- pips%
-
+200+1.50 - +250+1.48
-
-114-1.28
THE STORIES IN THE CURRENCY MARKET
* US DOLLAR: ARE STRESS TESTS A ROAD TOWARD NATIONALIZATION?
* EUR/USD: EUROPEANS POISED ON WORLDWIDE FINANCIAL REGULATION
* GBP/USD: BRITISH CONDITIONS IMPROVE
* AUD/USD: RISK APPETITE CONFOUNDS
* USD/CAD: RETAIL SALES TAKE A BIG HIT
* NZD/USD: COMMODITIES ARE UNDER PRESSURE
* USD/JPY: THE WORLDS SAFE HAVEN SUDDENLY DOESN’T SEEM SO SAFE
EXPECTATIONS FOR UPCOMING FED MEETINGS
| CURRENT US INTEREST RATE: 0.25% | Expectations for Another Rate Cut Rise in March | ||||
| 3/18 Meeting | 4/29 Meeting | ||||
| NO CHANGE | 94.0% | 87.0% | |||
| CUT TO 0BP | 6.0% | 5.5% | |||
| INCREASE TO 50BP | 0.0% | 7.5% | |||
| INCREASE TO 75BP | 0.0% | 0.0% | |||
US DOLLAR: ARE STRESS TESTS A ROAD TOWARD NATIONALIZATION?
The US dollar is trading in a market that is completely unsure of future economic turmoil. In many ways, today’s markets have retracted certain trends that have been known to formulate currency market movements. The market is completely mixed in terms of dollar strength despite the large decline in equities that would usually spell a fit of risk aversion. However, the dollar is weak against the pound and strong against the euro and yen. This combination does not necessarily show the safe haven status that the yen and dollar once played. Instead, today’s trading will take place under primarily fundamental conditions rather than over solely risk appetite. It also appears that the safe haven status of the dollar and yen are starting to lose their strength, as economic conditions prove that there is no safe haven.
Government Plans ‘Stress’ Banks are too large to Fail
After the speculation about the nationalization of banks has been introduced, which is not officially a policy being pursued, the Treasury has announced a test to see the survivability of the largest US banks. The stress test will be conducted in a “What If” basis in order to determine if the banks will be able to survive if economic conditions worsen materially. The logic behind this scenario is that many feel that the largest banking companies are “too large to fail”. Even though the idea seems innocent enough, it still shows that the screening is being done to determine inevitably which banks might have to be nationalized. In addition, it has been pledged that those that fail the test will have access to taxpayer money to act as a “buffer” in the event of continued economic troubles. While these capital infusions are primarily meant to improve lending conditions, it is just another way that the government will be receiving larger stakes in these companies. In fact, many are convinced that the “nationalization phase” has already begun, with Citigroup and Bank of America first on the list. In addition to the stress test announcement which will put in place on Wednesday, there have also been announcements that previous capital infusions under the TARP program will be converted into equity stakes on an “as needed basis”. Furthermore, it is expected that Citibank arranges for the government to take a 40% share in its operations. Apparently, there is truth to the fact that the nationalization phase has already begun.
What to Expect for Tomorrow
Data for tomorrow is weighted heavily on the housing market. We are expecting the S&P/Case-Shiller US Home Price Index, the House Price Index, and the House Purchase Price Index. The most likely result is that these reports undeniably show that house prices are continuing their decline. In the short-run this may be enough to artificially boost home sales on the low prices. Consumer Confidence is also expected to show that this month’s boost in Retail Sales was only a one-time phenomenon, as consumers will be forced to conserve their spending because they expect things to worsen. Ben Bernanke will also be testifying for the Senate, presenting the possibility that he will explain potential Fed plans. However, the only real clarifications that the markets are awaiting is that of the Treasury Secretary’s bank bailout plan, something that Bernanke will not be able to provide.
EUR/USD: EUROPEANS POISED ON WORLDWIDE FINANCIAL REGULATION
The euro’s volatile trading session has truly exhibited market uncertainty and fear. After rallying nearly 200 pips, the pair quickly reversed at a knee-jerk pace to find prices about 100 pips lower on the day. These declines followed two consecutive days of strong rallies. The Europeans are reiterating their interest in imposing worldwide restrictions and supervision on the financial industry. European leaders gathered in Berlin to discuss their plans to limit the potential for another economic catastrophe in the future. The region plans to submit a proposal which involves increased funding for regulatory bodies, increased transparency, and new regulatory constrictions on the worlds hedge funds. The ideas, which will be submitted at an upcoming G20 summit in London (in which President Obama will be in attendance) in April, are of the utmost priority to European officials. “If we fail, there will be no safety net” says the concerned French President Nicolas Sarkozy. As a probable catalyst for their urgent demands, we will receive the influential German IFO survey which tracks the Current Business Climate, a current assessment, and expectations.
GBP/USD: BRITISH CONDITIONS IMPROVE
The pound pushes higher on speculation of improvements within the very important financial sector. Some banks are showing efforts in the purification of their finances as to improve their positions once economic conditions rebound. The most noticeable in these efforts is the Royal Bank of Scotland group, who plans to cut costs by a total of $1 billion. In addition, as the UK continues to expand its recessionary policies, it is expected that the country will develop plans to insure banks against any continued ailments. This plan, which shows the willingness of the UK government to respond quickly with action, is providing for a temporary jolt in the pound. The proposals of banking solutions have hit paramount in the past few weeks. For awhile, British efforts assisted in retaining a certain sense of credibility. However, this confidence has turned on and off as often as the turns in the pound. The ultimate determination of the next swing in sentiment will be in Wednesday’s Gross Domestic Product, expected to show that growth has declines substantially to -1.6%.
AUD/USD: RISK APPETITE CONFOUNDS
For the most part, commodity currencies have been kept within an unnaturally tight range. It is possible that the exact implications of the risk aversion implicated by today’s US equity declines have been skewed. In fact, the reason why the commodity currencies fall as risk aversion increases is because there has been a clear and determinant safe haven for market participants. Now with the potential US bank nationalizations and the economic disaster in Japan, the location of such a safe haven is not an easy find. Even the declines in commodities have been negated by the fact that there does not seem to be another place to shift investment resources. In terms of economic indicators, Canada saw an unexpected drop in Retail Sales. The figure fell at the largest rate since 1991, reflecting the fact that consumers are stockpiling their income to protect themselves from the uncertain. New Car Sales unsurprisingly represented the most severe decline in sales, but losses were broadly spread across all consumer goods. All of this of course gives the BoC some extra push to take rates down by another 50bp on March 3rd. Meanwhile, as an intermeeting action, the bank formally extended its purchases of corporate bonds in order to restore ordinary financial conditions.
USD/JPY: THE WORLDS SAFE HAVEN SUDDENLY DOESN’T SEEM SO SAFE
USD/JPY surges to a fresh one and a half month high. As the pair finishes up the last week of the month of February, of which has seen the yen weaken the most since 2004, traders seem to be realizing that Japanese fundamentals do not warrant a strong currency. On a day like today, with US indices suffering once again, the yen would rally on its safe haven status. However, rather than the usual occurrence, the yen is now losing strength on a day that would otherwise promote risk aversion. Therefore, it can be seen that, at least temporarily, Japan is losing its status as a safe haven. Luckily for the Japanese, this rally provides an invaluable opportunity to boost sales on a weaker yen. Of course further weakness will be required to promote any noticeable impact for the country. As for economic data, Supermarket sales came in slightly better than expected at -2.7%. Later today will see the release of the BoJ Monetary Meeting Minutes which will most likely just reiterate the desperate shape of the world’s second largest economy.TEST
EUR/USD: Currency in Play for Next 24 Hours
EUR/USD will be the currency in play over the next 24 hours. Germany will be releasing its influential ZEW Survey report expected for 4:00 am ET or 9:00 GMT. The report will provide a consensus of the business climate, current assessment, and expectations. The US on the other hand will be releasing the House Price Purchase Index at 10:00 am ET or 15:00 GMT.
At this point, EUR/USD is in the Bollinger band range-bound trading zone, and shows that the boundaries will be the strong psychological levels of 1.3000 and 1.2500. The range has been a popular area for these undecided movements as it was revisited in November. As mentioned, the resistance for the consolidation area will be 1.3000. This level proved to be very significant as today’s high only touched it for a few seconds before retreating and losing all gains. As support, we are using the significant 1.2500 area, which evenly equates lows experience last week and those lows experience in November during the previous consolidation phase. Of course, looking back the very similar period in which prices were constrained by the two levels resulted in a monstrous breakout. There is a possibility that the break of the 1.3000 or 1.2500 level will result in a similar pattern.TEST
