Archive for the ‘Forex’ Category
If you chart the course of the Australian Dollar over the last twelve months alongside the S&P 500, the overlap is jarring. You can see from the chart below that the two lines zig and zag in almost perfect unison. It would seem that there was a slight break in the second quarter of 2010, but even this is an illusion, since the Aussie and the S&P continued to rise and fall in the same patterns over that time period, differing only in degree of fluctuation.
Since the S&P 500 is a pretty good proxy for risk it can be said that the Australian Dollar is a manifestation of investor risk appetite. When risk aversion was high, the S&P and the Aussie were low. When risk tolerance picked up, they rose. It’s funny how this came to be. It is probably best seen as a vestige from the credit crisis, whereby investors evenly divided assets into two classes: risky and safe. When you look at the performance of the Australian Dollar, it is pretty clear as to which side of the dividing line it was placed.
This is probably fair, since the Australian Dollar is a growth currency. According to the just-released Bank of International Settlements (BIS) Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity, the Australian Dollar is now the world’s fifth most traded currency (behind only the G4: Dollar, Euro, Yen, & Pound), having usurped that position from the Swiss Franc. In 2010, it accounted for 7.6% (out of a total of 200%) of all trading volume, primarily as a result of trading in the USD/AUD currency pair, which was the fourth most popular in forex.
Investors have come to see the Australian Dollar in somewhat contradictory terms. It is both stable and liquid, but its economy is unpredictable and inflation is usually above average. The current economic situation was strong, with GDP growth projected to exceed 3% in 2010. Its benchmark interest rate (4.5%) is the highest in the industrialized world, and may touch 5% before the year is over. On the other hand, its political situation is currently uncertain, thanks to an election that produced a hung Parliament and the recent resignation of its Prime Minster. In addition, while its trade balance is currently in surplus, it fell in July thanks to decreased demand from China. Analysts wonder whether it isn’t entirely dependent on China (directly via exports and indirectly via high commodity prices) to generate positive GDP growth.
Ultimately, investors don’t care about any of this. They care only whether the global economy is stable and whether another financial/credit/economic crisis is likely to occur. Even though any such crisis will probably spare Australia, the Aussie is punished by even the whiff of crisis because Australia is perceived as being riskier to invest than the US, for example. “The Australian dollar is going to stay heavy. Markets don’t like uncertainty,” summarized JP Morgan.
Sadly, it’s currently not worth parsing the nuances of trade statistics and monetary policy, because it has no bearing on the Aussie, though at least this makes my job easier. For the time being, the Australian Dollar will tick up if it looks like the global economy (principally the US) will avoid a double-dip recession. Otherwise, it is in for the same rough stretch as the S&P.
[FDIC ON PROBLEM BANKS] In its Q2-2010 Banking Profile report, FDIC said the number of "problem" banks on its watch list rose to 829 from 775 in Q1-2010. This was the highest since March 1993. Yet, total assets of problem banks fell to $403 bln from $431 bln in Q1. Note bank failures this year total 118 and 273 since end-2007. During 1988-1992 S&L crisis, 818 banks were shut down. The qtrly report also said Deposit Insurance Fund (DIF) balance or its net worth improved from -$20.7 bln to -$15.2 bln. The fund balance reflects $27.5 bln contingent loss reserve that has been set aside to cover estimated losses. FDIC Chrm Bair said the banking industry despite better qtrly profits still faces challenges and the number of unprofitable and problem banks remains high. For Q2, banks reported aggregate profit of $21.6 bln vs net loss of $4.4 bln a yr ago. 15:06 GMT – Mixed US data throughout the session has done little to inspire any risk-on behaviour, and while the Dow is managing hold 40 points in positive territory, [USD/YEN] is meanwhile having another go at the downside in late European trade. A fresh breach of the psych 84.00 support has been achieved, with the 83.51 15 year low made last week back in the sights of bears. The technical structure remains negative, while recent comments out of Japan regarding intervention, Yen strength or policy have all failed as yet to significantly spook Yen bulls. 84.50 will remain the preferred offer zone for intraday specs
[GBP VULNERABLE INTO DATA] Off recent 1.5327 lows, but Gbp remains on the back foot going into the UK manufacturing PMI number. A fall to 57.0 in Aug is expected vs 57.3 the month previous. A 57.0 outcome would still be a fair result given the recent range high was seen in April and May at 58.0. See page
USD/JPY Mid-Day Outlook
Daily Pivots: (S1) 84.13; (P) 85.01; (R1) 85.52; More.
As noted before, USD/JPY’s recovery from 83.61 should have completed at 85.89. Intraday bias remains cautiously on the downside for 83.61 low. Break there will confirm down trend resumption for 80 psychological level next. On the upside, above 84.83 minor resistance will turn intraday bias neutral and indicates that consolidations from 83.61 is still in progress. But after all, even in case of another rise, upside is expected to be limited well below 88.25 support turned resistance and bring another fall.
In the bigger picture, whole down trend from 2007 high of 124.13 is still in progress and there is no sign of reversal yet. Such down trend could still extend further towards 79.75 (1995 low). Though, we’ll be cautiously looking for some sign of loss of momentum in case of further decline. On the upside, however, note that break of 94.97 resistance is needed to be the first sign of medium term reversal. Otherwise, outlook will remain bearish.
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[MONTH-END RUMOURS] We are hearing of possible Usd buying vs the likes of Gbp, Cad and Aud ahead of and into 15GMT. The Dollar has been on the back foot for much of Europe so far, however. The Euro has been a relative outperformer amid talk of the traditional European central bank buying interest in Eur/Gbp
[CHICAGO PMI] The headline Chicago PMI came in at 56.7 vs a prior 62.3 and expectations centered around 57-58. That's the lowest reading in 9 months, but still points to far better factory sector growth than most similar surveys. The orders index fell to 55.6 from a prior 64.6
[WEEK AHEAD IN US] The coming week offers a light data/event slate following the Labor Day holiday. The main focus will be on the mid-week release of the Fed's Beige Book in prep for the Sept 21 FOMC policy meeting. That latter will likely debate any change to the Fed's core outlook for a better recovery into 2011 from current soft patch ala remarks from Atlanta's Lockhart today. He noted the Fed may need to do more if GDP growth stays at a sub-par rate of 2% or less as that would risk a protracted high unemployment rate and weak spending fallout. On the data side, weekly jobless claims will get usual attention while trade data is due out the same day. Net trade was a huge drag on Q2 GDP. Also,a wider gap with China poses headline risk when Congress returns with possible action on fx policy
[European Preview] Just when the mkt thought it was safe to buy risky assets, the disappointing BOJ emergency announcement along with soft Euro & US stocks saw risk aversion muscling back into the driver's seat leaving the commodity ccies high & dry while the USD & esp the JPY chalked out decent gains as Eur/Jpy & Aud/Jpy fell more than 200 pts from its high See page
[EMU PERIPHERAL SPREADS] are edging out as markets pause for breath after squeezing gaps yest. Eyes are on the ECB & its lqty measures while [GREECE/ITALY/PORTUGAL] are in focus as the IMF warns they face the highest risk of unsustainable debt. However, a US fund opines [IRISH] risks are higher than Italian (Rtrs) while Irish Fin Min Lenihan notes finances are stabilizing. Supply keeps gains in check as [SPAIN] offers up to Eur4 bn 5Y Bonos (8.30GMT) while [ITALY] considers 2-3 syndications for Eur8-15 bn as the state deficit widened to Eur8bn in Aug vs Eur7.1bn in 2009. 10Y yld spreads are out 1-2bp to 183/154bp resp from yest
About 90 minutes or so ago, we warned that [CABLE] could be ripe for another downside test and sure enough Gbp makes new lows for the day of 1.5350 post US pending home sales improvement. In truth, that has been no Gbp sell trigger. Gbp has been an underperformer all week and our identified sub-1.5320 stops zone is now well documented. There may be insufficient broader market interest for such a test before Europe's close today, but we would be very surprised if 1.5327 remains the low of this NFPs release week