InvestMacro

The big reason Florida insurance companies are failing isn’t just hurricane risk – it’s fraud and lawsuits

By Shahid S. Hamid, Florida International University

Hurricane Ian’s widespread damage is another disaster for Florida’s already shaky insurance industry. Even though home insurance rates in Florida are nearly triple the national average, insurers have been losing money. Six have failed since January 2022. Now, insured losses from Ian are estimated to exceed US$40 billion

Hurricane risk might seem like the obvious problem, but there is a more insidious driver in this financial train wreck.

Finance professor Shahid Hamid, who directs the Laboratory for Insurance at Florida International University, explained how Florida’s insurance market got this bad – and how the state’s insurer of last resort, Citizens Property Insurance, now carrying more than 1 million policies, can weather the storm.

What’s making it so hard for Florida insurers to survive?

Florida’s insurance rates have almost doubled in the past five years, yet insurance companies are still losing money for three main reasons.

One is the rising hurricane risk. Hurricanes Matthew (2016), Irma (2017) and Michael (2018) were all destructive. But a lot of Florida’s hurricane damage is from water, which is covered by the National Flood Insurance Program, rather than by private property insurance.

Another reason is that reinsurance pricing is going up – that’s insurance for insurance companies to help when claims spike.

But the biggest single reason is the “assignment of benefits” problem, involving contractors after a storm. It’s partly fraud and partly taking advantage of loose regulation and court decisions that have affected insurance companies.

It generally looks like this: Contractors will knock on doors and say they can get the homeowner a new roof. The cost of a new roof is maybe $20,000-$30,000. So, the contractor inspects the roof. Often, there isn’t really that much damage. The contractor promises to take care of everything if the homeowner assigns over their insurance benefit. The contractors can then claim whatever they want from the insurance company without needing the homeowner’s consent.

If the insurance company determines the damage wasn’t actually covered, the contractor sues.

So insurance companies are stuck either fighting the lawsuit or settling. Either way, it’s costly.

Other lawsuits may involve homeowners who don’t have flood insurance. Only about 14% of Florida homeowners pay for flood insurance, which is mostly available through the federal National Flood Insurance Program. Some without flood insurance will file damage claims with their property insurance company, arguing that wind caused the problem.

How widespread of a problem are these lawsuits?

Overall, the numbers are pretty striking.

About 9% of homeowner property claims nationwide are filed in Florida, yet 79% of lawsuits related to property claims are filed there.

The legal cost in 2019 was over $3 billion for insurance companies just fighting these lawsuits, and that’s all going to be passed on to homeowners in higher costs.

Insurance companies had a more than $1 billion underwriting loss in 2020 and again in 2021. Even with premiums going up so much, they’re still losing money in Florida because of this. And that’s part of the reason so many companies are deciding to leave.

Assignment of benefits is likely more prevalent in Florida than most other states because there is more opportunity from all the roof damage from hurricanes. The state’s regulation is also relatively weak. This may eventually be fixed by the legislature, but that takes time and groups are lobbying against change. It took a long time to pass a law saying the attorney fee has to be capped.

How bad is the situation for insurers?

We’ve seen about a dozen companies be declared insolvent or leave since early 2020. At least six dropped out this year alone.

Thirty more are on the Florida Office of Insurance Regulation’s watch list. About 17 of those are likely to be or have been downgraded from A rating, meaning they’re no longer considered to be in good financial health.

Chart show increasing losses for Florida's domestic property insurers in the past five years — Based on a Florida Office of Insurance Regulation chart

The ratings downgrades have consequences for the real estate market. To get a loan from the federal mortgage lenders Freddie Mac and Fannie Mae, you have to have insurance. But if an insurance company is downgraded to below A, Freddie Mac and Fannie Mae won’t accept it. Florida established a $2 billion reinsurance fund in May 2022 that can help smaller insurance companies in situations like this. If they get downgraded, the reinsurance can act like co-signing the loan so the mortgage lenders will accept it.

But it’s a very fragile market.

Ian could be one of the costliest hurricanes in Florida history. I’ve seen estimates of $40 billion to $60 billion in losses. I wouldn’t be surprised if some of those companies on the watch list leave after this storm. That will put more pressure on Citizens Property Insurance, the state’s insurer of last resort.

Some headlines suggest that Florida’s insurer of last resort is also in trouble. Is it really at risk, and what would that mean for residents?

Citizens is not facing collapse, per se. The problem with Citizens is that its policy numbers typically swell after a crisis because as other insurers go out of business, their policies shift to Citizens. It sells off those policies to smaller companies, then another crisis comes along and its policy numbers rise again.

Three years ago, Citizens had half a million policies. Now, it has twice that. All these insurance companies that left in the last two years, their policies have been migrated to Citizens.

Ian will be costly, but Citizens is flush with cash right now because it had a lot of premium increases and built up its reserves.

Citizens also has a lot of backstops.

It has the Florida Hurricane Catastrophe Fund, established in the 1990s after Hurricane Andrew. It’s like reinsurance, but it’s tax-exempt so it can build reserves faster. Once a trigger is reached, Citizens can go to the catastrophe fund and get reimbursed.

More importantly, if Citizens runs out of money, it has the authority to impose a surcharge on everyone’s policies – not just its own policies, but insurance policies across Florida. It can also impose surcharges on some other types of insurance, such as life insurance and auto insurance. After Hurricane Wilma in 2005, Citizens imposed a 1% surcharge on all homeowner policies.

Those surcharges can bail Citizens out to some degree. But if payouts are in the tens of billions of dollars in losses, it will probably also get a bailout from the state.

So, I’m not as worried for Citizens. Homeowners will need help, though, especially if they’re uninsured. I expect Congress will approve some special funding, as it did in the past for hurricanes like Katrina and Sandy, to provide financial aid for residents and communities.

About the Author:

Shahid S. Hamid, Professor of Finance, Florida International University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Economics & Fundamentals Financial News

05 Oct

Pound recovers but remains at low levels – how to assess the long-term value of sterling

By Ganesh Viswanath-Natraj, Warwick Business School, University of Warwick

The pound has recovered from a recent record dip after the chancellor’s mini-budget announcement. But it is still at low levels versus many other currencies.

The recent decline can be mostly attributed to the tax cuts announced during Chancellor Kwasi Kwarteng’s recent mini-budget. The £45 billion package caused concern among investors by considerably increasing future government debt, although Kwarteng has since announced a U-turn on the £2 billion plans to abolish cuts for the highest earners. More generally, escalating inflation expectations from this increased fiscal expansion, coupled with ongoing rising energy costs, have had a negative impact on the UK economy and therefore the value of sterling.

The weakening of the pound is also part of a global phenomenon. The US dollar has appreciated by 12% since the end of 2021 against a broad index of currencies, and by more than 20% against the pound. This broad appreciation is attributed to a tightening of US monetary policy and a shift in the risk appetite of investors towards US dollar assets, currently viewed as more of a safe haven.

Given these underlying pressures, questions about the long-term valuation of pound sterling abound, including whether it will settle at parity with the US dollar. An analysis by Bloomberg has shown financial markets believe there is a 60% probability that sterling will reach dollar parity by the end of 2022. A long-term decline in the valuation of the pound increases the price of imported goods, which can feed into consumer price inflation.

If policy makers want to shore up the currency’s strength, several economic theories suggest they must address high inflation expectations, the impacts of Brexit and the various supply chain issues plaguing the economy at present.

Comparing burgers with burgers

Ever heard of the Big Mac Index? Research about long-term movements in exchange rates shows they tend to change in line with relative inflation rates in many countries. This theory, known as purchasing power parity (PPP), uses the price of specific products or baskets of goods to compare currencies and standards of living in different countries.

As such, we can examine the value of the pound compared to other currencies by looking at a single good such as a McDonald’s Big Mac burger. Since this product is the same across countries, the Big Mac can be used to calculate a PPP-implied exchange rate by comparing its price in the UK and the US. In July 2022, the Big Mac Index showed the pound was undervalued by around 14%, based on the exchange rate implied by Big Mac prices in the US versus the UK.

Forecasts by the Bank of England put inflation at 14% by the fourth quarter of 2022, however it is expected to decline to 5% by the end of 2023. The relative fall in UK inflation in 2023 should strengthen the pound, reducing the undervaluation predicted by the Big Mac Index.

Another theory that can help us understand the long-term value of the pound is the link between the sustainability of public debt, sovereign risk and exchange rates. A large increase in the ratio of government debt to gross domestic product (GDP) can trigger a weakening of the currency as financial markets expect more risk, that is, concerns increase about the government being able to repay this debt.

Before the second world war, when sterling was the world’s reserve currency, the government could borrow at low cost. Present-day sterling no longer has the same privileges, however, particularly in recent weeks when sterling has even been compared to emerging market currencies. This theory would dictate that the debt-to-GDP ratio and corresponding sovereign risk must decrease for sterling to recover its value.

Long-term exchange rate movements can also be assessed by comparing productivity differences across countries. Known as the Balassa-Samuelson hypothesis, this theory links productivity slowdowns in a country’s tradeable sector – the industries that produce items that are traded internationally – to a weakening in its real exchange rate (that is, after accounting for differences in inflation).

This theory would therefore link supply chain disruptions resulting from Brexit and the war in Ukraine with fundamental declines in the UK’s productivity, causing the long-term value of the pound to depreciate.

Protecting the pound

Rescuing the pound from long-term parity with the dollar will require action from policy makers. The Bank of England oversees monetary policy – using interest rates, among other tools to control the supply of money to the economy – and has a mandate from the government to tackle price stability by using interest rate increases to bring down inflation. Futures markets forecast an interest rate increase of 4% to 6.25% by May 2023 , showing an expectation that the Bank will continue to hike rates to tackle inflation.

The government takes care of fiscal policy – spending and taxation decisions – and recommendations from markets and organisations such as the International Monetary Fund point towards a need for more prudence and fiscal restraint in light of current inflationary pressures. The UK government will announce a medium-term fiscal plan on November 23 that should aim to address the government debt to GDP ratio and shore up investor confidence in the economy.

Perhaps the most difficult challenge, however, will be tackling structural change as a result of the recent productivity slowdown due to Brexit and pandemic-related supply chain disruptions. Facilitating post-Brexit trade relations with the European Union could provide the necessary support to the UK’s tradeable sector to help boost the pound.

Without firm plans on these issues, the outlook for the long-term valuation of the pound remains uncertain. While global factors like the risk appetite of investors may continue to keep the dollar strong, domestic factors could mitigate these effects. Monetary tightening, fiscal consolidation and structural reform of the tradeable sector will all contribute to a revaluation of the pound, providing a route for policy makers to shore up its value on the international stage.

About the Author:

Ganesh Viswanath-Natraj, Assistant professor, Warwick Business School, University of Warwick

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Forex and Currency News Opinions

05 Oct

What are tactical nuclear weapons? An international security expert explains and assesses what they mean for the war in Ukraine

By Nina Srinivasan Rathbun, USC Dornsife College of Letters, Arts and Sciences

Tactical nuclear weapons have burst onto the international stage as Russian President Vladimir Putin, facing battlefield losses in eastern Ukraine, has threatened that Russia will “make use of all weapon systems available to us” if Russia’s territorial integrity is threatened. Putin has characterized the war in Ukraine as an existential battle against the West, which he said wants to weaken, divide and destroy Russia.

U.S. President Joe Biden criticized Putin’s overt nuclear threats against Europe. Meanwhile, NATO Secretary-General Jens Stoltenberg downplayed the threat, saying Putin “knows very well that a nuclear war should never be fought and cannot be won.” This is not the first time Putin has invoked nuclear weapons in an attempt to deter NATO.

I am an international security scholar who has worked on and researched nuclear restraint, nonproliferation and costly signaling theory applied to international relations for two decades. Russia’s large arsenal of tactical nuclear weapons, which are not governed by international treaties, and Putin’s doctrine of threatening their use have raised tensions, but tactical nuclear weapons are not simply another type of battlefield weapon.

Tactical by the numbers

Tactical nuclear weapons, sometimes called battlefield or nonstrategic nuclear weapons, were designed to be used on the battlefield – for example, to counter overwhelming conventional forces like large formations of infantry and armor. They are smaller than strategic nuclear weapons like the warheads carried on intercontinental ballistic missiles.

While experts disagree about precise definitions of tactical nuclear weapons, lower explosive yields, measured in kilotons, and shorter-range delivery vehicles are commonly identified characteristics. Tactical nuclear weapons vary in yields from fractions of 1 kiloton to about 50 kilotons, compared with strategic nuclear weapons, which have yields that range from about 100 kilotons to over a megaton, though much more powerful warheads were developed during the Cold War.

For reference, the atomic bomb dropped on Hiroshima was 15 kilotons, so some tactical nuclear weapons are capable of causing widespread destruction. The largest conventional bomb, the Mother of All Bombs or MOAB, that the U.S. has dropped has a 0.011-kiloton yield.

Delivery systems for tactical nuclear weapons also tend to have shorter ranges, typically under 310 miles (500 kilometers) compared with strategic nuclear weapons, which are typically designed to cross continents.

Because low-yield nuclear weapons’ explosive force is not much greater than that of increasingly powerful conventional weapons, the U.S. military has reduced its reliance on them. Most of its remaining stockpile, about 150 B61 gravity bombs, is deployed in Europe. The U.K. and France have completely eliminated their tactical stockpiles. Pakistan, China, India, Israel and North Korea all have several types of tactical nuclear weaponry.

Russia has retained more tactical nuclear weapons, estimated to be around 2,000, and relied more heavily on them in its nuclear strategy than the U.S. has, mostly due to Russia’s less advanced conventional weaponry and capabilities.

Russia’s tactical nuclear weapons can be deployed by ships, planes and ground forces. Most are deployed on air-to-surface missiles, short-range ballistic missiles, gravity bombs and depth charges delivered by medium-range and tactical bombers, or naval anti-ship and anti-submarine torpedoes. These missiles are mostly held in reserve in central depots in Russia.

Russia has updated its delivery systems to be able to carry either nuclear or conventional bombs. There is heightened concern over these dual capability delivery systems because Russia has used many of these short-range missile systems, particularly the Iskander-M, to bombard Ukraine.

Russia’s Iskander-M mobile short-range ballistic missile can carry conventional or nuclear warheads. Russia has used the missile with conventional warheads in the war in Ukraine.

Tactical nuclear weapons are substantially more destructive than their conventional counterparts even at the same explosive energy. Nuclear explosions are more powerful by factors of 10 million to 100 million than chemical explosions, and leave deadly radiation fallout that would contaminate air, soil, water and food supplies, similar to the disastrous Chernobyl nuclear reactor meltdown in 1986. The interactive simulation site NUKEMAP by Alex Wellerstein depicts the multiple effects of nuclear explosions at various yields.

Can any nuke be tactical?

Unlike strategic nuclear weapons, tactical weapons are not focused on mutually assured destruction through overwhelming retaliation or nuclear umbrella deterrence to protect allies. While tactical nuclear weapons have not been included in arms control agreements, medium-range weapons were included in the now-defunct Intermediate-range Nuclear Forces treaty (1987-2018), which reduced nuclear weapons in Europe.

Both the U.S. and Russia reduced their total nuclear arsenals from about 19,000 and 35,000 respectively at the end of the Cold War to about 3,700 and 4,480 as of January 2022. Russia’s reluctance to negotiate over its nonstrategic nuclear weapons has stymied further nuclear arms control efforts.

The fundamental question is whether tactical nuclear weapons are more “useable” and therefore could potentially trigger a full-scale nuclear war. Their development was part of an effort to overcome concerns that because large-scale nuclear attacks were widely seen as unthinkable, strategic nuclear weapons were losing their value as a deterrent to war between the superpowers. The nuclear powers would be more likely to use tactical nuclear weapons, in theory, and so the weapons would bolster a nation’s nuclear deterrence.

Yet, any use of tactical nuclear weapons would invoke defensive nuclear strategies. In fact, then-Secretary of Defense James Mattis notably stated in 2018: “I do not think there is any such thing as a tactical nuclear weapon. Any nuclear weapon use any time is a strategic game changer.”

This documentary explores how the risk of nuclear war has changed – and possibly increased – since the end of the Cold War.

The U.S. has criticized Russia’s nuclear strategy of escalate to de-escalate, in which tactical nuclear weapons could be used to deter a widening of the war to include NATO.

While there is disagreement among experts, Russian and U.S. nuclear strategies focus on deterrence, and so involve large-scale retaliatory nuclear attacks in the face of any first-nuclear weapon use. This means that Russia’s threat to use nuclear weapons as a deterrent to conventional war is threatening an action that would, under nuclear warfare doctrine, invite a retaliatory nuclear strike if aimed at the U.S. or NATO.

Nukes and Ukraine

I believe Russian use of tactical nuclear weapons in Ukraine would not achieve any military goal. It would contaminate the territory that Russia claims as part of its historic empire and possibly drift into Russia itself. It would increase the likelihood of direct NATO intervention and destroy Russia’s image in the world.

Putin aims to deter Ukraine’s continued successes in regaining territory by preemptively annexing regions in the east of the country after holding staged referendums. He could then declare that Russia would use nuclear weapons to defend the new territory as though the existence of the Russian state were threatened. But I believe this claim stretches Russia’s nuclear strategy beyond belief.

Putin has explicitly claimed that his threat to use tactical nuclear weapons is not a bluff precisely because, from a strategic standpoint, using them is not credible.

About the Author:

Nina Srinivasan Rathbun, Professor of International Relations, USC Dornsife College of Letters, Arts and Sciences

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Economics & Fundamentals Financial News

05 Oct

Murrey Math Lines 05.10.2022 (USDJPY, USDCAD)

Article By RoboForex.com

USDJPY, “US Dollar vs Japanese Yen”

In the H4 chart, USDJPY is trading within the “overbought area”. The Relative Strength Index is slowly moving towards 30. In this case, the pair is expected to break 8/8 (143.75) and then continue falling to reach the support at 7/8 (142.18). However, this scenario may be cancelled if the price breaks the resistance +1/8 (145.31) to the upside. After that, the instrument may grow towards +2/8 (146.87).

As we can see in the M15 chart, the pair has broken the downside line of the VoltyChannel indicator and, as a result, may continue its decline.

USDCAD, “US Dollar vs Canadian Dollar”

In the H4 chart, USDCAD is still correcting within the uptrend. The Relative Strength Index is approachi9ng 30, but may yet fall a bit. In this case, the price is expected to test 6/8 (1.3427), break it, and then continue moving downwards to reach the support at 5/8 (1.3305). However, this scenario may no longer be valid if the price breaks the resistance at 7/8 (1.3549) to the upside. After that, the instrument may resume growing towards +1/8 (1.3793).

As we can see in the M15 chart, the pair may has broken the downside line of the VoltyChannel indicator and, as a result, may continue trading downwards to reach 5/8 (1.3305) from the H4 chart.

Article By RoboForex.com

Attention!
Forecasts presented in this section only reflect the author’s private opinion and should not be considered as guidance for trading. RoboForex LP bears no responsibility for trading results based on trading recommendations described in these analytical reviews.

Financial News Forex and Currency News

05 Oct

The cryptocurrency market digest (BTC, DOGE). Overview for 05.10.2022

Article By RoboForex.com

The BTC recovered pretty much, but doesn’t want to follow the American stock market. On Wednesday, the asset is mostly fluctuating at $20,238.

So, the major crypto was supported from two sides: a rebound of the American exchanges and a correction in the DXY.

All technical aspects for the BTC remain pretty much the same, without any significant changes. In order for the rebound to transform into a proper growth, the asset must break the resistance at $21,000 and secure above $22,000. A major support area is still at $18,000-$19,000.

What’s next? We should keep a close eye on what will happen to global trends. Stock markets are highly unlikely to continue rising systematically, because the fundamental background hasn’t changed. The rates are rising, so is inflation, and the future prospects for companies and enterprises are still rather vague. However, the data released yesterday showed a slight slowdown in the US labour market, which may prevent the Fed from being aggressive in tightening its monetary policy. Any optimistic vibe is now looking very fragile, that’s why investors are very careful about buying.

Binance is launching a product for XRP

Crypto exchange Binance added the XRP to the list of products for bi-currency investments. It’s a double investment product, which helps to receive more profit during the subscription period regardless of the price movements.

DOGE is in demand again

DOGE has made Top 3 of the most profitable cryptos in the last 24 hours – it has gained over 8%. The market capitalisation has risen to $8.64 billion, while the daily transaction volume was $960 million.

Article By RoboForex.com

Cryptocurrencies Financial News

05 Oct

The Analytical Overview of the Main Currency Pairs on 2022.10.05

By JustForex

The EUR/USD currency pair

Technical indicators of the currency pair:

Prev Open: 0.9824
Prev Close: 0.9983
% chg. over the last day: +1.62 %

The Eurozone Producer Price Index, which measures the inflation rate between businesses and factories, reached an annualized rate of 5% in August, up from 4% in July. The biggest price increase was seen in the energy sector, plus 11.8%, while consumer goods rose by 0.8%. In her speech yesterday, ECB head Christine Lagarde said she did not know whether Eurozone inflation had peaked and was not ready to predict when that peak would be. So, the ECB will only rely on actual data and will gradually raise the interest rate until inflation starts to slow down.

Trading recommendations

Support levels: 0.9845, 0.9748, 0.9666.
Resistance levels: 0.9965, 1.0111, 1.0162, 1.0230

From the technical point of view, the trend on the EUR/USD currency pair on the hourly time frame has changed to bullish. Yesterday, the price broke through the priority change level and consolidated higher. The MACD indicator is positive, the price is trading above the average lines, and the buyer’s pressure remains high. Buy trades should be considered after a small pullback, as the price is overbought now and has strongly deviated from the middle lines. Sell deals can be considered from the resistance level of 1.0111, but only with confirmation.

Alternative scenario: if the price breaks down through the support level of 0.9666 and fixes below it, the downtrend will likely resume.

News feed for 2022.10.05:

– Eurozone Services PMI (m/m) at 11:00 (GMT+3);
– US ISM Services PMI (m/m) at 17:00 (GMT+3);
– US Crude Oil Reserves (w/w) at 17:30 (GMT+3).

The GBP/USD currency pair

Technical indicators of the currency pair:

Prev Open: 1.1317
Prev Close: 1.1467
% chg. over the last day: +1.33 %

The pound/dollar exchange rate is back above 1.14, extending a six-day recovery. Fiscal changes in the UK have had a fairly broad impact on global risk attitudes and likely contributed to a rebound in risk assets and bonds. But analysts believe that, given geopolitical developments in Europe and the energy crisis, it is “too early to rejoice” as winter is ahead. Experts believe that fundamentally, the euro and the pound are still inclined to fall, so any rebound should be used to look for sell deals.

Trading recommendations

Support levels: 1.1281, 1.1121, 1.0915, 1.0816, 1.0711, 1.03
Resistance levels: 1.1478, 1.1693, 1.1816, 1.1901

From the technical point of view, the trend on the GBP/USD currency pair on the hourly time frame has changed to bullish. The price has broken through the priority change level and is confidently trading above the moving averages. The MACD indicator remains positive, but the divergence is present. Under such market conditions, buy trades can be considered from the support level of 1.1281, but only with confirmation. Sell trades are best to look for on intraday time frames, the nearest resistance level is 1.1478, but it is also better with confirmation because the entry is against the main movement.

Alternative scenario: if the price breaks down from the 1.0709 support level and fixes below it, the downtrend will likely resume.

News feed for 2022.10.05:

– UK Services PMI (m/m) at 11:30 (GMT+3).

The USD/JPY currency pair

Technical indicators of the currency pair:

Prev Open: 144.50
Prev Close: 144.14
% chg. over the last day: -0.25 %

Japanese government bond yields fell sharply on Tuesday, following Treasury yields, which fell amid weaker-than-expected US manufacturing data. In a research note, Nomura Securities analyst predicted that the Bank of Japan (BOJ) is likely to loosen its yield curve control (YCC) policy next July, allowing 10-year bond yields to reach 0.4% or 0.5%. Right now, the BOJ is keeping the 10-year yield below 0.25%. In other words, once the BoJ starts to revise its policy, the Japanese yen could gain fundamental support.

Trading recommendations

Support levels: 143.00, 140.60, 139.61, 138.78, 137.65, 136.80, 135.20
Resistance levels: 144.66, 145.35

From the technical point of view, the medium-term trend on the currency pair USD/JPY is bullish. The MACD indicator has become negative, and the price is trading below the moving averages. Under such market conditions, buy trades can be searched for on intraday time frames from the support level of 143.00, but with confirmation. Sell deals can be sought from the resistance level of 144.66, but only with additional confirmation.

Alternative scenario: If the price fixes below 140.60, the downtrend will likely resume.

News feed for 2022.10.05:

– Japan Services PMI (m/m) at 03:30 (GMT+3).

The USD/CAD currency pair

Technical indicators of the currency pair:

Prev Open: 1.3618
Prev Close: 1.3508
% chg. over the last day: -0.81 %

The Canadian dollar strengthened sharply yesterday as the dollar index fell. CAD confidence was boosted by oil, which jumped by 3%, ahead of the OPEC+ meeting. The meeting will take place today, and OPEC+ countries will consider cutting their quota by 1-2 million BPD to support oil prices. If the OPEC+ countries do cut production, this move will drastically reduce supply in the oil market, but the Canadian dollar will only benefit from this as it is a commodity currency.

Trading recommendations

Support levels: 1.3454, 1.3297, 1.3212, 1.3053, 1.2990, 1.2958
Resistance levels: 1.3660, 1.3755, 1.3858, 1.3968

From the point of view of technical analysis, the trend on the USD/CAD currency pair has changed to bearish. The MACD indicator became negative, and the price is trading below the moving lines. Under such market conditions, buy trades should be considered on the lower time frames from the support level of 1.3454, but with confirmation. For sell deals, it is better to consider the resistance level of 1.3660 or 1.3756, but only after the additional confirmation.

Alternative scenario: if the price breaks out through and consolidates above the resistance level of 1.3756, the uptrend will likely resume.

News feed for 2022.10.05:

– OPEC+ Meeting at 13:00 (GMT+3);
– US Crude Oil Reserves (w/w) at 17:30 (GMT+3).

By JustForex

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

Financial News Forex and Currency News

05 Oct

The RBNZ raised the interest rate by 50 bps. Stock indices rise as economic indicators fall

By JustForex

The US Bureau of Labor Statistics (BLS) reported on Tuesday that job openings fell from 11.17 million to 10.05 million during August. On the one hand, the news is negative. Still, on the other hand, investors have begun to wonder if the slowdown seen in the US economy will cause the Federal Reserve to adjust its rate hike trajectory and be less aggressive. The real estate market is already in recession, manufacturing activity is slowing, and the labor market has shown signs of weakness. This caused the dollar and US government bond yields to pull back sharply, allowing the stock market to rise substantially.

At the close of the stock market yesterday, the Dow Jones Index (US30) increased by 2.80%, and the S&P 500 Index (US500) added 3.06%. The NASDAQ Technology Index (US100) jumped by 2.69% on Tuesday.

Monetary and fiscal policies in advanced economies, including continued interest rate hikes, could push the world into a global recession and stagnation, the UN Trade and Development said. The global recession has the potential to cause more damage than the 2008 financial crisis and the Covid-19 shock in 2020. Developing countries in Asia and Africa could bear the brunt of the impending recession, according to the report. If central banks continue to raise interest rates without using other tools and without considering supply-side economics, the desired soft landing is unlikely.

The Global Manufacturing PMI fell into contractionary territory (below the 50 level) for the first time since 2020. The Core Index fell from 50.3 in August to 49.8 in September. The report points to a worsening manufacturing trend in the coming months amid an intensifying downturn in global trade flows, reduced demand related to the ongoing cost-of-living crisis, and growing economic uncertainty about the outlook.

Reuters reported that billionaire Elon Musk plans to realize his initial $44 billion bid to privatize Twitter Inc.

Stock markets in Europe were mostly rising yesterday. Germany’s DAX (DE30) gained 3.78%, France’s CAC 40 (FR40) added 4.24%, Spain’s IBEX 35 (ES35) jumped by 3.14%, Britain’s FTSE 100 (UK100) closed up 2.57% yesterday.

Fiscal changes in the UK had a rather broad impact on global risk attitude and probably contributed to the recovery of risky assets and bonds. But according to analysts, European assets still have a long way to go to restore market positioning, given the energy crisis and geopolitical events. Experts remain skeptical about Europe and believe the recent recovery in sentiment is temporary.

There will be an important OPEC+ meeting today. According to preliminary information, the OPEC+ countries will consider cutting the quota by 1-2 million barrels per day in order to support oil prices. Yesterday, the price of “black gold” jumped by 3% on these rumors. If OPEC+ countries cut production, this step will sharply reduce supply in the oil market. For his part, Kuwait Oil Minister said yesterday that OPEC+ would make a suitable decision to guarantee energy supplies and serve the interests of producers and consumers.

Asian markets traded higher yesterday. Japan’s Nikkei 225 (JP225) gained 2.96%, Hong Kong’s Hang Seng (HK50) did not trade, and Australia’s S&P/ASX 200 (AU200) ended the day up 3.75%.

The Central Bank of New Zealand (RBNZ) raised its interest rate by 0.5% but considered a 0.75% increase. The RBNZ raised interest rates for the eighth time in a row, bringing the interest rate to 3.5%, the highest among major economies. The meeting minutes said that inflation is currently too high and employment is above the maximum sustainable level. RBNZ Governor Adrian Orr noted that their tightening cycle has become “very mature,” although “there is still some work to be done.” The RBNZ expects its OCR rate to be 3.7% by December, and with only one meeting left this year, the RBNZ is very likely to raise the rate by 0.25% at the end of the year.

S&P 500 (F) (US500) 3,791.05 +112.62 (+3.06%)

Dow Jones (US30) 30,316.98 +826.09 (+2.80%)

DAX (DE40) 12,670.48 +461.00 (+3.78%)

FTSE 100 (UK100) 7,086.46 +177.70 (+2.57%)

USD Index 110.15 -1.60 (-1.43%)

Important events for today:

– Australia Retail Sales (m/m) at 03:30 (GMT+3);
– Japan Services PMI (m/m) at 03:30 (GMT+3);
– New Zealand Interest Rate Decision at 04:00 (GMT+3);
– New Zealand RBNZ Rate Statement at 04:00 (GMT+3);
– Eurozone Services PMI (m/m) at 11:00 (GMT+3);
– UK Services PMI (m/m) at 11:30 (GMT+3);
– OPEC+ Meeting at 13:00 (GMT+3);
– US ISM Services PMI (m/m) at 17:00 (GMT+3);
– US Crude Oil Reserves (w/w) at 17:30 (GMT+3).

By JustForex

Economics & Fundamentals Financial News

05 Oct

PREVIEW: OPEC+ could rock oil markets today

By ForexTime

OPEC+ will be holding an in-person meeting in Vienna today, and is set to announce a major decision that’s likely to reverberate across global oil markets.

Given the forward-looking nature of markets, oil benchmarks have climbed over the past week in anticipation of today’s keenly-awaited meeting.

Brent is now in sentinel mode, hovering above the psychologically-important $90/bbl line at the time of writing, but still remains in the downtrend that’s persisted since June.

Brent’s recent recovery have been based on the notion that the OPEC+ alliance would significantly tighten its oil taps in November, perhaps by as much as 2 million bpd, in order to shore up prices.

What is OPEC+?

OPEC+ is an alliance of 23 major oil-producing nations, with Saudi Arabia and Russia seen as its de facto leaders.

Their collective job is to determine how much of their oil supplies are sent out into the world, which in turn influences global prices such a Brent and US Crude.

Econs 101: Supply vs. Demand

Let’s revisit some basic Economics in order to understand how OPEC+’s upcoming decision will impact oil prices:

When supply is higher than demand = prices go down
When demand is higher than supply = prices go up

Note in the chart above how Brent has been dropping since June.

This is because of fears that global demand for oil is weakening amid a potential recession.

Lower demand (possible global recession) + Higher supply (OPEC+ restoring supplies; more on this below) = Brent prices falling.

The declines in oil prices have already prompted OPEC+ to sit up and act.

Earlier this month, the alliance had already imposed a symbolic 100k bpd supply reduction for October.

100,000 bpd pales in comparison against the 100,000,000 (100 million) barrels that the world uses per day. That’s just 0.1%

Even with such a token sum, that was already an early sign of a U-turn.

Recall how since July 2021, OPEC+ has been gradually raising output, or more specifically, restoring output back to pre-pandemic levels.
Today, they could announce a sizeable lowering of its output starting in November.

The hope is that:

Elevated global demand + lower supplies = prices move back higher
(so that OPEC+ members can continue earning higher revenue from those elevated global oil prices).

Here are 3 potential scenarios for markets to consider in light of the imminent OPEC+ decision:

OPEC+ announces a 2 million bpd cut

Such an announcement may lead to a knee-jerk spike in oil prices.

Potential immediate resistance for Brent:

$93.50 = 50-day simple moving average (SMA)
$95.11 = previous cycle high

Now this is where it gets tricky, cause the devil is in the details.

Such a massive headline figure also must meaningfully change that supply-demand equation (as above) for global markets.

Note that, under the previous campaign (since mid-2021) to restore output, OPEC+ members had already been struggling to reach their respective ramped-up output quotas.

Due to years of underinvestment and even political instability in some OPEC+ members, many countries couldn’t pump out as many barrels of oil as they said they were going to under the previous agreement.

Bloomberg estimates that gap between the output target vs. the actual output = 3.5 million bpd.

Hence, even if OPEC+ announces a 2 million bpd cut, it may just be perceived as empty words and may not be an actual cut in the real world.

It all boils down to how those 2 million bpd would filter down to each OPEC+ member’s actual output levels.

OPEC+ announces an output cut of 1 million bpd – 1.5 million bpd

Brent prices may just hold around current levels

OPEC+ announces an output cut that’s smaller than 1 million bpd

Such disappointing news may prompt Brent to unwind its recent gains.

Potential immediate support levels for Brent:

(previous cycle lows)

$86.88
$84.77
$82.53

Overall, OPEC+ has to forcefully demonstrate its desire to restore prices to market fundamentals in order to offer meaningful support for oil benchmarks, amid the wave of demand-destroying policy tightening by central banks around the world.

In order for oil prices to continue marching higher, the OPEC+ announcement today has to not just materially influence the global supply-demand equation, but the alliance also has to signal its willingness for more output cuts in the future.

Article by ForexTime

ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

Energy Financial News

05 Oct

The Dollar Has Hit The First Target

By Ino.com

The king currency has finally hit the first long-term target of $114 that was set in the summer of a distant 2019 when it traded around $96.

That aim wasn’t clear then as the dollar index (DX) looked weak in the chart. The short-term structure was similar to a pullback after a heavy drop.

The majority of readers did not believe the DX would ever raise its head as you can see in the 2019 ballot results below.

However, I had found a bullish hint in a very big map, and I warned you “Don’t Get Trapped By Recent Dollar Weakness”.

Back in August, you had already been more bullish on the dollar as you voted the most for the target of $121.3 in the earlier post. This confidence is due to the certain position of the Fed, which resolutely fights the inflation, lifting the rate aggressively round by round.

Let me update the visualization of the real interest rate comparison below to see if the dollar still has fuel to keep unstoppable.

Source: TradingView

The real interest rate differentials are shown on the scale B: blue line for U.S. – Eurozone, orange line for U.S. – U.K. and the red line for U.S. – Japan.

As you can see in the chart above the dollar’s buffer only grows over time as the trend gets even sharper. In August, the blue line was at +2.4%, the orange line was at +2.35% and the red line was at -3.3%. The change is huge in favor of the U.S. compared to its rivals.

Currently, the DX is lagging behind two differentials: U.S. – Eurozone (the largest component of the DX) and U.S. – U.K. (3rd largest component of DX). We can clearly observe the potential of the dollar to close that gap, rallying at least in the area of $120-$123, where the next target of the distant 2001-year top is located.

Let me refresh the technical chart below for more details.

Source: TradingView

This chart above represents the right part of a Giant Double bottom pattern (purple). It emerges accurately as planned as the price is approaching the main barrier of the Neckline.

There is another crucial element in the chart, the uptrend channel (blue dotted). Recently, the price has pierced the upside of it above $114. However, the DX couldn’t consolidate the success and dropped back below the barrier to close the month’s candle underneath.

The price could take two paths from here. The continuation to the upside based on the aggressive tightening is the first option. Another option could put the market on the pause within a consolidation (red down arrow). The former is needed to let the market take a break and reflect on the consequences of the Fed’s actions. This path is not bearish as it is just one of the natural stages of the market to let the latter accumulate enough power for further growth.

The bearish scenario is not considered as the next target of $121 is closer than the first support at $100. That area has been shown in my earlier post. It consists of the simple moving average for the past one year and the large volume profile zone.

Intelligent trades!

Aibek Burabayev
INO.com Contributor

Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

By Ino.com – See our Trader Blog, INO TV Free & Market Analysis Alerts

Source: The Dollar Has Hit The First Target

Forex and Currency News Opinions

04 Oct

Capping Russia’s oil profits could keep oil flowing to global markets at a reasonable cost while slashing Putin’s war funding

By Amitrajeet A. Batabyal, Rochester Institute of Technology

The world as we know it cannot function without oil, giving oil-producing countries an advantage economists call market power. Nations that produce oil are able to set the price, while countries that rely on oil have little choice but to buy it at prices determined by the seller.

While this asymmetry in market power generally favors the seller, in response to the war in Ukraine, a group of global oil buyers are trying to leverage their economic purchasing power to weaken Russia’s strength as a major global oil producer. The European Union and the United States have both imposed bans on the purchase of Russian oil. In solidarity, other nations like Australia and Canada have also decided to not purchase Russian oil anymore.

Now, the G-7 countries – a group of democracies including the United States that try to coordinate global policy – are developing a price cap they hope nations will agree to when paying for Russian oil to further limit Russia’s profits and shrink the income stream that fuels its war with Ukraine. Can a price cap make a difference? And if so, how?

Oil as an economic engine

Given that it is not possible for the world to completely wean itself off Russian oil, the G-7 recently announced that it is planning to cap the price of Russian oil beginning in December 2022. Its goal is to get more nations to join the G-7 price cap scheme.

Tankers in the foreground of an industrial landscape. Billowing emissions from smokestacks rise in the air. — European Union sanctions will prohibit Russian oil exports from international shipping lanes and ports.
Chris LeBoutillier for Unsplash, CC BY-SA

The economics of a price cap can be quite straightforward. The escalating costs of an apartment in New York, for example, demonstrate how rent control – a price cap policy – protects renters from the rising cost of housing. When the market rental price, which equates the demand for apartments with its supply, is too high, a price cap below the market rental rate ensures that the price of an apartment cannot legally be higher than the cap.

Squeezing Russian oil profits

Led by U.S. Treasury Secretary Janet Yellen, the G-7 nations in July 2022 decided to cap the price of oil sold by Russia, a policy that is planned to go into effect on Dec. 5. Since this cap would be executed in an international setting with different rules and regulations and with nations whose interests are not always aligned, the success of a price cap is not guaranteed. Even so, the leaders of the G-7 agree that a cap policy is needed to decelerate, if not stop, the Russian war machine.

A man stands in a doorway of a residential building that has been bombed. Rubble blocks his way. — Shelling continued in the town of Toretsk in the Donetsk region in late September 2022 as Russia moved to annex portions of Ukraine.
Anatolie Stepanov via Getty Images, CC BY-ND

In addition to ensuring Putin’s war funding is reduced, a cap may help preclude an even higher spike of oil prices. The European Union’s sixth sanctions package is set to ban all Russian crude imports by sea – also set to begin Dec. 5, 2022 – and all refined oil products starting on Feb. 5, 2023. Because the world economy will have relatively little time to adjust to these hard cutoff dates, they are likely to lead to enormous oil price hikes that could cause great suffering in the European Union, the United States and other nations.

If capped at the right level – a little above Russia’s cost of producing oil, estimated at US$40 per barrel – and periodically monitored, then Russia will likely act in its own interest and legally sell oil at the capped price. Potential buyers would not run afoul of Western sanctions if oil is purchased at the capped price, helping to limit dramatic upticks in the price. This is how the price cap concept is supposed to work. Yet a few things could go wrong.

Chief among these is the behavior of nations that are not party to the G-7 cap. China and India, for instance, could decide that they will pay no heed to the cap and simply continue to do business with Russia as they have in the recent past.

But economic forces are likely to make China and India behave consistent with the cap policy.

Since oil can always be purchased at the capped price, China and India have an incentive to reduce their oil expenditures by obtaining even larger discounts from Russia to continue to buy its oil. Since Russia is desperate to find markets for its oil, to continue to do business in these large markets, President Vladimir Putin either has to sell his oil at the capped price or at a negotiated discount. Either way, the intention of the cap, to reduce oil revenues flowing to Putin, will be met.

Some nations might be able to undermine the cap because it would be difficult to enforce. Privately held companies in the business of shipping and financing Russian oil may continue to sell oil to buyers. Such entities, because of the risk of running afoul of Western sanctions, are likely to do so after demanding a cut from any oil sales, and this will, once again, have the impact of cutting into Putin’s profits.

Other forces may help maintain a cap

Another consideration for businesses that ignore the cap is that 90% of maritime insurance is based in Britain and the EU. Such firms will not be able to do legal business with Russian entities or those promoting its interests as determined by the international cap enforcement criteria. Based on my research, I believe that not many buyers will continue to do business with Russia when most seaports, ocean shipping lanes and oil tankers are off-limits to Russian oil because of the terms stipulated in the European Union’s sixth sanctions package.

Putin claims that he will not sell Russian oil to nations participating in the cap program. Based on my research, this is difficult to believe given how dependent the Russian economy is on oil revenue.

Russia’s economy is in poor shape. By one measure, its war with Ukraine is costing about $1 billion per day. Such high costs, in concert with Western sanctions, will continue to have an adverse impact on Russia’s economy. To continue his “special military operation” in Ukraine, Putin urgently needs more revenue.

Oil sales are Russia’s principal revenue source. Perhaps the price cap will pressure Russia to choose selling oil over waging war.

About the Author:

Amitrajeet A. Batabyal, Distinguished Professor, Arthur J. Gosnell Professor of Economics, & Interim Head, Department of Sustainability, Rochester Institute of Technology

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Economics & Fundamentals Opinions

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