we’re only talking about a 0.5% difference. (Which does sound like small bickies.) What does it actually mean?

Well, apparently this cut in the RRR will put about $50 billion back into China’s economy. This will be good for small businesses, because they’ll find it easier to get funding than they have recently. (This is a big reason why China’s economy has been slowing down.)

More importantly, this is the first cut in the RRR rate for three years. If this is the start of a series in rate cuts, then it could be the start of the next wave of expansion for China’s economy. And this could give commodity prices and the resource sector a nudge in the right direction.

Click here to enlarge

But hang on. Why are the Chinese reducing rates now?

Chinese inflation only started to cool off a few months ago. It peaked at 6.5% in August this year, and is still up at 5.5% now. This is still very high. And by loosening the RRR, the Chinese risk getting inflation back up. The Chinese inflation rate closely follows commodity prices, so I’ll be keeping a watch on this.

Rising inflation will also give Chinese investors more reason to buy gold and silver to protect their capital. China’s silver market is just a few years old, but is exploding. In 2010, it imported 8 million ounces of silver. This year it imported the same amount in the September quarter alone. Loosening rates gives 1.3 billion Chinese people more reason than ever to buy gold and silver.

The rate drop means Beijing must be getting anxious about the Purchasing Managers Index (PMI) data. The official PMI was out on 1 December and came in at 49. This is the first time the numbers have been below 50 there for a while. Anything below 50 suggests China’s economy is contracting. So you see why they are taking action at the risk of higher inflation.

If they keep up the rate cuts, we could see higher prices for industrial resources. And precious metals.

Dr. Alex Cowie
Editor, Diggers & Drillers

[Ed note: To see more of what Alex is writing about in Diggers and Drillers, click here…]

What The Next Wave of Expansion in China’s Economy Means For You

By MoneyMorning.com.au

Shouldn’t we be giving credit where credit is due…?

“Retailers preparing for the last-minute Christmas rush are expecting stronger sales than last year but recent chilly weather could see clothing stores miss out on the spree.” – News.com.au

If all else fails… blame the weather.

It’s an easy excuse. And it doesn’t wash.

For instance, we’re sure bad weather isn’t why: “Myer will close stores in Victoria and New South Wales and shrink surviving stores in response to the two-speed economy and online shopping.” [The Age]

The fact is it’s tough being a retailer right now. After getting hit last Friday, JB Hi-Fi [ASX: JBH] shares have taken another pounding this morning… down nearly 4% in early trade.

So, if it’s not the weather what is it?

It’s lack of understanding by the mainstream.

They see falling retail sales and they look for an immediate cause: the weather, the rise of online sales, or what about the high Aussie dollar and cheaper imports?

But it’s none of those.

The real reason is the end of the credit boom.

Not So Smart After All

Yes. It’s simple. For years, big business executives have been praised as geniuses. And the Aussie economy has been labelled a miracle economy due to 20 years of growth.

In reality, it’s all about the credit bubble. Remember, a bubble can make anyone look like a genius when the market is going up.

It’s the same as the housing bubble. An entire generation of 50-60 something’s still think it was their know-how and street-smarts that caused them to buy a house for $10,000 in 1971 and sell it for $2 million in 2011.

Where in reality they benefited from nothing more than a good old-fashioned easy-money credit boom.

But based on that brief 40-year period, an entire industry was born – property spruiking.

The good news is, slowly but surely the message is seeping through to the mainstream that asset prices don’t always go up. But boy is it slow. Yet we note a good article on the Business Spectator website by Phil Soos, a researcher at Deakin University.

Mr. Soos pretty much says everything we’ve said for the past three years.

He even mentions the ridiculous National Housing Supply Council (NHSC) report that counted the homeless as proof of a housing shortage!

By the way, we’re waiting with bated breath for the latest NHSC report. According to correspondence we’ve had with them, the 2011 report is due this month.

It’ll be interesting to see what the report says on the housing shortage (especially the impact of homeless people) and whether it acknowledges falling house prices.

But back to our point…

It’s the Credit Boom What’s Done It

Whether it’s slower retail sales or falling house prices, there’s one thing that links both – slowing credit growth. It was credit growth that fuelled the boom. And it’s lack of credit growth that has halted the boom and is set to send Australia into a recession.

Bottom line: the only reasons you go into debt is if you want to buy something now because you aren’t prepared to wait to buy it, or because you think it will be more expensive in the future.

And credit growth compounds that belief. The more people borrow, the higher prices grow, which requires people to borrow more.

That happens until credit growth reaches breaking point (where we are now). The fact is there just isn’t enough new credit to repay the old credit… let alone enough credit to increase the supply of credit.
That’s why Myer is downsizing and closing stores… it’s why JB Hi-Fi is set to post lower profit growth… and it’s why the Aussie housing market is heading down the toilet.

The era of the miracle economy is almost over. It’s now just a matter of “when”, not “if” the Aussie economy finally hits the skids. All eyes should be on China’s economy… because what happens there will have a direct impact on Australia’s future.

Cheers.
Kris

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From the Archives…

A More Profitable Investment Than Cheap Gold?
2011-12-16 – Aaron Tyrrell

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Is Now a Good Time to Invest in Stocks?
2011-12-13 – Kris Sayce

Why You Shouldn’t Trust Your Gold to a Banker
2011-12-12 – Kris Sayce

For editorial enquiries and feedback, email [email protected]

Why the End of the Credit Boom is the Only Reason Stocks are Falling

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 boosted their long bets for the US dollar last week against the Euro while other major currencies saw slight improvements, according to the latest data which shows trader positions as of December 13th.  Euro short positions against the US dollar rose to the highest level of the year and to a new record surpassing the May 11th 2010 level of 113,890 Euro short positions recorded.

Non-commercial futures traders, usually hedge funds and large speculators, increased their total US dollar long positions to $16.32 billion on December 13th from a total long position of $14.59 billion on December 6th, according to the CFTC COT 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.

EuroFX: Currency speculators increased their Euro short positions to a new record high as of December 13th as doubts continue to mount over the Eurozone’s solutions to the ongoing sovereign debt crisis. Euro short positions increased to a total of 116,457 net contracts from the previous week’s total of 95,814 net short contracts. The last time the euro short positions were this high was May 2010 when contracts numbered 113,890.

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: Currency speculators decreased their bearish bets of the British pound sterling as of December 13th for second consecutive week. British pound positions saw a total of 39,509 short positions on December 13th following a total of 43,560 net short positions registered on December 6th.

JPY: The Japanese yen net long speculative contracts decreased for a third consecutive week as of December 13th. Yen long positions declined to a total of 35,600 net long contracts reported on December 13th following a total of 38,271 net long contracts that were reported on December 6th.

CHF: Swiss franc positions reversed four consecutive weeks of declines to show improvement on December 13th. Speculator positions for the Swiss currency futures edged higher to a total of 10,481 net short contracts on December 13th following a total of 11,158 net short contracts as of December 6th.

CAD: Canadian dollar positions rose higher for a second consecutive week to the best level since September 20th. CAD net contracts improved to a total of 13,385 net short contracts as of December 13th following a total of 20,171 short contracts reported on December 6th. CAD positions are now at their highest level since being on the short side by 5,458 contracts in late September.

AUD: The Australian dollar long positions rose higher for second consecutive week after three consecutive weekly declines. Australian dollar positions rose to a total net amount of 34,429 long contracts on December 13th following a total of 29,824 net long contracts reported as of December 6th. The AUD speculative positions last week reached their highest level since September 13th when Australian dollar long positions totaled 36,934.

NZD: New Zealand dollar futures speculator positions improved for a second consecutive week as of December 13th after edging up just slightly higher the previous week. NZD contracts increased to a total of 5,383 net long contracts as of December 13th following a total of 3,857 net long contracts registered the previous week. NZD contract’s most recent bottom on November 29th was the lowest New Zealand dollar position level since April 5th when positions equaled 2,695 long contracts.

MXN: Mexican peso contracts fell last week directly against the US dollar as more speculative traders chose to short the Mexican currency. Peso short positions rose to a total of 22,894 net short speculative positions as of December 13th following a total of 20,862 short contracts that were reported on December 6th.

COT Currency Data Summary as of December 13, 2011
Large Speculators Net Positions vs. the US Dollar

EUR -116457
GBP -39509
JPY +35600
CHF -10481
CAD -13385
AUD +34429
NZD +5383
MXN -22894

USDCHF formed a cycle top at 0.9546 on 4-hour chart. Deeper decline would likely be seen and target would be at the lower border of the price channel. However, the fall from 0.9546 is treated as consolidation of uptrend from 0.8569 (Oct 27 low), another rise towards 1.0000 could be seen after consolidation, and a break above 0.9546 could signal resumption of uptrend.

Daily Forex Reports

The past week in monetary policy saw interest rate decisions announced by 11 central banks.  Of those adjusting interest rates, all were reductions; Mozambique -100bps to 15.00%, Mauritius -10bps to 5.40%, Norway -50bps to 1.75%, and Denmark -10bps to 0.70%.  Meanwhile those that held interest rates unchanged were: US 0-0.25%, Hong Kong 0.50%, Chile 5.25%, Switzerland 0-0.25%, Sri Lanka 7.00%, India 8.50%, and Colombia 4.75%.  The US FOMC also announced no changes to its quantitative easing programs, and the Swiss National Bank maintained a strong stance on its exchange rate floor with the Euro.

Following are some of the key quotes from the central banks that announced monetary policy decisions over the past week:

• Reserve Bank of India (held rate at 8.50%): “On the domestic front, growth is clearly decelerating. This reflects the combined impact of several factors: the uncertain global environment, the cumulative impact of past monetary policy tightening and domestic policy uncertainties.Both inflation and inflation expectations are currently above the comfort level of the Reserve Bank. However, reassuringly, inflationary pressures are expected to abate in the coming months despite high crude oil prices and rupee depreciation. The growth deceleration is contributing to a decline in inflation momentum, which is also being helped by softening food inflation.”
• Norges Bank (dropped rate 50bps to 1.75%): “The turbulence in financial markets has intensified and external growth is now expected to be clearly weaker, particularly in the euro area. In order to dampen the impact on the Norwegian economy, the Executive Board has decided to lower the key policy rate.”  The Bank further noted: In order to guard against an economic setback and even lower inflation, we are of the view that a reduction in the key policy rate is now appropriate.”
• Bank of Mauritius (cut rate 10bps to 5.40%): “The MPC observed a decline in externally-generated inflationary pressures…. The MPC is of the view that the Key Repo Rate is  broadly appropriate in view of the expected impact of the 2012 budget measures. However, to signal its concern about the low level of business and consumer confidence, it has decided to cut the Key Repo Rate by 10 basis points.”
• Banco Central de Chile (held rate at 5.25%): “Domestically, economic activity has evolved somewhat below projections, while domestic demand is still strong. Labor market conditions continue to be tight. Financial conditions are somewhat more constrained, reflecting the situation in global markets. Headline inflation has exceeded expectations somewhat, due to the incidence of fuels and foodstuffs. Core inflation figures remain contained. Inflation expectations are close to the target.”
• US Federal Reserve (held rate at 0-0.25%): “To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”

Looking at the central bank calendar, there’s a couple more Europe area banks meeting which will be interesting in the sovereign debt crisis context, and the Bank of Japan may or may not be interesting. There’s also meeting minutes due from the RBA on Tuesday, and the Bank of England on Wednesday.